Attached files
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, 2009.
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 000-19978
ALASKA
AIRLINES, INC.
(Exact
name of registrant as specified in its charter)
Alaska
|
92-0009235
|
(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
|
19300
International Boulevard, Seattle, Washington 98188
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (206) 392-5040
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer x
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨ No x
The
registrant meets the conditions specified in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure
format.
The
registrant is a wholly owned subsidiary of Alaska Air Group, Inc., a Delaware
corporation, and there is no market for the registrant’s common stock, par value
$1.00 per share. As of October 31, 2009, shares of common stock
outstanding totaled 500.
ALASKA
AIRLINES, INC.
Quarterly
Report on Form 10-Q for the three months ended September 30,
2009
As used
in this Form 10-Q, the terms “Alaska,” “our,” “we” and “the Company” refer to
Alaska Airlines, Inc. and its subsidiaries, unless the context indicates
otherwise. Alaska Air Group, Inc. and Horizon Air Industries, Inc.
are referred to as “Air Group” and “Horizon,” respectively.
Cautionary
Note Regarding Forward-Looking Statements
In
addition to historical information, this Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of
1995. Forward-looking statements are those that predict or
describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements
containing the words "believe," "expect," "will," "anticipate," "intend,"
"estimate," "project," "assume" or other similar expressions, although not all
forward-looking statements contain these identifying
words. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical experience
or the Company’s present expectations. Some
of the things that could cause our actual results to differ from our
expectations are:
|
·
|
general
economic conditions, including the impact of the current economic
environment on customer travel
behavior;
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· changes
in our operating costs, including fuel, which can be volatile;
· the
competitive environment in our industry;
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·
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our
ability to meet our cost reduction
goals;
|
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·
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our
significant indebtedness;
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·
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an
aircraft accident or incident;
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·
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our
ability to achieve or maintain
profitability;
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·
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labor
disputes and our ability to attract and retain qualified
personnel;
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·
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potential
downgrades of our credit ratings and the availability of
financing;
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·
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operational
disruptions;
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·
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the
concentration of our revenue from a few key
markets;
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·
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actual
or threatened terrorist attacks, global instability and potential U.S.
military actions or activities;
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·
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insurance
costs;
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·
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fluctuations
in our quarterly results;
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·
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liability
and other claims asserted against
us;
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·
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our
reliance on automated systems and the risks associated with changes made
to those systems;
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·
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our
reliance on third-party vendors and
partners;
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·
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compliance
with our financial covenants;
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·
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changes
in laws and regulations; and
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·
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increases
in government fees and taxes.
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You
should not place undue reliance on our forward-looking statements because the
matters they describe are subject to known and unknown risks, uncertainties and
other unpredictable factors, many of which are beyond our
control. Our forward-looking statements are based on the information
currently available to us and speak only as of the date on which this report was
filed with the SEC. We expressly disclaim any obligation to issue any
updates or revisions to our forward-looking statements, even if subsequent
events cause our expectations to change regarding the matters discussed in those
statements. Over time, our actual results, performance or
achievements will likely differ from the anticipated results, performance or
achievements that are expressed or implied by our forward-looking
statements. For a discussion of these and other risk
factors, see "Item 1A: Risk Factors” of the Company’s annual report
on Form 10-K for the year ended December 31, 2008. Please consider
our forward-looking statements in light of those risks as you read this
report.
PART I. FINANCIAL INFORMATION
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||||||||
ITEM 1. CONDENSED FINANCIAL
STATEMENTS
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||||||||
CONDENSED
BALANCE SHEETS (unaudited)
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||||||||
Alaska
Airlines, Inc.
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||||||||
ASSETS
|
||||||||
(in
millions)
|
September
30, 2009
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December
31, 2008
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||||||
Current
Assets
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||||||||
Cash
and cash equivalents
|
$ | 169.9 | $ | 283.0 | ||||
Marketable
securities
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1,059.6 | 794.3 | ||||||
Total
cash and marketable securities
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1,229.5 | 1,077.3 | ||||||
Receivables
from related companies
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302.9 | 285.9 | ||||||
Receivables
- net
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126.4 | 98.9 | ||||||
Inventories
and supplies - net
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27.3 | 26.7 | ||||||
Deferred
income taxes
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121.9 | 146.7 | ||||||
Fuel
hedge contracts
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36.2 | 13.7 | ||||||
Prepaid
expenses and other current assets
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47.4 | 30.1 | ||||||
Total
Current Assets
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1,891.6 | 1,679.3 | ||||||
Property
and Equipment
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||||||||
Aircraft
and other flight equipment
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3,032.2 | 2,898.5 | ||||||
Other
property and equipment
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529.4 | 519.8 | ||||||
Deposits
for future flight equipment
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138.4 | 237.6 | ||||||
3,700.0 | 3,655.9 | |||||||
Less
accumulated depreciation and amortization
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1,092.0 | 1,009.8 | ||||||
Total
Property and Equipment - Net
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2,608.0 | 2,646.1 | ||||||
Fuel
Hedge Contracts
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29.3 | 29.8 | ||||||
Other
Assets
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76.7 | 73.4 | ||||||
Total
Assets
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$ | 4,605.6 | $ | 4,428.6 | ||||
See
accompanying notes to condensed financial statements.
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CONDENSED
BALANCE SHEETS (unaudited)
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||||||||
Alaska
Airlines, Inc.
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||||||||
LIABILITIES
AND SHAREHOLDER'S EQUITY
|
||||||||
(in
millions except share amounts)
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September
30, 2009
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December
31, 2008
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||||||
Current
Liabilities
|
||||||||
Accounts
payable
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$ | 45.3 | $ | 49.4 | ||||
Payables
to related companies
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65.9 | 53.5 | ||||||
Accrued
aircraft rent
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52.7 | 60.2 | ||||||
Accrued
wages, vacation and payroll taxes
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117.3 | 101.2 | ||||||
Other
accrued liabilities
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515.2 | 510.7 | ||||||
Air
traffic liability
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396.6 | 372.2 | ||||||
Fuel
hedge contracts liability
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1.4 | 20.0 | ||||||
Current
portion of long-term debt
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126.3 | 225.1 | ||||||
Total
Current Liabilities
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1,320.7 | 1,392.3 | ||||||
Long-Term
Debt, Net of Current Portion
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1,383.3 | 1,334.1 | ||||||
Other
Liabilities and Credits
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||||||||
Deferred
income taxes
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52.0 | 2.0 | ||||||
Deferred
revenue
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426.2 | 394.1 | ||||||
Obligation
for pension and postretirement medical benefits
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582.7 | 584.7 | ||||||
Other
liabilities
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121.3 | 126.4 | ||||||
1,182.2 | 1,107.2 | |||||||
Commitments
and Contingencies
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||||||||
Shareholder's
Equity
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||||||||
Common
stock, $1 par value
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||||||||
Authorized: 1,000
shares
|
||||||||
Issued: 2009
and 2008 - 500 shares
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- | - | ||||||
Capital
in excess of par value
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648.2 | 640.1 | ||||||
Accumulated
other comprehensive loss
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(303.0 | ) | (328.3 | ) | ||||
Retained
earnings
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374.2 | 283.2 | ||||||
719.4 | 595.0 | |||||||
Total
Liabilities and Shareholder's Equity
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$ | 4,605.6 | $ | 4,428.6 | ||||
See
accompanying notes to condensed financial statements.
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CONDENSED
STATEMENTS OF OPERATIONS (unaudited)
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||||||||||||||||
Alaska
Airlines, Inc.
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||||||||||||||||
Three
Months Ended September 30
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Nine
Months Ended September 30
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|||||||||||||||
(in
millions)
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2009
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2008
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2009
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2008
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||||||||||||
Operating
Revenues
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||||||||||||||||
Passenger
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$ | 702.0 | $ | 751.2 | $ | 1,844.3 | $ | 2,041.2 | ||||||||
Freight
and mail
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26.5 | 29.2 | 69.0 | 77.1 | ||||||||||||
Other
- net
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48.4 | 33.5 | 136.5 | 101.2 | ||||||||||||
Change
in Mileage Plan terms
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- | 42.3 | - | 42.3 | ||||||||||||
Total
mainline operating revenues
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776.9 | 856.2 | 2,049.8 | 2,261.8 | ||||||||||||
Passenger
- purchased capacity
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81.9 | 85.7 | 211.4 | 233.9 | ||||||||||||
Total
Operating Revenues
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858.8 | 941.9 | 2,261.2 | 2,495.7 | ||||||||||||
Operating
Expenses
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||||||||||||||||
Wages
and benefits
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199.1 | 182.5 | 594.9 | 558.9 | ||||||||||||
Variable
incentive pay
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20.8 | 4.9 | 44.0 | 10.8 | ||||||||||||
Aircraft
fuel, including hedging gains and losses
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166.6 | 479.1 | 405.9 | 864.0 | ||||||||||||
Aircraft
maintenance
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36.5 | 32.6 | 129.4 | 112.1 | ||||||||||||
Aircraft
rent
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27.2 | 26.3 | 81.8 | 82.4 | ||||||||||||
Landing
fees and other rentals
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43.0 | 42.3 | 124.4 | 126.9 | ||||||||||||
Contracted
services
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29.7 | 31.9 | 88.6 | 100.5 | ||||||||||||
Selling
expenses
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29.4 | 33.1 | 76.8 | 95.6 | ||||||||||||
Depreciation
and amortization
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45.1 | 42.8 | 132.6 | 123.2 | ||||||||||||
Food
and beverage service
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12.0 | 12.8 | 34.9 | 37.1 | ||||||||||||
Other
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38.0 | 41.0 | 119.3 | 130.2 | ||||||||||||
New
pilot contract transition costs
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- | - | 35.8 | - | ||||||||||||
Restructuring
charges
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- | 3.7 | - | 3.7 | ||||||||||||
Fleet
transition costs - MD-80
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- | 21.5 | - | 47.5 | ||||||||||||
Total
mainline operating expenses
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647.4 | 954.5 | 1,868.4 | 2,292.9 | ||||||||||||
Purchased
capacity costs
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74.7 | 85.6 | 206.3 | 246.8 | ||||||||||||
Total
Operating Expenses
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722.1 | 1,040.1 | 2,074.7 | 2,539.7 | ||||||||||||
Operating
Income (Loss)
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136.7 | (98.2 | ) | 186.5 | (44.0 | ) | ||||||||||
Nonoperating
Income (Expense)
|
||||||||||||||||
Interest
income
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9.6 | 12.8 | 29.2 | 38.2 | ||||||||||||
Interest
expense
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(22.4 | ) | (23.5 | ) | (67.5 | ) | (67.5 | ) | ||||||||
Interest
capitalized
|
1.4 | 4.8 | 5.7 | 16.1 | ||||||||||||
Other
- net
|
(0.5 | ) | (3.3 | ) | (5.3 | ) | (2.7 | ) | ||||||||
(11.9 | ) | (9.2 | ) | (37.9 | ) | (15.9 | ) | |||||||||
Income
(loss) before income tax
|
124.8 | (107.4 | ) | 148.6 | (59.9 | ) | ||||||||||
Income
tax expense (benefit)
|
47.5 | (38.1 | ) | 57.6 | (21.2 | ) | ||||||||||
Net
Income (Loss)
|
$ | 77.3 | $ | (69.3 | ) | $ | 91.0 | $ | (38.7 | ) | ||||||
See
accompanying notes to condensed financial statements.
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CONDENSED
STATEMENTS OF SHAREHOLDER'S EQUITY (unaudited)
|
||||||||||||||||||||
Alaska
Airlines, Inc.
|
||||||||||||||||||||
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Capital
in
|
Accumulated Other
|
|
|||||||||||||||||
(in
millions)
|
Common
Stock
|
Excess
of Par Value
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Comprehensive
Loss
|
Retained
Earnings
|
Total
|
|||||||||||||||
Balances
at December 31, 2008
|
$ | 0.0 | $ | 640.1 | $ | (328.3 | ) | $ | 283.2 | $ | 595.0 | |||||||||
Net
income for the nine months ended September 30, 2009
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91.0 | 91.0 | ||||||||||||||||||
Other
comprehensive income (loss):
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||||||||||||||||||||
Related
to marketable securities:
|
||||||||||||||||||||
Change
in fair value
|
22.3 | |||||||||||||||||||
Reclassification
to earnings
|
(1.2 | ) | ||||||||||||||||||
Income
tax effect
|
(7.9 | ) | ||||||||||||||||||
13.2 | 13.2 | |||||||||||||||||||
Adjustments
related to employee benefit plans:
|
25.6 | |||||||||||||||||||
Income
tax effect
|
(9.6 | ) | ||||||||||||||||||
16.0 | 16.0 | |||||||||||||||||||
Related
to interest rate derivative instruments:
|
||||||||||||||||||||
Change
in fair value
|
(6.2 | ) | ||||||||||||||||||
Income
tax effect
|
2.3 | |||||||||||||||||||
(3.9 | ) | (3.9 | ) | |||||||||||||||||
Total
comprehensive income
|
116.3 | |||||||||||||||||||
Impact
of issuance of Air Group stock under stock plans
|
(0.6 | ) | (0.6 | ) | ||||||||||||||||
Stock-based
compensation
|
8.7 | 8.7 | ||||||||||||||||||
Balances
at September 30, 2009
|
$ | 0.0 | $ | 648.2 | $ | (303.0 | ) | $ | 374.2 | $ | 719.4 | |||||||||
See
accompanying notes to condensed financial statements.
|
||||||||||||||||||||
CONDENSED
STATEMENTS OF CASH FLOWS (unaudited)
|
||||||||
Alaska
Airlines, Inc.
|
||||||||
Nine
Months Ended September 30
|
||||||||
(in
millions)
|
2009
|
2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 91.0 | $ | (38.7 | ) | |||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Non-cash
impact of pilot contract transition costs
|
15.5 | - | ||||||
Restructuring
charges
|
- | 3.7 | ||||||
Fleet
transition costs
|
- | 47.5 | ||||||
Depreciation
and amortization
|
132.6 | 123.2 | ||||||
Stock-based
compensation
|
8.7 | 8.6 | ||||||
Changes
in fair values of open fuel hedge contracts
|
(40.6 | ) | 12.6 | |||||
Changes
in deferred income taxes
|
57.8 | (15.4 | ) | |||||
Changes
in receivables (including from related companies)
|
(44.5 | ) | 61.2 | |||||
Increase
in prepaid expenses and other current assets
|
(17.3 | ) | (35.2 | ) | ||||
Increase
in air traffic liability
|
24.4 | 96.3 | ||||||
Increase
(decrease) in other current liabilities (including payable to related
parties)
|
21.2 | (9.9 | ) | |||||
Increase
(decrease) in deferred revenue and other-net
|
16.5 | (34.0 | ) | |||||
Net
cash provided by operating activities
|
265.3 | 219.9 | ||||||
Cash
flows from investing activities:
|
||||||||
Property
and equipment additions:
|
||||||||
Aircraft
and aircraft purchase deposits
|
(262.9 | ) | (287.4 | ) | ||||
Other
flight equipment
|
(21.1 | ) | (16.9 | ) | ||||
Other
property and equipment
|
(25.1 | ) | (31.0 | ) | ||||
Total
property and equipment additions
|
(309.1 | ) | (335.3 | ) | ||||
Proceeds
from disposition of assets
|
0.8 | 5.9 | ||||||
Purchases
of marketable securities
|
(767.8 | ) | (608.4 | ) | ||||
Sales
and maturities of marketable securities
|
521.8 | 398.7 | ||||||
Restricted
deposits and other
|
(4.6 | ) | 7.0 | |||||
Net
cash used in investing activities
|
(558.9 | ) | (532.1 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of long-term debt
|
159.3 | 576.4 | ||||||
Proceeds
from sale-leaseback transactions, net
|
230.0 | - | ||||||
Long-term
debt payments
|
(208.8 | ) | (209.7 | ) | ||||
Net
cash provided by financing activities
|
180.5 | 366.7 | ||||||
Net
change in cash and cash equivalents
|
(113.1 | ) | 54.5 | |||||
Cash
and cash equivalents at beginning of year
|
283.0 | 204.3 | ||||||
Cash
and cash equivalents at end of period
|
$ | 169.9 | $ | 258.8 | ||||
Supplemental
disclosure of cash paid during the period for:
|
||||||||
Interest
(net of amount capitalized)
|
$ | 66.2 | $ | 49.9 | ||||
Income
taxes
|
- | 0.8 | ||||||
See
accompanying notes to condensed financial statements.
|
NOTES
TO CONDENSED FINANCIAL STATEMENTS (unaudited)
Alaska
Airlines, Inc.
NOTE
1. BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Basis of Presentation
The
accompanying unaudited condensed financial statements of Alaska Airlines,
Inc. (Alaska or the Company) should be read in conjunction with the
financial statements in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008. Alaska Airlines, Inc., an Alaska corporation, is a
wholly-owned subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware
corporation. In the opinion of management, all adjustments have been
made that are necessary to present fairly the Company’s financial position as of
September 30, 2009, as well as the results of operations for the three and nine
months ended September 30, 2009 and 2008. The adjustments made were of a normal
recurring nature.
The
Company’s interim condensed financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (GAAP). In preparing these statements, the Company is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities, as well as the
reported amounts of revenues and expenses. Significant estimates made include
assumptions used to record liabilities; expenses and revenues associated with
the Company’s Mileage Plan; amounts paid to lessors upon aircraft lease
terminations; the fair market value of surplus or impaired aircraft, engines and
parts; assumptions used in the calculations of pension expense in the Company’s
defined-benefit plans; and the amounts of certain accrued liabilities. Actual
results may differ from the Company’s estimates.
New
and Proposed Accounting Pronouncements
Effective
July 2, 2009, the Accounting Standards Codification (ASC) of the Financial
Accounting Standards Board (FASB) became the single official source of
authoritative, nongovernmental GAAP in the United States. Although
the Company’s accounting policies were not affected by the conversion to ASC,
references to specific accounting standards in these notes to the condensed
financial statements have been changed to reference the appropriate section of
the ASC.
In March
2008, the FASB issued Statement of Financial Standards (SFAS) No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133. SFAS 161 requires entities that use derivative
instruments to provide certain qualitative disclosures about their objectives
and strategies for using such instruments, amounts and location of the
derivatives in the financial statements, among other disclosures. SFAS 161
was adopted as of January 1, 2009 and was incorporated into ASC 815, Derivatives and
Hedging. The required disclosures are included in Note 2 and
Note 4. The adoption of this standard did not have a material impact
on the disclosures historically provided.
In April
2009, the FASB issued Staff Position No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, which
clarifies the determination of fair value for assets and liabilities that may be
involved in transactions that would not be considered orderly as defined in the
position statement. This position was incorporated into ASC 820,
Fair Value Measurements and
Disclosures. In April 2009, the FASB also issued FASB Staff
Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, as incorporated into ASC 320, Investments – Debt and Equity
Securities. This position statement provides additional guidance in
determining whether a debt security is other-than-temporarily impaired and how
entities should record the impairment in the financial
statements. The standard requires credit losses, as defined, to be
recorded through the statement of operations and the remaining impairment loss
to be recorded through accumulated other comprehensive income. Both
of these staff positions were effective for the Company as of June 30,
2009. See Note 2 for a discussion of the impact of these new
positions to the Company’s financial statements.
In April
2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This position was incorporated into
ASC 825, Financial
Instruments, and requires companies to provide, on an interim basis,
disclosures that were previously only required in annual statements for the fair
value of financial instruments. This staff position was effective for
the Company as of June 30, 2009. See Note 2 for these required
disclosures.
In May
2009, the FASB issued statement No. 165, Subsequent Events (SFAS
165), which was incorporated into ASC 855, Subsequent Events. The
standard modified the definition of what qualifies as a subsequent event—those
events or transactions that occur following the balance sheet date, but before
the financial statements are issued—and requires companies to disclose the date
through which it has evaluated subsequent events and the basis for determining
that date. The Company adopted the provisions as of June 30,
2009. The Company has performed an evaluation of subsequent events
through November 6, 2009, which is the date these financial statements were
issued.
In
December 2008, the FASB issued Staff Position No. FAS 132(R)-1 amending SFAS
132(R), Employers’ Disclosures
about Pensions and Other Postretirement Benefits, which, among other
things, expands the disclosure regarding assets in an employer’s pension and
postretirement benefit plans. The standard requires the Company to
add the fair value hierarchy disclosures required by ASC 820 as it relates to
the underlying assets of the pension and postretirement benefit
plans. This position has been incorporated into ASC 715, Compensation – Retirement Benefits,
and is effective for annual financial statements for fiscal years ending
after December 15, 2009. This position will impact the Company’s
financial statement disclosures, but will have no impact on its financial
position or results of operations.
NOTE
2. FAIR VALUE OF FINANCIAL
INSTRUMENTS
Fair
Value Measurements
Accounting
standards define fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The standards also establish a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
There are three levels of inputs that may be used to measure fair
value:
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs
that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities.
Cash,
Cash Equivalents and Marketable Securities
The
Company uses the “market approach” as defined in the accounting standards in
determining the fair value of its cash, cash equivalents and marketable
securities. The securities held by the Company are valued based on observable
prices in active markets and considered to be liquid and easily
tradable.
Amounts
measured at fair value as of September 30, 2009 are as follows (in
millions):
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Cash
and cash equivalents
|
$ | 169.9 | $ | — | $ | — | $ | 169.9 | ||||||||
Marketable
securities
|
72.3 | 987.3 | — | 1,059.6 | ||||||||||||
Total
|
$ | 242.2 | $ | 987.3 | $ | — | $ | 1,229.5 | ||||||||
All of
the Company’s marketable securities are classified as
available-for-sale. The securities are carried at fair value, with
the unrealized gains and losses, excluding credit losses, reported in
shareholder’s equity under the caption “accumulated other comprehensive loss”
(AOCL). Realized gains and losses are included in other nonoperating
income (expense) in the condensed statements of operations.
The cost
of securities sold is based on the specific identification
method. Interest and dividends on marketable securities are included
in interest income in the condensed statements of operations.
Marketable
securities consisted of the following (in millions):
September 30, 2009
|
December
31, 2008
|
|||||||
Amortized
cost:
|
||||||||
Government
securities/agencies
|
$ | 386.1 | $ | 329.1 | ||||
Asset-backed
obligations
|
236.3 | 198.0 | ||||||
Other
corporate obligations
|
420.0 | 263.7 | ||||||
$ | 1,042.4 | $ | 790.8 | |||||
Fair
value:
|
||||||||
Government
securities/agencies
|
$ | 392.9 | $ | 342.8 | ||||
Asset-backed
obligations
|
235.6 | 187.7 | ||||||
Other
corporate obligations
|
431.1 | 263.8 | ||||||
$ | 1,059.6 | $ | 794.3 |
Of the
marketable securities on hand at September 30, 2009, 8% mature in 2009, 29% in
2010, and 63% thereafter. Gross realized gains and losses for the
three and nine-month periods ended September 30, 2009 and 2008 were not material
to the condensed financial statements.
The
Company determined that credit losses, as defined in the accounting standards,
existed as of September 30, 2009 with respect to certain asset-backed
obligations. Based on a future cash flow analysis, the Company
determined that it does not expect to recover the full amortized cost basis of
certain asset-backed obligations. This analysis estimated the
expected future cash flows by using a discount rate equal to the effective
interest rate implicit in the securities at the date of
acquisition. The inputs used to estimate future cash flows included
the default, foreclosure, and bankruptcy rates on the underlying mortgages and
expected home pricing trends. The Company also looked at the average
credit scores of the individual mortgage holders and the average loan-to-value
percentage. Although management believes the underlying securities
are performing well considering
the
current market, all of the factors mentioned result in expected future cash
flows that are less than the current amortized cost of the portfolio of
asset-backed obligations. Therefore, the Company recorded an
aggregate credit loss in other nonoperating expense of $1.7 million in the first
nine months 2009 to reflect the difference between the present value of future
cash flows and the amortized cost basis of the affected
securities. Management does not believe the securities associated
with the remaining $3.9 million unrealized loss recorded in AOCL are
“other-than-temporarily” impaired, as defined in the accounting standards, based
on the current facts and circumstances. Management currently does not
intend to sell these securities prior to their recovery nor does it believe that
it will be more-likely-than-not that the Company would need to sell these
securities for liquidity or other reasons.
Gross
unrealized gains and losses, including credit losses, at September 30, 2009 are
presented in the table below (in millions):
Unrealized
Losses
|
|||||||||||||||||||||||||||
Unrealized
Gains in AOCL
|
Less
than 12 months
|
Greater
than 12 months
|
Total
Unrealized Losses
|
Less:
Credit Loss Recorded in Earnings
|
Net
Unrealized Losses in AOCL
|
Net
Unrealized Gains/(Losses) in AOCL
|
Fair
Value of Securities with Unrealized Losses
|
||||||||||||||||||||
Government
Securities/Agencies
|
$ | 6.8 | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | 6.8 | $ | 35.1 | |||||||||||
Asset-backed
obligations
|
3.1 | -- | (5.5 | ) | (5.5 | ) | (1.7 | ) | (3.8 | ) | (0.7 | ) | 25.0 | ||||||||||||||
Other
corporate obligations
|
11.2 | (0.1 | ) | -- | (0.1 | ) | -- | (0.1 | ) | 11.1 | 35.7 | ||||||||||||||||
Total
|
$ | 21.1 | $ | (0.1 | ) | $ | (5.5 | ) | $ | (5.6 | ) | $ | (1.7 | ) | (3.9 | ) | $ | 17.2 | $ | 95.8 |
Interest
Rate Swap Agreements
In the
third quarter of 2009, the Company entered into interest rate swap agreements
with a third party designed to hedge the volatility of the underlying variable
interest rate in the Company’s aircraft lease agreements for six B737-800
aircraft. The agreements stipulate that the Company pay a fixed
interest rate over the term of the contract and receive a floating interest
rate. All significant terms of the swap agreement match the terms of
the lease agreements, including interest-rate index, rate reset dates,
termination dates and underlying notional values. The agreements
expire beginning in June 2020 through March 2021 to coincide with the lease
termination dates.
The
Company has formally designated these swap agreements as hedging instruments and
will record the effective portion of the hedge as an adjustment to aircraft rent
in the condensed statement of operations in the period of contract
settlement. The effective portion of the changes in fair value for
instruments that settle in the future are recorded in AOCL in the condensed
balance sheets.
At
September 30, 2009, the Company had a liability of $6.2 million associated with
these contracts, $5.6 million of which is expected to be reclassified into
earnings within the next twelve months and is recorded in other accrued
liabilities in the condensed balance sheets. The fair value of these
contracts is determined based on the difference between the fixed interest rate
in the agreements and the observable LIBOR-based interest forward rates at
period end, multiplied by the total notional value. As such, the
Company places these contracts in Level 2 of the fair value
hierarchy.
Fair
Value of Financial Instruments
The
majority of the Company’s financial instruments are carried at fair
value. These include cash, cash equivalents and marketable securities
(Note 2); restricted deposits (Note 8); fuel hedge contracts (Note 4); and
interest rate swap agreements (Note 2). The Company’s long-term
fixed-rate debt is not carried at fair value. The estimated fair
value of the Company’s long-term debt was as follows (in millions):
Carrying
Amount
|
Fair
Value
|
|||||||
Long-term
debt at September 30, 2009
|
$ | 1,509.6 | $ | 1,465.2 | ||||
Long-term
debt at December 31, 2008
|
$ | 1,559.2 | $ | 1,696.9 |
The fair
value of cash and cash equivalents approximates carrying values due to the short
maturity of these instruments. The fair value of marketable
securities is based on market prices. The fair value of fuel hedge
contracts is based on commodity exchange prices. The fair value of
restricted deposits approximates the carrying amount. The fair value
of interest rate swap agreements is based on quoted market swap
rates. The fair value of long-term debt is based on a discounted cash
flow analysis using the Company’s current borrowing rate.
NOTE
3. NEW PILOT CONTRACT
TRANSITION COSTS AND RESTRUCTURING CHARGES
New
Pilot Contract Transition Costs
On
May 19, 2009, Alaska announced that its pilots, represented by the Air Line
Pilots Association, ratified a new four-year contract. Among other
items, the contract has a provision that allows for pilots to receive, at
retirement, a cash payment equal to 25% of their accrued sick leave balance
multiplied by their hourly rate. The transition expense associated with
establishing this sick-leave payout program was $15.5 million. Pilots
also received a one-time cash bonus following ratification of the contract of
$20.3 million in the aggregate. These items have been combined and
reported as “New pilot contract transition costs” in the condensed statements of
operations.
Restructuring
Charges
In the
third quarter of 2008, Alaska announced reductions in work force among union and
non-union employees. The Company recorded a $3.7 million charge in
the third quarter of 2008 representing the severance payments and estimated
medical coverage obligation for the affected employees.
NOTE
4. FUEL HEDGE
CONTRACTS
The
Company’s operations are inherently dependent upon the price and availability of
aircraft fuel. To manage economic risk associated with fluctuations in aircraft
fuel prices, the Company periodically enters into call options for crude oil and
swap agreements for jet fuel refining margins, among other initiatives. The
Company records these instruments on the balance sheet at their fair
value. Changes in the fair value of these fuel hedge contracts are
recorded each period in aircraft fuel expense.
The
following table summarizes the components of aircraft fuel expense for the three
and nine months ended September 30, 2009 and 2008 (in millions):
Three
Months Ended September 30
|
Nine
Months Ended September 30
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Raw
or “into-plane” fuel cost
|
$ | 159.5 | $ | 334.5 | $ | 410.6 | $ | 918.8 | ||||||||
Impact
of hedging activity
|
7.1 | 144.6 | (4.7 | ) | (54.8 | ) | ||||||||||
Aircraft
fuel expense
|
$ | 166.6 | $ | 479.1 | $ | 405.9 | $ | 864.0 |
The net
cash paid for hedges that settled during the period was $3 million and $19
million during the three and nine months ended September 30, 2009,
respectively. The net cash received for the three and nine months
ended September 30, 2008 was $44.6 million and $128.3 million,
respectively.
The
Company uses the “market approach” in determining the fair value of its hedge
portfolio. The Company’s fuel hedge contracts consist of over-the-counter
contracts, which are not traded on an exchange. The fair value of
these contracts is determined based on observable inputs that are readily
available in active markets or can be derived from information available in
active, quoted markets. Therefore, the Company has categorized these
contracts as Level 2 in the fair value hierarchy described in Note
2.
The
Company continually monitors its positions with, and the credit quality of, the
financial institutions that are counterparties to its fuel-hedging contracts and
does not anticipate nonperformance by the counterparties.
Outstanding
future fuel hedge positions are as follows:
Approximate
% of
Expected
Fuel Requirements
|
Gallons
Hedged
(in
millions)
|
Weighted-Average
Crude Oil
Price
per Barrel
|
|
Fourth
Quarter 2009
|
50%
|
36.1
|
$76
|
Remainder
2009
|
50%
|
36.1
|
$76
|
First
Quarter 2010
|
46%
|
33.2
|
$68
|
Second
Quarter 2010
|
47%
|
35.7
|
$68
|
Third
Quarter 2010
|
46%
|
36.9
|
$72
|
Fourth
Quarter 2010
|
34%
|
24.9
|
$78
|
Full
Year 2010
|
43%
|
130.7
|
$71
|
First
Quarter 2011
|
26%
|
19.7
|
$86
|
Second
Quarter 2011
|
24%
|
19.1
|
$79
|
Third
Quarter 2011
|
22%
|
17.8
|
$80
|
Fourth
Quarter 2011
|
15%
|
11.2
|
$81
|
Full
Year 2011
|
22%
|
67.8
|
$82
|
First
Quarter 2012
|
10%
|
7.6
|
$87
|
Second
Quarter 2012
|
7%
|
5.8
|
$86
|
Full
Year 2012
|
4%
|
13.4
|
$86
|
The
Company also uses fixed-price physical contracts and financial swaps to fix the
refining margin component for approximately 47% and 27% of expected fourth
quarter 2009 and first quarter 2010 jet fuel purchases, respectively, at an
average price per gallon of 22 cents per gallon and 25 cents per gallon,
respectively.
As of
September 30, 2009 and December 31, 2008, the net fair values of the Company’s
fuel hedge positions were as follows (in millions):
September
30, 2009
|
December
31, 2008
|
|||||||
Crude
oil call options or “caps”
|
$ | 65.5 | $ | 43.5 | ||||
Crude
oil collar contracts
|
--- | (20.0 | ) | |||||
Refining
margin swap contracts
|
(1.4 | ) | --- | |||||
Total
|
$ | 64.1 | $ | 23.5 |
The
Company paid premiums of $67.2 million and $73.9 million to purchase the call
options that were in the portfolio at September 30, 2009 and December 31, 2008,
respectively. The Company does have agreements with its
counterparties for the refining margin swap contracts requiring cash collateral
if certain liability levels are met. The Company did not have any
cash collateral held by these counterparties at September 30, 2009 or December
31, 2008.
NOTE
5. FLEET
TRANSITION
In 2006,
Air Group’s Board of Directors approved a plan to accelerate the retirement of
Alaska’s MD-80 fleet and remove those aircraft from service by the end of 2008.
All of the MD-80s were removed from operation by the end of the third quarter of
2008. Two and four of the aircraft were retired during the third
quarter and first nine months of 2008, respectively, and placed in temporary
storage at an aircraft storage facility. As a result, the Company recorded a
$21.5 million and $47.5 million charge in the third quarter and first nine
months of 2008, respectively, reflecting the remaining discounted future lease
payments and other contract-related costs to be incurred through the remaining
lease terms ending in 2012.
NOTE
6. LONG-TERM
DEBT
Long-term
debt obligations were as follows (in millions):
September
30, 2009
|
December
31, 2008
|
|||||||
Fixed-rate
notes payable due through 2022
|
$ | 1,182.2 | $ | 1,192.1 | ||||
Variable-rate
notes payable due through 2019
|
327.4 | 252.2 | ||||||
16BBank
line-of-credit facility expiring in 2010
|
17B-- | 18B75.0 | ||||||
19BPre-delivery
payment facility expiring in 2011
|
20B-- | 21B39.9 | ||||||
Long-term
debt
|
1,509.6 | 1,559.2 | ||||||
Less current portion | (126.3 | ) | (225.1 | ) | ||||
$ | 1,383.3 | $ | 1,334.1 |
During
the first nine months of 2009, the Company borrowed $148.9 million using
fixed-rate and variable-rate debt secured by flight equipment and another $10.4
million from its pre-delivery payment facility. The Company made
payments of $208.8 million, including $50.3 million on its pre-delivery payment
facility and $75 million on its bank line-of-credit facility.
The
Company’s $80 million pre-delivery payment facility expires on August 31,
2011. During the second quarter of 2009, the available amount on the
facility was reduced from $152 million to $90.5 million and then again to $80
million on August 31, 2009. The reduction was primarily driven by the
decline in the remaining future obligations under the purchase agreement with
Boeing.
NOTE
7. EMPLOYEE BENEFIT
PLANS
Pension
Plans - Qualified Defined Benefit
Net
pension expense for the three and nine months ended September 30, 2009 and 2008
included the following components (in millions):
Three
Months Ended September 30
|
Nine
Months Ended September 30
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Service
cost
|
$ | 11.0 | $ | 11.7 | $ | 33.2 | $ | 35.0 | ||||||||
Interest
cost
|
16.7 | 15.7 | 50.1 | 47.0 | ||||||||||||
Expected
return on assets
|
(12.8 | ) | (18.0 | ) | (38.4 | ) | (53.9 | ) | ||||||||
Amortization
of prior service cost
|
1.1 | 1.1 | 3.3 | 3.3 | ||||||||||||
Actuarial
loss
|
7.2 | 1.4 | 21.6 | 4.2 | ||||||||||||
Net
pension expense
|
$ | 23.2 | $ | 11.9 | $ | 69.8 | $ | 35.6 |
The
Company contributed $15.9 million and $47.8 million to its qualified
defined-benefit plans during the three and nine months ended September 30, 2009,
respectively. Management is currently evaluating the amount of
additional funding for 2009, if any. The Company made $17.3 million
and $51.7 million in contributions to its qualified defined-benefit pension
plans during the three and nine months ended September 30, 2008,
respectively.
Pension
Plans - Nonqualified Defined Benefit
Net
pension expense for the unfunded, noncontributory defined-benefit plans was $0.8
million and $0.9 million for the three months ended September 30, 2009 and 2008,
respectively, and $2.3 million and $2.7 million for the nine months ended
September 30, 2009 and 2008, respectively.
Postretirement
Medical Benefits
Net
periodic benefit cost for the post-retirement medical plans for the three months
ended September 30, 2009 and 2008 was $4.0 million and $2.8 million,
respectively. The net periodic benefit cost for the nine months ended
September 30, 2009 and 2008 was $12.9 million and $8.4 million,
respectively.
NOTE
8. OTHER
ASSETS
Other
assets consisted of the following (in millions):
September 30,
2009
|
December
31, 2008
|
|||||||
Restricted
deposits (primarily restricted investments)
|
$ | 62.1 | $ | 57.4 | ||||
Deferred
costs and other*
|
14.6 | 16.0 | ||||||
$ | 76.7 | $ | 73.4 |
*Deferred
costs and other includes deferred financing costs, long-term prepaid rent, lease
deposits and other items.
NOTE
9. MILEAGE
PLAN
Mileage
Plan deferrals and liabilities are included under the following balance sheet
captions (in
millions):
September
30, 2009
|
December
31, 2008
|
|||||||
Current
Liabilities:
|
||||||||
Other
accrued liabilities
|
$ | 268.6 | $ | 280.4 | ||||
Other
Liabilities and Credits (non-current):
|
||||||||
Deferred
revenue
|
409.7 | 394.1 | ||||||
Other
liabilities
|
12.8 | 15.9 | ||||||
$ | 691.1 | $ | 690.4 |
Mileage
Plan revenue is included under the following condensed statement of operations
captions for the three and nine months ended September 30 (in
millions):
|
Three
Months Ended September 30
|
Nine
Months Ended September 30
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Passenger
revenues
|
$ | 51.9 | $ | 39.8 | $ | 135.4 | $ | 100.6 | ||||||||
Other
- net revenues
|
39.5 | 25.5 | 109.8 | 76.6 | ||||||||||||
Change
in Mileage Plan terms
|
-- | 42.3 | -- | 42.3 | ||||||||||||
|
$ | 91.4 | $ | 107.6 | $ | 245.2 | $ | 219.5 |
In the
third quarter of 2008, the Company changed the terms of its Mileage Plan program
regarding the expiration of award miles. Beginning in the third
quarter of 2008, Mileage Plan accounts with no activity for two years
are deleted. Under the previous policy, accounts with no activity for
three years were deleted. As a result of the deletion of a number of
accounts at that time, the Company reduced its liability for future awards by
$42.3 million, which was recorded in the condensed statements of operations as
“Change in Mileage Plan terms.”
NOTE
10. STOCK-BASED COMPENSATION
PLANS
Stock-based
compensation recorded by the Company relates to stock awards granted to Company
employees by Air Group. As the Company does not have common stock
that is traded on an exchange and all equity-based awards are related to Air
Group common stock, the disclosures below have been limited.
The
Company has stock awards outstanding under a number of Air Group’s long-term
incentive equity plans, one of which continues to provide for the grant of stock
awards of Air Group’s common stock to directors, officers and employees of the
Company. Compensation expense is recorded over the shorter of the
vesting period or the period between the grant date and the date the employee
becomes retirement-eligible as defined in the applicable plan. All
stock-based compensation expense is recorded in wages and benefits in the
condensed statements of operations.
Stock
Options
During
the nine months ended September 30, 2009, Air Group granted 347,588 options to
the Company’s employees with a weighted-average fair value of $14.00 per
share. During the same period in the prior year, Air Group granted
326,113 options with a weighted-average fair value of $11.09 per
share.
The
Company recorded stock-based compensation expense related to stock options of
$0.7 million and $0.5 million for the three months ended September 30, 2009 and
2008, respectively. The Company recorded expense of $3.3 million and
$3.2 million in the nine months ended September 30, 2009 and 2008,
respectively. As of September 30, 2009, $4.3 million of compensation
cost associated with unvested stock option awards attributable to future service
had not yet been recognized. This amount will be recognized as
expense over a weighted-average period of 2.4 years.
As of
September 30, 2009, options held by employees of the Company to purchase
2,248,244 shares of Air Group’s common stock were outstanding with a
weighted-average exercise price of $29.51. Of that total, 1,554,378
were exercisable at a weighted-average exercise price of $29.88.
Restricted
Stock Awards
During
the nine months ended September 30, 2009, Air Group awarded 226,097 restricted
stock units (RSUs) to certain employees of the Company, with a weighted-average
grant date fair value of $27.17. This amount reflects the value of
the RSU awards at the grant date based on the closing price of Air Group’s
common stock. The Company recorded stock-based compensation expense
related to RSUs of $0.9 million and $1.4 million for the three months ended
September 30, 2009 and 2008, respectively, and $4.4 million and $4.5 million for
the nine-month periods ended September 30, 2009 and 2008,
respectively.
As of
September 30, 2009, $5.7 million of compensation cost associated with unvested
restricted stock awards attributable to future service of employees of the
Company had not yet been recognized. This amount will be recognized
as expense over a weighted-average period of two years.
Employee
Stock Purchase Plan
Compensation
expense recognized under Air Group’s Employee Stock Purchase Plan was $0.3
million for both of the three-month periods ended September 30, 2009 and 2008,
and $1.0 million and $1.2 million for the nine months ended September 30, 2009
and 2008, respectively.
Summary
of Stock-Based Compensation
The table
below summarizes the components of total stock-based compensation for the three
and nine months ended September 30 (in millions):
|
Three
Months Ended September 30
|
Nine
Months Ended September 30
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Stock
options
|
$ | 0.7 | $ | 0.5 | $ | 3.3 | $ | 3.2 | ||||||||
Restricted
stock units
|
0.9 | 1.4 | 4.4 | 4.5 | ||||||||||||
Performance
share units
|
--- | --- | --- | (0.3 | ) | |||||||||||
Employee
stock purchase plan
|
0.3 | 0.3 | 1.0 | 1.2 | ||||||||||||
|
$ | 1.9 | $ | 2.2 | $ | 8.7 | $ | 8.6 |
NOTE
11. RELATED PARTY
TRANSACTIONS
Capacity
Purchase Agreement
The
Company has entered into a Capacity Purchase Agreement (CPA) with its sister
company, Horizon Air Industries, Inc. (Horizon), whereby the Company purchases
capacity in certain routes (“CPA markets”) from Horizon as specified by the
agreement. Under the CPA, the Company pays Horizon a contractual amount for the
purchased capacity in the CPA markets, regardless of the revenue collected on
those flights. The amount paid to Horizon is generally based on Horizon’s
operating costs, plus a margin. The Company establishes the scheduling, routes
and pricing for the flights, and has the inventory and revenue risk in those
markets.
The
Company paid $69.9 million and $81.8 million to Horizon under the CPA agreement
for the quarters ended September 30, 2009 and 2008, respectively, and
$191.2 million and $231.2 million during the nine months ended
September 30, 2009 and 2008, respectively.
Intercompany
Services
The
Company performs all ticket processing for Horizon. Horizon’s ticket sales are
recorded by Alaska as air traffic liability and revenue is allocated to and
recorded by Horizon when transportation is provided.
Mileage
Plan participants may earn and redeem miles on Horizon flights. As of
January 1, 2009, the Company began allocating Mileage Plan revenue to Horizon
for miles redeemed on Horizon flights and also began allocating expenses to
Horizon for miles earned on Horizon flights. For the three and nine
months ended September 30, 2009, $2.0 million and $5.5 million of passenger
revenue, respectively, was allocated to Horizon for miles redeemed on Horizon
flights. For the nine months ended September 30, 2009, a $0.1 million
credit to selling expenses was allocated to Horizon for miles earned on Horizon
flights. There was no allocation of Mileage Plan revenues or expenses
in 2008.
The
Company provides certain services to Horizon for which the Company receives
payment from Horizon based on the cost of the services, including personnel
expenses related to development and maintenance of certain information and
communication systems, processing Horizon’s revenue transactions, accounting and
payroll services, and other administrative services. The Company also pays
certain leasing and other facilities costs on Horizon’s behalf that are
reimbursed monthly by Horizon. Total amounts received by the Company from
Horizon were $3.2 million and $2.4 million for the quarters ended
September 30, 2009 and 2008, respectively,
and $8.9 million and $7.5 million for the nine months ended September 30,
2009 and 2008, respectively.
In the
normal course of business, Alaska and Horizon each provide certain ground
handling services to the other company. Charges for ground services provided by
the Company to Horizon totaled $2.6 million and $2.2 million during the three
months ended September 30, 2009 and 2008, respectively, and $7.4 million
and $6.9 million for the nine months ended September 30, 2009 and 2008,
respectively. Charges for ground services provided by Horizon to the Company
totaled $1.5 million and $2.3 million for the three months ended
September 30, 2009 and 2008, respectively, and $4.6 million and $7.1
million for the nine months ended September 30, 2009 and 2008,
respectively.
The
Company advances Horizon funds at varying interest rates. All amounts are
payable on demand. Interest income recognized related to the Horizon receivable
totaled $1.2 million and $2.2 million for the three months ended
September 30, 2009 and 2008, respectively and $4.3 million and $7 million
for the nine months ended September 30, 2009 and 2008, respectively.
Offsetting this amount is interest paid to Horizon on ticket sales processed by
Alaska. Interest expense related to these ticket sales was $0.5 million and $1
million for the three months ended September 30, 2009 and 2008,
respectively, and $1.7 million and $3.4 million for the nine months ended
September 30, 2009 and 2008, respectively.
At
September 30, 2009, receivables from related companies include $142 million from
Horizon, $7 million from Alaska Air Group Leasing (AAGL) and $153.9 million from
Air Group. At September 30, 2009, payables to related companies
include $3 million to Horizon, $0.8 million to AAGL and $62.1 million to Air
Group.
NOTE
12. CONTINGENCIES
Grievance
with International Association of Machinists
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) alleging that Alaska violated the CBA
by, among other things, subcontracting the ramp service operation in
Seattle. The dispute was referred to an arbitrator and hearings on
the grievance commenced in January 2007, with a final hearing date in August
2007. In July 2008, the arbitrator issued a final decision regarding
basic liability in the matter. In that ruling, the arbitrator found
that Alaska had violated the CBA and instructed Alaska and the IAM to attempt to
negotiate a remedy. In June 2009, another hearing was conducted, specifically
related to the parties’ views on available remedies. Subsequent to
that hearing, there have been additional executive sessions of the arbitration
panel. Further hearings regarding the nature and scope of available
remedies are scheduled to commence in December 2009. Management
currently does not believe that any final remedy will materially impact our
financial position or results of operations.
Other
items
The
Company is a party to routine litigation matters incidental to its business and
with respect to which no material liability is expected.
Management
believes the ultimate disposition of the matters discussed above is not likely
to materially affect the Company’s financial position or results of operations.
This forward-looking statement is based on management’s current understanding of
the relevant law and facts, and it is subject to various contingencies,
including the potential costs and risks associated with litigation and the
actions of arbitrators, judges and juries.
OVERVIEW
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand the
Company, our operations and our present business
environment. MD&A is provided as a supplement to – and should be
read in conjunction with – our condensed financial statements and the
accompanying notes. All statements in the following discussion that
are not statements of historical information or descriptions of current
accounting policy are forward-looking statements. Please consider our
forward-looking statements in light of the risks referred to in this report’s
introductory cautionary note and the risks mentioned in the Company’s filings
with the Securities and Exchange Commission, including those listed in Part I,
“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2008. This overview summarizes MD&A,
which includes the following sections:
|
·
|
Third Quarter in Review
– highlights from the third quarter of 2009 outlining some of the major
events that happened during the period and how they affected our financial
performance.
|
|
·
|
Results of Operations –
an in-depth analysis of the results of operations for the nine months
ended September 30, 2009. We believe this analysis will help
the reader better understand our condensed statements of
operations. This section also includes forward-looking
statements regarding our view of the remainder of
2009.
|
|
·
|
Liquidity and Capital
Resources – as we are filing this Form 10-Q with reduced
disclosures in accordance with General Instruction H(1)(a) and (b) of Form
10-Q, we do not discuss liquidity and capital
resources. Liquidity and capital resources are managed at an
Air Group level. As such, we would refer the reader to Alaska
Air Group, Inc.’s Form 10-Q filed on November 6, 2009 for an analysis of
cash flows, liquidity, and capital
resources.
|
Our
filings with the Securities and Exchange Commission, including our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports are accessible free of charge at www.alaskaair.com. The
information contained on our website is not a part of this quarterly report on
Form 10-Q.
THIRD
QUARTER IN REVIEW
Our
pretax income was $124.8 million during the third quarter of 2009 compared to a
pretax loss of $107.4 million in the third quarter of 2008. The
increase in our pretax earnings was primarily due to the $312.5 million decline
in aircraft fuel costs and the decline in fleet transition costs from the third
quarter of 2008, partially offset by an $83.1 million decline in operating
revenues. The decline in fuel cost is primarily due to a 49%
reduction in the cost per gallon of raw fuel and a $137.5 million reduction in
net losses associated with our fuel-hedging portfolio. The 8.8%
decline in operating revenues is more fully described below.
|
·
|
Mainline
passenger revenue declined 6.5% because of continued demand weakness as
compared to the prior year. In the third quarter, we had a
capacity reduction of 3.3% and a 3.4% decline in passenger unit
revenue compared with the prior-year period. This compares with
a 2.2% year-over-year decline in the second quarter of 2009. We
believe that demand deterioration is moderating compared with the
prior-year periods as evidenced by a year-over-year increase in passenger
traffic in the third quarter. However, ticket yield continues
to be under significant
pressure.
|
|
·
|
As
previously announced, we began charging a $15 first bag service charge on
July 7, 2009. This fee does not apply to our MVP or MVP Gold Mileage Plan
members, for those traveling solely within the state of Alaska, or for
certain other passengers. For the third quarter, the fee
generated $19.8 million of incremental revenue. As previously
disclosed, we believe this fee will generate at least $70 million of
incremental revenue for Air Group on an annual basis, and Air Group
expects to meet or exceed the estimate of at least $30 million of
incremental revenue during the last half of
2009.
|
|
·
|
Mileage
Plan revenue increased by $14 million primarily as a result of an increase
in the commission revenue recognized from the sale of Mileage Plan
miles. See further discussion in the “Results of Operations”
segment beginning on page 24.
|
|
·
|
We
recorded $42.3 million in the prior-year quarter associated with a change
in our Mileage Plan program terms.
|
|
Other
significant developments during the third quarter of 2009 and through the filing
of this Form 10-Q are described below.
New
Markets
In the
third quarter, we announced that we would begin daily non-stop service between
Portland and Chicago on November 16, 2009. We launched previously
announced service from Seattle to two new cities in Texas - Houston and Austin
during the quarter, and our previously announced non-stop service between
Seattle and Atlanta began in October.
Labor
Agreements
As
previously disclosed, in August 2009, Alaska and its aircraft technicians
reached an agreement on a two-year contract extension. The extended
contract, which becomes amendable on October 17, 2011, provides technicians with
a 1.5-percent pay scale increase in October 2009 and 2010. In addition,
technicians will no longer participate in the company’s Variable Pay Plan.
Instead, they will participate in the Performance-Based Pay (PBP)
Plan.
In
October 2009, the International Association of Machinists presented its
membership with two-year contract extension proposals for Alaska’s clerical,
office and passenger service employees, and its ramp service and stores
agents. The proposed extension includes participation in the PBP
incentive plan and a 1.5-percent pay scale increase in June 2010 and
2011. The vote by the covered employees is expected to be completed
in December 2009.
Outlook
Looking
ahead, year-over-year advance booked load factor for November is up about 3.5
points for mainline flying and about three points for purchased capacity
flying. December advance booked load factor is up about 1.5 points
and about three points for mainline and purchased capacity flying, respectively,
although the trend has been for the year-over-year comparison to improve as the
date of travel approaches. These advance booked load factors are on
relatively flat expected mainline capacity and an expected increase of about 16%
in purchased capacity from Horizon for the fourth quarter.
We are
continuing to see lower year-over-year unit revenues and ticket yields due to
the current economic conditions and need to stimulate traffic with low fares and
sale activity. We expect to continue to see year-over-year declines
in unit revenue through the fourth quarter based on current bookings and fare
sales. The impacts of our new first bag fee and new affinity card
agreement, along with other revenue initiatives such as increases in on-board
products, have helped to ease the impact of revenue declines from low ticket
yields.
RESULTS
OF OPERATIONS
COMPARISON
OF NINE MONTHS ENDED SEPTEMBER 30, 2009 TO NINE MONTHS ENDED SEPTEMBER 30,
2008
Our net
income for the nine months ended September 30, 2009 was $91.0 million compared
to a net loss of $38.7 million for the first nine months of
2008. Items that impact the comparability between the periods are as
follows:
|
·
|
Both
periods include adjustments to reflect timing of gain and loss recognition
resulting from mark-to-market fuel hedge accounting. For the
first nine months of 2009, we recognized net mark-to-market gains of $47.4
million ($29.6 million after tax), compared to net losses of $52.4 million
($32.8 million after tax) in the same period of
2008.
|
|
·
|
The
first nine months of 2009 include the new pilot contract transition costs
of $35.8 million ($22.3 million after
tax).
|
|
·
|
The
first nine months of 2008 include charges of $47.5 million ($29.8 million
after tax) related to the completion of our MD-80 fleet
transition.
|
|
·
|
The
first nine months of 2008 included a $42.3 million benefit ($26.5 million
after tax) related to a change in the terms of our Mileage Plan
program.
|
|
·
|
The
first nine months of 2008 included restructuring charges of $3.7 million
($2.3 million after tax) related to the reduction in our work
force.
|
Financial
and statistical data is shown on page 23.
An in-depth discussion of the results begins on page 24.
Financial
and Statistical Data (unaudited)
|
||||||||||||||||||||||||
Three
Months Ended September 30
|
Nine
Months Ended September 30
|
|||||||||||||||||||||||
Financial
Data (in millions):
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Operating
Revenues:
|
||||||||||||||||||||||||
Passenger
|
$ | 702.0 | $ | 751.2 | (6.5 | ) | $ | 1,844.3 | $ | 2,041.2 | (9.6 | ) | ||||||||||||
Freight
and mail
|
26.5 | 29.2 | (9.2 | ) | 69.0 | 77.1 | (10.5 | ) | ||||||||||||||||
Other
- net
|
48.4 | 33.5 | 44.5 | 136.5 | 101.2 | 34.9 | ||||||||||||||||||
Change
in Mileage Plan terms
|
- | 42.3 |
NM
|
- | 42.3 |
NM
|
||||||||||||||||||
Total
mainline operating revenues
|
776.9 | 856.2 | (9.3 | ) | 2,049.8 | 2,261.8 | (9.4 | ) | ||||||||||||||||
Passenger
- purchased capacity
|
81.9 | 85.7 | (4.4 | ) | 211.4 | 233.9 | (9.6 | ) | ||||||||||||||||
Total
Operating Revenues
|
858.8 | 941.9 | (8.8 | ) | 2,261.2 | 2,495.7 | (9.4 | ) | ||||||||||||||||
Operating
Expenses:
|
||||||||||||||||||||||||
Wages
and benefits
|
199.1 | 182.5 | 9.1 | 594.9 | 558.9 | 6.4 | ||||||||||||||||||
Variable
incentive pay
|
20.8 | 4.9 | 324.5 | 44.0 | 10.8 | 307.4 | ||||||||||||||||||
Aircraft
fuel, including hedging gains and losses
|
166.6 | 479.1 | (65.2 | ) | 405.9 | 864.0 | (53.0 | ) | ||||||||||||||||
Aircraft
maintenance
|
36.5 | 32.6 | 12.0 | 129.4 | 112.1 | 15.4 | ||||||||||||||||||
Aircraft
rent
|
27.2 | 26.3 | 3.4 | 81.8 | 82.4 | (0.7 | ) | |||||||||||||||||
Landing
fees and other rentals
|
43.0 | 42.3 | 1.7 | 124.4 | 126.9 | (2.0 | ) | |||||||||||||||||
Contracted
services
|
29.7 | 31.9 | (6.9 | ) | 88.6 | 100.5 | (11.8 | ) | ||||||||||||||||
Selling
expenses
|
29.4 | 33.1 | (11.2 | ) | 76.8 | 95.6 | (19.7 | ) | ||||||||||||||||
Depreciation
and amortization
|
45.1 | 42.8 | 5.4 | 132.6 | 123.2 | 7.6 | ||||||||||||||||||
Food
and beverage service
|
12.0 | 12.8 | (6.3 | ) | 34.9 | 37.1 | (5.9 | ) | ||||||||||||||||
Other
|
38.0 | 41.0 | (7.3 | ) | 119.3 | 130.2 | (8.4 | ) | ||||||||||||||||
New
pilot contract transition costs
|
- | - |
NM
|
35.8 | - |
NM
|
||||||||||||||||||
Restructuring
charges
|
- | 3.7 |
NM
|
- | 3.7 |
NM
|
||||||||||||||||||
Fleet
transition costs - MD-80
|
- | 21.5 |
NM
|
- | 47.5 |
NM
|
||||||||||||||||||
Total
mainline operating expenses
|
647.4 | 954.5 | (32.2 | ) | 1,868.4 | 2,292.9 | (18.5 | ) | ||||||||||||||||
Purchased
capacity costs
|
74.7 | 85.6 | (12.7 | ) | 206.3 | 246.8 | (16.4 | ) | ||||||||||||||||
Total
Operating Expenses
|
722.1 | 1,040.1 | (30.6 | ) | 2,074.7 | 2,539.7 | (18.3 | ) | ||||||||||||||||
Operating
Income (Loss)
|
136.7 | (98.2 | ) | 186.5 | (44.0 | ) | ||||||||||||||||||
Interest
income
|
9.6 | 12.8 | 29.2 | 38.2 | ||||||||||||||||||||
Interest
expense
|
(22.4 | ) | (23.5 | ) | (67.5 | ) | (67.5 | ) | ||||||||||||||||
Interest
capitalized
|
1.4 | 4.8 | 5.7 | 16.1 | ||||||||||||||||||||
Other
- net
|
(0.5 | ) | (3.3 | ) | (5.3 | ) | (2.7 | ) | ||||||||||||||||
(11.9 | ) | (9.2 | ) | (37.9 | ) | (15.9 | ) | |||||||||||||||||
Income
(Loss) Before Income Tax
|
$ | 124.8 | $ | (107.4 | ) | $ | 148.6 | $ | (59.9 | ) | ||||||||||||||
Mainline
Operating Statistics:
|
||||||||||||||||||||||||
Revenue
passengers (000)
|
4,240 | 4,532 | (6.4 | ) | 11,796 | 13,037 | (9.5 | ) | ||||||||||||||||
RPMs
(000,000) "traffic"
|
5,020 | 5,012 | 0.2 | 13,812 | 14,410 | (4.1 | ) | |||||||||||||||||
ASMs
(000,000) "capacity"
|
6,097 | 6,306 | (3.3 | ) | 17,469 | 18,628 | (6.2 | ) | ||||||||||||||||
Passenger
load factor
|
82.3 | % | 79.5 | % |
2.8
|
pts | 79.1 | % | 77.4 | % |
1.7
|
pts | ||||||||||||
Yield
per passenger mile
|
13.98 | ¢ | 14.99 | ¢ | (6.7 | ) | 13.35 | ¢ | 14.17 | ¢ | (5.8 | ) | ||||||||||||
Operating
revenue per ASM (RASM)
|
12.74 | ¢ | 13.58 | ¢ | (6.2 | ) | 11.73 | ¢ | 12.14 | ¢ | (3.4 | ) | ||||||||||||
Change
in Mileage Plan terms per ASM
|
0.00 | ¢ | 0.67 | ¢ |
NM
|
0.00 | ¢ | 0.23 | ¢ |
NM
|
||||||||||||||
Passenger
revenue per ASM
|
11.51 | ¢ | 11.91 | ¢ | (3.4 | ) | 10.56 | ¢ | 10.96 | ¢ | (3.6 | ) | ||||||||||||
Operating
expenses per ASM
|
10.62 | ¢ | 15.14 | ¢ | (29.9 | ) | 10.70 | ¢ | 12.31 | ¢ | (13.1 | ) | ||||||||||||
Aircraft
fuel cost per ASM
|
2.73 | ¢ | 7.60 | ¢ | (64.1 | ) | 2.32 | ¢ | 4.64 | ¢ | (50.0 | ) | ||||||||||||
New
pilot contract transition costs per ASM
|
0.00 | ¢ | 0.00 | ¢ |
NM
|
0.21 | ¢ | 0.00 | ¢ |
NM
|
||||||||||||||
Restructuring
charges per ASM
|
0.00 | ¢ | 0.06 | ¢ |
NM
|
0.00 | ¢ | 0.02 | ¢ |
NM
|
||||||||||||||
Fleet
transition costs per ASM
|
0.00 | ¢ | 0.34 | ¢ |
NM
|
0.00 | ¢ | 0.25 | ¢ |
NM
|
||||||||||||||
Aircraft
fuel cost per gallon
|
$ | 2.07 | $ | 5.57 | (62.8 | ) | $ | 1.77 | $ | 3.34 | (47.0 | ) | ||||||||||||
Economic
fuel cost per gallon
|
$ | 2.15 | $ | 3.47 | (38.0 | ) | $ | 1.98 | $ | 3.14 | (36.9 | ) | ||||||||||||
Fuel
gallons (000,000)
|
80.1 | 86.0 | (6.9 | ) | 229.9 | 258.3 | (11.0 | ) | ||||||||||||||||
Average
number of full-time equivalent employees
|
9,002 | 9,594 | (6.2 | ) | 8,987 | 9,785 | (8.2 | ) | ||||||||||||||||
Aircraft
utilization (blk hrs/day)
|
9.9 | 10.8 | (8.3 | ) | 9.9 | 10.8 | (8.3 | ) | ||||||||||||||||
Average
aircraft stage length (miles)
|
1,044 | 981 | 6.4 | 1,027 | 975 | 5.3 | ||||||||||||||||||
Operating
fleet at period-end
|
116 | 110 | 6 | a/c | 116 | 110 | 6 | a/c | ||||||||||||||||
Regional
Operating Statistics:
|
||||||||||||||||||||||||
RPMs
(000,000)
|
298 | 304 | (2.0 | ) | 777 | 873 | (11.0 | ) | ||||||||||||||||
ASMs
(000,000)
|
383 | 391 | (2.0 | ) | 1,058 | 1,153 | (8.2 | ) | ||||||||||||||||
Passenger
load factor
|
77.8 | % | 77.7 | % |
0.1
|
pts | 73.4 | % | 75.7 | % |
(2.3
|
)pts | ||||||||||||
Yield
per passenger mile
|
27.48 | ¢ | 28.19 | ¢ | (2.5 | ) | 27.21 | ¢ | 26.79 | ¢ | 1.6 | |||||||||||||
Operating
revenue per ASM
|
21.38 | ¢ | 21.92 | ¢ | (2.5 | ) | 19.98 | ¢ | 20.29 | ¢ | (1.5 | ) | ||||||||||||
Operating
expenses per ASM
|
19.50 | ¢ | 21.89 | ¢ | (10.9 | ) | 19.50 | ¢ | 21.41 | ¢ | (8.9 | ) | ||||||||||||
NM
= Not Meaningful
|
REVENUES
Total
operating revenues declined $234.5 million, or 9.4%, during the first nine
months of 2009 as compared to the same period in 2008. The changes
are summarized in the following table:
Nine
Months Ended September 30
|
||||||||||||
(in
millions)
|
2009
|
2008
|
%
Change
|
|||||||||
Passenger
revenue - mainline
|
$ | 1,844.3 | $ | 2,041.2 | (9.6 | ) | ||||||
Freight
and mail
|
69.0 | 77.1 | (10.5 | ) | ||||||||
Other
- net
|
136.5 | 101.2 | 34.9 | |||||||||
Change
in Mileage Plan Terms
|
- | 42.3 |
NM
|
|||||||||
Total
mainline revenues
|
$ | 2,049.8 | $ | 2,261.8 | (9.4 | ) | ||||||
Passenger
revenue - purchased capacity
|
211.4 | 233.9 | (9.6 | ) | ||||||||
Total
operating revenues
|
$ | 2,261.2 | $ | 2,495.7 | (9.4 | ) |
NM = Not
Meaningful
Operating
Revenues – Mainline
Mainline
passenger revenue for the first nine months fell by 9.6% on a 6.2% reduction in
capacity. There was a 3.6% decline in PRASM, which was driven by a 5.8% drop in
ticket yield compared to the prior-year period, partially offset by a 1.7-point
increase in load factor.
Our load
factor in October 2009 was 77.0%,
compared to 73.6% in October 2008. Our advance bookings currently suggest that
load factors will be up about 3.5 points in November and 1.5 points in December
compared to the prior year.
Ancillary
revenue included in passenger revenue increased from $71.4 million in the first
nine months of 2008 to $88.4 million in the current year. The
increase is primarily due to the implementation of our first checked bag fee in
the third quarter of 2009 ($17.3 million) and our second checked bag fee in the
third quarter of 2008, resulting in a year-over-year increase of $7.1 million,
partially offset by a decline in other fees. The decline in other
fees is the result of fewer passengers.
Freight
and mail revenue decreased $8.1 million, or 10.5%, primarily as a result of
lower mail volumes and yield and lower freight fuel surcharges, partially offset
by higher freight volumes and yield.
Other –
net revenue increased $35.3 million, or 34.9%, from the prior-year
quarter. Mileage Plan revenue increased by $33.2 million primarily as
a result of an increase in the commission revenue recognized from the sale of
Mileage Plan miles. The increase in the commission component from the
prior-year period is driven by two primary factors – 1) the decline in the fair
value assigned to sold miles as our award structure changed in the fourth
quarter of 2008 and 2) the increase in the rate paid to us by our affinity
credit card partner for miles sold. The new affinity card agreement
was effective January 1, 2009.
In the
third quarter of 2008, we reduced the length of time that a Mileage Plan account
could be inactive from three years to two years before the account is
deleted. As a result of this change in terms, our Mileage Plan
liability was reduced by $42.3 million in the prior-year period.
Passenger
Revenue – Purchased Capacity
Passenger
revenue - purchased capacity flying fell by $22.5 million over the same period
of last year because of an 8.2% decline in capacity combined with a 1.5%
decrease in unit revenue compared to the prior year. Unit revenue dropped as a
result of a 2.3-point decline in load factor, partially offset by a 1.6%
improvement in ticket yield.
EXPENSES
For the
nine months ended September 30, 2009, total operating expenses decreased $465.0
million or 18.3% compared to the same period in 2008 as a result of a
significantly lower aircraft fuel cost, partially offset by higher mainline
non-fuel operating costs. We believe it is useful to summarize operating
expenses as follows, which is consistent with the way expenses are reported
internally and evaluated by management:
Nine
Months Ended September 30
|
||||||||||||
(in
millions)
|
2009
|
2008
|
%
Change
|
|||||||||
Mainline
fuel expense
|
$ | 405.9 | $ | 864.0 | (53.0 | ) | ||||||
Mainline
non-fuel operating expenses
|
1,462.5 | 1,428.9 | 2.4 | |||||||||
Mainline
operating expenses
|
1,868.4 | 2,292.9 | (18.5 | ) | ||||||||
Purchased
capacity costs
|
206.3 | 246.8 | (16.4 | ) | ||||||||
Total
operating expenses
|
$ | 2,074.7 | $ | 2,539.7 | (18.3 | ) |
NM = Not
Meaningful
Mainline
Operating Expenses
Total
mainline operating expenses declined $424.5 million or 18.5% during the first
nine months of 2009 compared to the same period last year. The reduction was
mostly due to the $458.1 million decline in aircraft fuel expense, partially
offset by the new pilot contract transition costs and increases in wages and
benefits, variable incentive pay and maintenance. Significant
operating expense variances from the first nine months of 2008 are more fully
described below.
Wages
and Benefits
Wages and
benefits were up $36.0 million, or 6.4%, compared to the first nine months of
2008. The primary components of wages and benefits are shown in the
following table:
Nine
Months Ended September 30
|
||||||||||||
(in
millions)
|
2009
|
2008
|
%
Change
|
|||||||||
Wages
|
$ | 405.9 | $ | 410.7 | (1.2 | ) | ||||||
Pension
and defined-contribution retirement benefits
|
87.6 | 50.9 | 72.1 | |||||||||
Medical
benefits
|
60.1 | 55.1 | 9.1 | |||||||||
Other
benefits and payroll taxes
|
41.3 | 42.2 | (2.1 | ) | ||||||||
Total
wages and benefits
|
$ | 594.9 | $ | 558.9 | 6.4 |
Wages
declined 1.2% on an 8.2% reduction in FTEs compared to the first nine months of
2008. Wages have not declined in step with the FTE reduction because
of higher wage rates for the pilot group in connection with their new contract
and increased average wages for certain other employees stemming from higher
average seniority.
The 72.1%
increase in pension and other retirement-related benefits is primarily due to a
$36.0 million increase in our defined-benefit pension cost driven by the
significant decline in the market value of pension assets at the end of
2008.
Medical
benefits increased 9.1% from the prior-year period primarily as a result of a
rise in the post-retirement medical cost for the pilot group in connection with
their new contract.
We expect
wages and benefits to be up in the fourth quarter of 2009 compared to the fourth
quarter of 2008 for the same reasons mentioned above.
Variable
Incentive Pay
Variable
incentive pay expense increased from $10.8 million in the first nine months of
2008 to $44.0 million in the same period of 2009. The increase reflects higher
year-over-year expense for the PBP incentive plan based on estimated full-year
Air Group results and those estimated results compared to our original 2009
plan. The increase can also be attributed to the addition of pilots,
flight attendants and mechanics to the PBP incentive plan, which results in a
larger expected payout for 2009 than the incentive plans under which they were
previously covered. We expect fourth quarter 2009 incentive pay will be higher
than in the same period of 2008.
Aircraft
Fuel
Aircraft
fuel expense includes both raw
fuel expense (as defined below) plus the effect of mark-to-market
adjustments to our fuel hedge portfolio included in our condensed statement of
operations as the value of that portfolio increases and decreases. Our aircraft
fuel expense is very volatile, even between quarters, because it includes these
gains or losses in the value of the underlying instrument as crude oil prices
and refining margins increase or decrease. Raw fuel expense is defined
as the price that we generally pay at the airport, or the “into-plane” price,
including taxes and fees. Raw fuel prices are impacted by world oil prices and
refining costs, which can vary by region in the U.S. Raw fuel expense approximates
cash paid to suppliers and does not reflect the effect of our fuel
hedges.
Aircraft
fuel expense declined $458.1 million, or 53.0%, compared to the first nine
months of 2008. The elements of the change are illustrated in the following
table:
Nine
Months Ended September 30
|
||||||||||||
(in
millions, except per-gallon amounts)
|
2009
|
2008
|
%
Change
|
|||||||||
Fuel
gallons consumed
|
229.9 | 258.3 | (11.0 | ) | ||||||||
Raw
price per gallon
|
$ | 1.79 | $ | 3.56 | (49.7 | ) | ||||||
Total
raw fuel expense
|
$ | 410.6 | $ | 918.8 | (55.3 | ) | ||||||
Net
impact on fuel expense from (gains) and losses arising from
fuel-hedging activities
|
(4.7 | ) | (54.8 | ) |
NM
|
|||||||
Aircraft
fuel expense
|
$ | 405.9 | $ | 864.0 | (53.0 | ) |
NM = Not
Meaningful
Fuel
gallons consumed declined 11.0%, primarily as a result of an 8.2% reduction in
aircraft flight hours and the improved fuel efficiency of our fleet as we
completed the transition to newer, more fuel-efficient B737-800 aircraft in the
second half of 2008.
The raw
fuel price per gallon declined 49.7% as a result of lower West Coast jet fuel
driven by lower crude oil costs and refining margins. Based on the current price
of jet fuel, we expect that the raw price per gallon in the fourth quarter of
2009 will be lower than in 2008, although not to the same extent as in the first
nine months of the year.
We also
evaluate economic fuel
expense, which we define as raw fuel expense less the
cash we receive from hedge counterparties for hedges that settle during the
period, offset by the premium expense that we paid for those contracts. A key
difference between aircraft
fuel expense and economic fuel expense is the
timing of gain or loss recognition on our hedge portfolio. When we refer to
economic fuel expense,
we include gains and losses only when they are realized for those contracts that
were settled during the period based on their original contract
terms. We believe this is the best measure of the effect that fuel
prices are currently having on our business because it most closely approximates
the net cash outflow associated with purchasing fuel for our operations.
Accordingly, many industry analysts evaluate our results using this measure, and
it is the basis for most internal management reporting and incentive pay
plans.
Our economic fuel expense is
calculated as follows:
Nine
Months Ended September 30
|
||||||||||||
(in
millions, except per-gallon amounts)
|
2009
|
2008
|
%
Change
|
|||||||||
Raw
fuel expense
|
$ | 410.6 | $ | 918.8 | (55.3 | ) | ||||||
Plus
or minus: net of cash received from settled hedges and
premium expense recognized
|
42.7 | (107.2 | ) |
NM
|
||||||||
Economic
fuel expense
|
$ | 453.3 | $ | 811.6 | (44.1 | ) | ||||||
Fuel
gallons consumed
|
229.9 | 258.3 | (11.0 | ) | ||||||||
Economic
fuel cost per gallon
|
$ | 1.98 | $ | 3.14 | (36.9 | ) |
NM = Not
meaningful
As noted
above, the total net expense recognized for hedges that settled during the
period was $42.7 million in the first nine months of 2009, compared to a net
cash benefit of $107.2 million in the same period of 2008. These
amounts represent the net of the premium expense recognized for those hedges and
any cash received or paid upon settlement. The decrease is primarily due to the
significant drop in crude oil prices over the past year.
We
currently expect economic fuel
expense to be lower for the remainder of 2009 than in 2008 because of
lower jet fuel prices.
Aircraft
Maintenance
Aircraft
maintenance increased by $17.3 million, or 15.4%, compared to the prior-year
period primarily because of a higher average cost of airframe maintenance events
and a new power-by-the-hour maintenance agreement on our B737-700 and B737-900
aircraft engines, partially offset by the benefits of our fleet transition, as
we have replaced all of our aging MD-80s with newer B737-800s. Our
current expectation is that aircraft maintenance costs will be relatively flat
in the fourth quarter of 2009 compared to 2008.
Contracted
Services
Contracted
services declined by $11.9 million, or 11.8%, compared to the first nine months
of 2008 as a result of the reduction in the number of flights operated
throughout our system to ports where vendors are used and a reduction in project
contract labor. We expect contracted services to be relatively flat
in the fourth quarter compared to the same period in 2008.
Selling
Expenses
Selling
expenses declined by $18.8 million, or 19.7%, compared to the prior-year period
as a result of lower credit card and travel agency commissions and lower ticket
distribution costs due to the decline in passenger traffic and lower Mileage
Plan expenses. We expect fourth quarter 2009 selling expenses to be
higher compared to the fourth quarter of 2008 due to higher expected
advertising costs.
Depreciation
and Amortization
Depreciation
and amortization increased $9.4 million, or 7.6%, compared to the first nine
months of 2008. This is primarily due to the additional B737-800
aircraft delivered in the last quarter of 2008 and the first nine months of
2009, partially offset by the sale-leaseback of six B737-800 aircraft in the
first quarter of 2009. We expect depreciation and amortization to be
slightly higher in the fourth quarter of 2009 compared to the same period of
2008, primarily due to the new aircraft delivered in 2009.
Other
Operating Expenses
Other
operating expenses declined $10.9 million, or 8.4%, compared to the prior
year. The decline is primarily driven by a reduction in outside
professional services costs and personnel costs. We expect other
operating expenses to be lower in the fourth quarter of 2009 compared to the
same period in 2008 for the same reasons.
New
Pilot Contract Transition Costs
In
connection with the new four-year contract ratified by Alaska’s pilots in the
second quarter, the pilots received a one-time aggregate bonus of $20.3
million. The transition expense associated with establishing the new
sick-leave payout program previously described was $15.5
million. These items have been combined and reported as “New pilot
contract transition costs” in the condensed statements of
operations.
Restructuring
Charges and Fleet Transition Costs
In the
third quarter of 2008, we announced work force reductions among union and
non-union employees. The affected non-union employees were terminated
in the third quarter, resulting in a $1.6 million severance
charge. For union personnel, we recorded a $2.1 million charge in the
third quarter of 2008.
In the
first nine months of 2008, we retired four MD-80 aircraft that were under
long-term lease arrangements and placed them in temporary storage at an aircraft
storage facility. These aircraft are under long-term lease arrangements. The
$47.5 million charge in the period represents the remaining discounted lease
payments under the lease contract and our estimate of maintenance costs that
will be incurred in the future to meet the minimum return conditions under the
lease requirements.
Mainline
Unit Costs per Available Seat Mile
Operating
costs per ASM (CASM) is an important metric in the industry and we use it to
gauge the effectiveness of our cost-reduction efforts. Our effort to reduce unit
cost focuses not only on controlling the actual dollars we spend, but also on
the ability to increase our capacity without adding a commensurate amount of
cost.
Our
mainline operating costs per ASM are summarized below:
Nine
Months Ended September 30
|
||||||||||||
2009
|
2008
|
%
Change
|
||||||||||
Total
mainline operating expenses per ASM (CASM)
|
10.70 | ¢ | 12.31 | ¢ | (13.1 | ) | ||||||
CASM
includes the following components:
|
||||||||||||
Aircraft
fuel cost per ASM
|
2.32 | ¢ | 4.64 | ¢ | (50.0 | ) | ||||||
New
pilot contract transition costs per ASM
|
0.21 | ¢ | - |
NM
|
||||||||
Restructuring
charges per ASM
|
- | 0.02 | ¢ |
NM
|
||||||||
Fleet
transition costs per ASM
|
- | 0.25 | ¢ |
NM
|
NM = Not
Meaningful
CASM
decreased from the prior-year period because of the 18.5% decline in mainline
operating costs, which is discussed above, partially offset by a 6.2% reduction
in capacity. We have listed separately in the above table our fuel costs, new
pilot contract transition costs, fleet transition costs and restructuring
charges per ASM. These amounts are included in CASM, but for internal purposes
we consistently use unit cost metrics that exclude fuel and certain special
items to measure our cost-reduction progress. We believe that such analysis may
be important to investors and other readers of these financial statements for
the following reasons:
|
·
|
By
eliminating fuel expense and certain special items from our unit cost
metrics, we believe that we have better visibility into the results of our
non-fuel cost-reduction initiatives. Our industry is highly
competitive and is characterized by high fixed costs, so even a small
reduction in non-fuel operatingcosts can result in a significant
improvement in operating results. In addition, we believe that
all domestic carriers are similarly impacted by changes in jet fuel costs
over the long run, so it is important for management (and thus investors)
to understand the impact of (and trends in) company-specific cost drivers
such as labor rates and productivity, airport costs, maintenance costs,
etc., which are more controllable by
management.
|
|
·
|
Cost
per ASM excluding fuel and certain special items is one of the most
important measures used by management and by the Air Group Board of
Directors in assessing quarterly and annual cost
performance. These decision-makers evaluate operating results
of the “mainline” operation, which includes the operation of the B737
fleet branded in Alaska Airlines livery. The revenue and
expenses associated with purchased capacity are evaluated
separately.
|
|
·
|
Cost
per ASM excluding fuel (and other items as specified in our plan
documents) is an important metric for the PBP incentive plan that covers
the majority of our employees.
|
|
·
|
Cost
per ASM excluding fuel and certain special items is a measure commonly
used by industry analysts, and we believe it is the basis by which they
compare our airlines to others in the industry. The measure is
also the subject of frequent questions from
investors.
|
|
·
|
Disclosure
of the individual impact of certain noted items provides investors the
ability to measure and monitor performance both with and without these
special items. We believe that disclosing the impact of certain items such
as fleet transition costs, new pilot contract transition costs, and
restructuring charges is important because it provides information on
significant items that are not necessarily indicative of future
performance. Industry analysts and investors consistently measure our
performance without these items for better comparability between periods
and among other airlines.
|
|
·
|
Although
we disclose our “mainline” passenger unit revenue, we do not (nor are we
able to) evaluate mainline unit revenue excluding the impact that changes
in fuel costs have had on ticket prices. Fuel expense
represents a large percentage of our total mainline operating
expenses. Fluctuations in fuel prices often drive changes in
unit revenue in the mid-to-long term. Although we believe it is
useful to evaluate non-fuel unit costs for the reasons noted above, we
would caution readers of these financial statements not to place undue
reliance on unit costs excluding fuel as a measure or predictor of future
profitability because of the significant impact of fuel costs on our
business.
|
We
currently forecast our mainline costs per ASM excluding fuel and other special
items for the fourth quarter and full year of 2009 to be up 6% and 10%,
respectively, compared to 2008.
Purchased
Capacity Costs
Purchased
capacity costs decreased $40.5 million compared to the nine months ended
September 30, 2009. Of the total, $191.2 million was paid to Horizon
under the CPA for 1.0 billion ASMs.
NONOPERATING
INCOME (EXPENSE)
Net
nonoperating expense was $37.9 million in the first nine months of 2009 compared
to $15.9 million in the same period of 2008. Interest income declined
$9 million compared to the first nine months of 2008 primarily as a result of
lower average portfolio returns, partially offset by a higher average balance of
cash and marketable securities. Interest expense was flat on a higher
average debt balance, offset by lower interest rates on our variable-rate
debt. Capitalized interest was $10.4 million lower than in the first
nine months of 2008 because of lower advance aircraft purchase deposits and the
deferral of future aircraft deliveries.
INCOME
TAX EXPENSE (BENEFIT)
We
provide for income taxes each quarter based on either our estimate of the
effective tax rate for the full year or the actual year-to-date effective tax
rate if it is our best estimate of our annual rate. For the first
nine months of 2009, we used the estimated income tax rate based on our current
full-year estimate of pretax earnings. Our effective income tax rate
on pretax income or loss for the first nine months of 2009 was 38.8%, compared
to 35.4% for the first nine months of 2008. In arriving at this rate,
we considered a variety of factors, including our full-year forecasted pretax
results, the U.S. federal rate of 35%, year-to-date nondeductible expenses and
estimated state income taxes.
We
evaluate our tax rate each quarter and make adjustments when necessary. Our
final effective tax rate for the full year is highly dependent on the level of
pretax income or loss and the magnitude of any nondeductible expenses in
relation to that pretax amount.
CRITICAL
ACCOUNTING ESTIMATES
For
information on our critical accounting estimates, see Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2008.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2009, an evaluation was performed under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer (collectively, our “certifying officers”), of the
effectiveness of the design and operation of our disclosure controls and
procedures. These disclosure controls and procedures are designed to ensure that
the information required to be disclosed by us in our periodic reports filed
with or submitted to the Securities and Exchange Commission (the SEC)
is
recorded,
processed, summarized and reported within the time periods specified by the
SEC’s rules and forms, and includes, without limitation, controls and procedures
designed to ensure that such information is accumulated and communicated to our
management, including our certifying officers, as appropriate to allow timely
decisions regarding required disclosure. Our certifying officers concluded,
based on their evaluation, that disclosure controls and procedures were
effective as of September 30, 2009.
Changes
in Internal Control over Financial Reporting
We made
no changes in our internal control over financial reporting during the quarter
ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) alleging that Alaska violated the CBA
by, among other things, subcontracting the ramp service operation in Seattle.
The dispute was referred to an arbitrator and hearings on the grievance
commenced in January 2007, with a final hearing date in August 2007. In July
2008, the arbitrator issued a ruling regarding basic liability in the matter. In
that ruling, the arbitrator found that Alaska had violated the CBA and
instructed Alaska and the IAM to attempt to negotiate a remedy. In June 2009,
another hearing was conducted, specifically related to the parties’ views on
available remedies. Subsequent to that hearing, there have been
additional executive sessions of the arbitration panel. Further
hearings regarding the nature and scope of available remedies are scheduled to
commence in December 2009. Management currently does not believe that
any final remedy will materially impact our financial position or results of
operations.
We are a
party to routine litigation matters incidental to our business and with respect
to which no material liability is expected.
Management
believes the ultimate disposition of these matters is not likely to materially
affect our financial position or results of operations. This
forward-looking statement is based on management’s current understanding of the
relevant law and facts, and it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.
ITEM 1A. RISK FACTORS
Area
flooding could significantly disrupt our operations
A dam in
the Kent Valley, near Seattle-Tacoma International Airport, is partly
compromised. Many of the services necessary for the operation of our
airlines are located in the valley, e.g., fuel supply, power, catering,
reservations call centers, etc. If the area experiences heavy rains,
flooding could occur and our operations could be disrupted. The Army
Corps of Engineers estimates that the dam will be repaired within three to five
years. We have contingency plans in place and are continuing to
monitor the situation. Any significant disruption would harm our
business, financial condition and results of operations.
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial condition or future results. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
ITEM 5. OTHER
INFORMATION
None.
ITEM 6.
EXHIBITS
See
Exhibit Index on page 33.
SIGNATURES
Pursuant
to the requirements 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 AIRLINES,
INC.
Registrant
Date: November
6, 2009
By: /s/ Brandon S.
Pedersen
Brandon
S. Pedersen
Vice
President/Finance and Controller (Principal Accounting Officer)
By: /s/ Glenn S.
Johnson
Glenn S.
Johnson
Executive
Vice President/Finance and Chief Financial Officer (Principal Financial
Officer)
EXHIBIT INDEX
Pursuant
to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The
following exhibits are numbered in accordance with Item 601 of Regulation
S-K.
Exhibit
No.
|
Description
|
10.1#
|
Third
Amendment to October 19, 2005 Credit Agreement, dated May 29, 2009 (Filed
as Exhibit 10.1 to Alaska Air Group, Inc.’s {Commission File No. 1-8957}
Quarterly Report on Form 10-Q for the period ended September 30, 2009,
filed on November 6, 2009 and incorporated herein by
reference)
|
Exhibits
32.1 and 32.2 are being furnished pursuant to 18 U.S.C. Section 1350 and shall
not deemed to be “filed” for purposes of Section 18 of the Securities Exchange
Act of 1934, as amended (“Exchange Act”,) or otherwise subject to the liability
of that section. Such exhibits shall not be deemed to be incorporated
by reference into any filing of the Company under the Securities Act of 1933, or
the Exchange Act, whether made before or after the date hereof, regardless of
any general incorporation language in such filing.
* Filed
herewith
#
Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and
filed separately with the Securities and Exchange Commission pursuant to a
Confidential Treatment Application filed with the Commission.
33