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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - ALASKA AIR GROUP, INC.alk10-q12016ex321.htm
EX-10.1 - EXHIBIT 10.1 - ALASKA AIR GROUP, INC.exhibit101embraerpurchasea.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - ALASKA AIR GROUP, INC.alk10-q12016ex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - ALASKA AIR GROUP, INC.alk10-q12016ex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - ALASKA AIR GROUP, INC.alk10-q12016ex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

T    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016
 
OR

£    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from                      to                      

Commission File Number 1-8957
ALASKA AIR GROUP, INC.
 
Delaware
 
91-1292054
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

 
19300 International Boulevard, Seattle, Washington 98188
Telephone: (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 T  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 T 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 definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer   T
Accelerated filer  £ 
Non-accelerated filer   £
Smaller reporting company   £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes £ No T
 
The registrant has 123,252,559 common shares, par value $0.01, outstanding at April 30, 2016.




ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016

 TABLE OF CONTENTS


As used in this Form 10-Q, the terms “Air Group,” the "Company," “our,” “we” and "us," refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”
 

2




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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:

our pending acquisition and the subsequent integration of Virgin America Inc. (Virgin America);
the competitive environment in our industry;
changes in our operating costs, primarily fuel, which can be volatile;
general economic conditions, including the impact of those conditions on customer travel behavior;
our ability to meet our cost reduction goals;
operational disruptions;
an aircraft accident or incident;
labor disputes and our ability to attract and retain qualified personnel;
the concentration of our revenue from a few key markets;
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
our reliance on automated systems and the risks associated with changes made to those systems;
changes in laws and regulations.

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, and such differences might be significant and materially adverse to our shareholders. 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, 2015, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.


3



PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
78

 
$
73

Marketable securities
1,486

 
1,255

Total cash and marketable securities
1,564

 
1,328

Receivables - net
235

 
212

Inventories and supplies - net
45

 
51

Prepaid expenses and other current assets
79

 
72

Total Current Assets
1,923

 
1,663

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
5,945

 
5,690

Other property and equipment
967

 
955

Deposits for future flight equipment
617

 
771

 
7,529

 
7,416

Less accumulated depreciation and amortization
2,699

 
2,614

Total Property and Equipment - Net
4,830

 
4,802

 
 
 
 
Other Assets
76

 
65

 
 
 
 
Total Assets
$
6,829

 
$
6,530


See accompanying notes to condensed consolidated financial statements.


4


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts)
March 31,
2016
 
December 31,
2015
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
63

 
$
63

Accrued wages, vacation and payroll taxes
213

 
298

Air traffic liability
868

 
669

Other accrued liabilities
809

 
661

Current portion of long-term debt
116

 
114

Total Current Liabilities
2,069

 
1,805

 
 
 
 
Long-Term Debt, Net of Current Portion
531

 
569

Other Liabilities and Credits
 

 
 

Deferred income taxes
678

 
682

Deferred revenue
467

 
431

Obligation for pension and postretirement medical benefits
270

 
270

Other liabilities
359

 
362

 
1,774

 
1,745

Commitments and Contingencies


 


Shareholders' Equity
 

 
 

Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding

 

Common stock, $0.01 par value, Authorized: 200,000,000 shares, Issued: 2016 - 128,901,410 shares; 2015 - 128,442,099 shares, Outstanding: 2016 - 123,913,223 shares; 2015 - 125,175,325 shares
1

 
1

Capital in excess of par value
86

 
73

Treasury stock (common), at cost: 2016 - 4,988,187 shares; 2015 - 3,266,774 shares
(377
)
 
(250
)
Accumulated other comprehensive loss
(294
)
 
(303
)
Retained earnings
3,039

 
2,890

 
2,455

 
2,411

Total Liabilities and Shareholders' Equity
$
6,829

 
$
6,530


See accompanying notes to condensed consolidated financial statements.


5


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
Three Months Ended March 31,
(in millions, except per share amounts)
2016
 
2015
Operating Revenues
 
 
 
Passenger
 
 
 
Mainline
$
927

 
$
901

Regional
206

 
186

Total passenger revenue
1,133

 
1,087

Freight and mail
24

 
23

Other - net
190

 
159

Total Operating Revenues
1,347

 
1,269

 
 
 
 
Operating Expenses
 
 
 
Wages and benefits
336

 
306

Variable incentive pay
32

 
26

Aircraft fuel, including hedging gains and losses
167

 
235

Aircraft maintenance
68

 
63

Aircraft rent
29

 
26

Landing fees and other rentals
80

 
71

Contracted services
60

 
52

Selling expenses
49

 
53

Depreciation and amortization
88

 
76

Food and beverage service
31

 
25

Third-party regional carrier expense
23

 
15

Other
94

 
83

Total Operating Expenses
1,057

 
1,031

Operating Income
290

 
238

 
 
 
 
Nonoperating Income (Expense)
 
 
 
Interest income
6

 
5

Interest expense
(13
)
 
(11
)
Interest capitalized
8

 
8

Other - net
1

 

 
2

 
2

Income before income tax
292

 
240

Income tax expense
108

 
91

Net Income
$
184

 
$
149

 
 
 
 
Basic Earnings Per Share:
$
1.47

 
$
1.13

Diluted Earnings Per Share:
$
1.46

 
$
1.12

 
 
 
 
Shares used for computation:
 
 
 
Basic
124.550

 
131.120

Diluted
125.328

 
132.230

 
 
 
 
Cash dividend declared per share:
$
0.275

 
$
0.20

See accompanying notes to condensed consolidated financial statements.

6


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
Three Months Ended March 31,
(in millions)
2016
 
2015
 
 
 
 
Net Income
$
184

 
$
149

 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
Related to marketable securities:
 
 
 
Unrealized holding gains (losses) arising during the period
12

 
7

Reclassification of (gains) losses into Other-net nonoperating income (expense)

 

Income tax effect
(4
)
 
(3
)
Total
8

 
4

 
 
 
 
Related to employee benefit plans:
 
 
 
Reclassification of net pension expense into Wages and benefits
5

 
3

Income tax effect
(2
)
 
(1
)
Total
3

 
2

 
 
 
 
Related to interest rate derivative instruments:
 
 
 
Unrealized holding gains (losses) arising during the period
(5
)
 
(4
)
Reclassification of (gains) losses into Aircraft rent
1

 
2

Income tax effect
2

 
1

Total
(2
)
 
(1
)
 
 
 
 
Other Comprehensive Income
9

 
5

 
 
 
 
Comprehensive Income
$
193

 
$
154


See accompanying notes to condensed consolidated financial statements.


7


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Three Months Ended March 31,
(in millions)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
184

 
$
149

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
88

 
76

Stock-based compensation and other
9

 
9

Changes in certain assets and liabilities:
 
 
 
Changes in deferred tax provision
(8
)
 
(6
)
Increase (decrease) in air traffic liability
199

 
183

Increase (decrease) in deferred revenue
36

 
8

Other - net
17

 
95

Net cash provided by operating activities
525

 
514

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(91
)
 
(245
)
Other flight equipment
(15
)
 
(21
)
Other property and equipment
(13
)
 
(13
)
Total property and equipment additions, including capitalized interest
(119
)
 
(279
)
Purchases of marketable securities
(358
)
 
(403
)
Sales and maturities of marketable securities
140

 
259

Proceeds from disposition of assets and changes in restricted deposits
1

 
2

Net cash used in investing activities
(336
)
 
(421
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Long-term debt payments
(36
)
 
(35
)
Common stock repurchases
(127
)
 
(102
)
Dividends paid
(34
)
 
(26
)
Other financing activities
13

 
14

Net cash used in financing activities
(184
)
 
(149
)
Net increase (decrease) in cash and cash equivalents
5

 
(56
)
Cash and cash equivalents at beginning of year
73

 
107

Cash and cash equivalents at end of the period
$
78

 
$
51

 
 
 
 
Supplemental disclosure:
 

 
 

Cash paid during the period for:
 
 
 
Interest (net of amount capitalized)
$
8

 
$
7

Income taxes paid (received)
13

 
(65
)
See accompanying notes to condensed consolidated financial statements.

8



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The interim condensed consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in the Form 10-K for the year ended December 31, 2015. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of March 31, 2016, as well as the results of operations for the three months ended March 31, 2016 and 2015. The adjustments made were of a normal recurring nature.

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. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three months ended March 31, 2016, are not necessarily indicative of operating results for the entire year.

Certain reclassifications have been made to prior year financial statements to conform with classifications used in the current year.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. At this time, the Company believes the most significant impact to the financial statements will be in Mileage Plan revenues and liabilities. The Company currently uses the incremental cost approach for miles earned through travel. This standard eliminates that option and the Company will be required to increase its liability for earned miles through a relative selling price model. The Company has not evaluated the full impact of the standard, although application is expected to result in a material increase to Deferred Revenue. The Company has not yet selected a transition method.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), which requires debt issuance costs related to a debt liability be presented as a direct deduction from the carrying value of the debt liability. The amendment was adopted as of January 1, 2016. Prior period debt balances have been adjusted to reflect the adoption of ASU 2015-03. The adoption of the ASU had no impact on the Statements of Operations or retained earnings.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use-asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The new standard would be effective for the Company on January 1, 2019. Early adoption of the standard is permitted. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures. The Company has not yet determined whether it will early adopt the standard.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations. The proposed standard provides guidance when a revenue transaction involves a third party in providing goods or services to a customer in determining whether the Company is considered the principal or the agent in the transaction. When an entity is engaged to provide the underlying good or service, such entity is classified as the principal in the transaction. When an entity is engaged to arrange for a third party to provide the goods or services, such entity is classified as the agent in the transaction. This ASU has the same effective date as the new revenue standard. Entities are required to adopt this ASU using

9



the same transition method they use to adopt the new revenue accounting standard. The Company is evaluating the effect that ASU 2016-08 will have on its consolidated financial statements and related disclosures. The Company has not yet elected a transition method nor has it determined whether it will early adopt.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The proposed standard simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company is evaluating the effect of ASU 2016-09 on the consolidated financial statements and related disclosures. The ASU will be effective for the Company beginning January 1, 2017, however early adoption is permitted. The Company has not yet elected a transition method nor has it determined whether it will early adopt.

NOTE 2. PROPOSED ACQUISITION OF VIRGIN AMERICA INC.

On April 1, 2016 the Company entered into an agreement to acquire Virgin America Inc. (Virgin America). The Company has agreed to pay Virgin America shareholders $57 per share, or approximately $2.6 billion, in cash for the outstanding common stock of Virgin America. In addition, the Company expects to assume Virgin America's debt and lease obligations, other than related party debt, on the date of acquisition. The merger is subject to approval by Virgin America's shareholders and various regulatory bodies, among other customary closing conditions. To date, the financial impacts of the pending acquisition have not been material, and future financial impacts are not yet estimable. The Company currently expects the acquisition will close no later than January 1, 2017.

NOTE 3. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):
March 31, 2016
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
3

 
$

 
$

 
$
3

Cash equivalents
75

 

 

 
75

Cash and cash equivalents
78

 

 

 
78

U.S. government and agency securities
410

 
2

 

 
412

Foreign government bonds
28

 

 

 
28

Asset-backed securities
154

 
1

 
(1
)
 
154

Mortgage-backed securities
120

 
1

 

 
121

Corporate notes and bonds
749

 
6

 
(1
)
 
754

Municipal securities
17

 

 

 
17

Marketable securities
1,478

 
10

 
(2
)
 
1,486

Total
$
1,556

 
$
10

 
$
(2
)
 
$
1,564


December 31, 2015
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
4

 
$

 
$

 
$
4

Cash equivalents
69

 

 

 
69

Cash and cash equivalents
73

 

 

 
73

U.S. government and agency securities
254

 

 
(1
)
 
253

Foreign government bonds
31

 

 

 
31

Asset-backed securities
130

 

 

 
130

Mortgage-backed securities
117

 

 
(1
)
 
116

Corporate notes and bonds
711

 
1

 
(4
)
 
708

Municipal securities
17

 

 

 
17

Marketable securities
1,260

 
1

 
(6
)
 
1,255

Total
$
1,333

 
$
1

 
$
(6
)
 
$
1,328



10



Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of March 31, 2016.

Activity for marketable securities (in millions):  
 
Three Months Ended March 31,
 
2016
 
2015
Proceeds from sales and maturities
$
140

 
$
259

Gross realized gains

 
1

Gross realized losses

 
(1
)
 
Maturities for marketable securities (in millions):
March 31, 2016
Cost Basis
 
Fair Value
Due in one year or less
$
258

 
$
258

Due after one year through five years
1,218

 
1,226

Due after five years through 10 years
2

 
2

Due after 10 years

 

Total
$
1,478

 
$
1,486


NOTE 4. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

Fair values of financial instruments on the consolidated balance sheet (in millions):
March 31, 2016
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
412

 
$

 
$
412

Foreign government bonds

 
28

 
28

Asset-backed securities

 
154

 
154

Mortgage-backed securities

 
121

 
121

Corporate notes and bonds

 
754

 
754

Municipal securities

 
17

 
17

Total Marketable securities
412

 
1,074

 
1,486

Derivative instruments
 
 
 
 
 
Fuel hedge call options

 
8

 
8

Total Assets
412

 
1,082

 
1,494

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements

 
(22
)
 
(22
)
Total Liabilities

 
(22
)
 
(22
)


11



December 31, 2015
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
253

 
$

 
$
253

Foreign government bonds

 
31

 
31

Asset-backed securities

 
130

 
130

Mortgage-backed securities

 
116

 
116

Corporate notes and bonds

 
708

 
708

Municipal securities

 
17

 
17

Total Marketable securities
253

 
1,002

 
1,255

Derivative instruments
 
 
 
 
 
Fuel hedge call options

 
4

 
4

Total Assets
253

 
1,006

 
1,259

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements

 
(18
)
 
(18
)
Total Liabilities

 
(18
)
 
(18
)

The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets, or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as 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.

The Company has no financial assets that are measured at fair value on a nonrecurring basis at March 31, 2016.

Fair Value of Other Financial Instruments

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carried at amortized cost, which approximates fair value.

Debt: The carrying amount of the Company's variable-rate debt approximates fair values. For fixed-rate debt, the Company uses the income approach to determine the estimated fair value, by using discounted cash flows using borrowing rates for comparable debt over the weighted life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions) is as follows:
 
March 31,
2016
 
December 31,
2015
Carrying amount
$
491

 
$
520

Fair value
529

 
557




12



NOTE 5. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals on the consolidated balance sheets (in millions):
 
March 31,
2016
 
December 31,
2015
Current Liabilities:
 
 
 
Other accrued liabilities
$
388

 
$
368

Other Liabilities and Credits:
 
 
 
Deferred revenue
464

 
427

Other liabilities
19

 
19

Total
$
871

 
$
814

 
Alaska's Mileage Plan revenue included in the consolidated statements of operations (in millions):
 
Three Months Ended March 31,
 
2016
 
2015
Passenger revenues
$
69

 
$
64

Other - net revenues
103

 
76

Total
$
172

 
$
140


NOTE 6. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
March 31,
2016
 
December 31,
2015
Fixed-rate notes payable due through 2024
$
491

 
$
520

Variable-rate notes payable due through 2025
159

 
166

Less debt issuance costs
(3
)
 
(3
)
Total debt
647

 
683

Less current portion
116

 
114

Long-term debt, less current portion
$
531

 
$
569

 
 
 
 
Weighted-average fixed-interest rate
5.7
%
 
5.7
%
Weighted-average variable-interest rate
2.1
%
 
1.8
%

During the three months ended March 31, 2016, the Company made debt payments of $36 million. As discussed in Note 1, the Company adopted ASU 2015-03 which resulted in a reclassification of debt issuance costs as an offset to debt in the consolidated balance sheet.

At March 31, 2016, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2016
$
79

2017
121

2018
151

2019
114

2020
116

Thereafter
69

Total
$
650

 




13



Bank Lines of Credit
 
The Company has two $100 million credit facilities and one $52 million credit facility. All three facilities have variable interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in September 2017, is secured by aircraft. The other $100 million facility, which expires in March 2017, is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The $52 million facility expires in October 2016 with a mechanism for annual renewal and is secured by two 737-800 aircraft. The Company has no immediate plans to borrow using any of these facilities. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is in compliance with this covenant at March 31, 2016.

NOTE 7. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized included the following components for the three months ended March 31, 2016 (in millions): 
 
Three Months Ended March 31,
 
Qualified
 
2016
 
2015
Service cost
$
9

 
$
10

Interest cost
18

 
21

Expected return on assets
(27
)
 
(31
)
Recognized actuarial loss (gain)
6

 
7

Total
$
6

 
$
7


NOTE 8. COMMITMENTS

Future minimum fixed payments for commitments (in millions):
March 31, 2016
Aircraft Leases
 
Facility Leases
 
Aircraft Purchase Commitments
 
Capacity Purchase Agreements (a)
Remainder of 2016
$
60

 
$
70

 
$
402

 
$
53

2017
104

 
90

 
516

 
90

2018
98

 
43

 
472

 
94

2019
90

 
42

 
381

 
99

2020
81

 
40

 
320

 
106

Thereafter
467

 
147

 
392

 
858

Total
$
900

 
$
432

 
$
2,483

 
$
1,300

(a) Includes all non-aircraft lease costs associated with CPA arrangements.

Lease Commitments

At March 31, 2016, the Company had lease contracts for 27 B737 aircraft, 15 Q400 aircraft, 6 CRJ-700 aircraft (operated under the CPA with SkyWest) and 8 CRJ-700 aircraft that are subleased and operated by another carrier (i.e., not in the Company's fleet). The Company has 23 E175 lease commitments under the CPA with SkyWest, 7 of which are included in the fleet as of March 31, 2016. All lease contracts have remaining noncancelable lease terms ranging from 2016 to 2029. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with 2017 and 2018 delivery dates.

The majority of airport and terminal facilities are also leased. Rent expense for aircraft and facility leases was $81 million and $73 million for the three months ended March 31, 2016 and 2015, respectively.

Aircraft Purchase Commitments
 
As of March 31, 2016, the Company is committed to purchasing 62 B737 aircraft (25 737-900ER aircraft and 37 737 MAX aircraft) and two Q400 aircraft, with deliveries in 2016 through 2022. As of March 31, 2016 we do not intend to take delivery

14



of the two Q400 aircraft that are currently contracted. In addition, the Company has options to purchase 46 B737 aircraft and five Q400 aircraft, which are not reflected in the commitments table above.

Subsequent to March 31, 2016, the Company placed an order for 30 Embraer E175 regional jets with options to purchase an additional 33. The above table does not reflect this purchase. See Note 11 for additional information.

Capacity Purchase Agreements (CPAs)
 
At March 31, 2016, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. In addition, Alaska has CPAs with SkyWest to fly certain routes and PenAir to fly certain routes in the state of Alaska. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.

Contingencies

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 these matters 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.

NOTE 9. SHAREHOLDERS' EQUITY

Dividends

During the three months ended March 31, 2016, the Company declared and paid cash dividends of $0.275 per share, or $34 million.

Common Stock Repurchase

In May 2014, the Board of Directors authorized a $650 million share repurchase program, which was completed in October 2015. In August 2015, the Board of Directors authorized a $1 billion share repurchase program.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended March 31,
 
2016
 
2015
 
Shares
 
Amount
 
Shares
 
Amount
2015 Repurchase Program - $1 billion
1,721,413

 
$
127

 

 
$

2014 Repurchase Program - $650 million

 
$

 
1,580,747

 
$
102

Total
1,721,413

 
$
127

 
1,580,747

 
$
102

 
Accumulated Other Comprehensive Loss
 
Components of accumulated other comprehensive income (loss), net of tax (in millions):
 
March 31,
2016
 
December 31,
2015
Marketable securities
$
5

 
$
(3
)
Employee benefit plans
(285
)
 
(288
)
Interest rate derivatives
(14
)
 
(12
)
Total
$
(294
)
 
$
(303
)



15





Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three months ended March 31, 2016 and 2015, anti-dilutive shares excluded from the calculation of EPS were not material.


NOTE 10. OPERATING SEGMENT INFORMATION
 
Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams. To manage the two operating airlines and the revenues and expenses associated with the CPAs, management views the business in three operating segments:
Alaska Mainline - The Boeing 737 part of Alaska's business.
Alaska Regional - Alaska's shorter distance network. In this segment, Alaska Regional records actual on board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under CPAs. Additionally, Alaska Regional includes a small allocation of corporate overhead such as IT, finance and other administrative costs incurred by Alaska and on behalf of the regional operations.
Horizon - Horizon operates regional aircraft. All of Horizon's capacity is sold to Alaska under a CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs, station handling costs, and maintenance costs.

16



Additionally, the following table reports “Air Group adjusted,” which is not a measure determined in accordance with GAAP. The Company's chief operating decision-makers and others in management use this measure to evaluate operational performance and determine resource allocations. Adjustments are further explained below in a reconciliation to consolidated GAAP results.

Operating segment information is as follows (in millions):
 
Three Months Ended March 31, 2016
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
927

 
$

 
$

 
$

 
$
927

 
$

 
$
927

Regional

 
206

 

 

 
206

 

 
206

Total passenger revenues
927

 
206

 

 

 
1,133

 

 
1,133

CPA revenues

 

 
103

 
(103
)
 

 

 

Freight and mail
23

 
1

 

 

 
24

 

 
24

Other - net
172

 
17

 
1

 

 
190

 

 
190

Total operating revenues
1,122

 
224

 
104

 
(103
)
 
1,347

 

 
1,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
701

 
186

 
105

 
(102
)
 
890

 

 
890

Economic fuel
144

 
25

 

 

 
169

 
(2
)
 
167

Total operating expenses
845

 
211

 
105

 
(102
)
 
1,059

 
(2
)
 
1,057

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
6

 

 

 

 
6

 

 
6

Interest expense
(12
)
 

 
(1
)
 

 
(13
)
 

 
(13
)
Other
7

 

 

 
2

 
9

 

 
9

 
1

 

 
(1
)
 
2

 
2

 

 
2

Income (loss) before income tax
$
278

 
$
13

 
$
(2
)
 
$
1

 
$
290

 
$
2

 
$
292


17



 
Three Months Ended March 31, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
901

 
$

 
$

 
$

 
$
901

 
$

 
$
901

Regional

 
186

 

 

 
186

 

 
186

Total passenger revenues
901

 
186

 

 

 
1,087

 

 
1,087

CPA revenues

 

 
99

 
(99
)
 

 

 

Freight and mail
22

 
1

 

 

 
23

 

 
23

Other - net
142

 
16

 
1

 

 
159

 

 
159

Total operating revenues
1,065

 
203

 
100

 
(99
)
 
1,269

 

 
1,269

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
639

 
164

 
91

 
(98
)
 
796

 

 
796

Economic fuel
203

 
32

 

 

 
235

 

 
235

Total operating expenses
842

 
196

 
91

 
(98
)
 
1,031

 

 
1,031

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
5

 

 

 

 
5

 

 
5

Interest expense
(7
)
 

 
(4
)
 

 
(11
)
 

 
(11
)
Other
7

 

 
1

 

 
8

 

 
8

 
5

 

 
(3
)
 

 
2

 

 
2

Income (loss) before income tax
$
228

 
$
7

 
$
6

 
$
(1
)
 
$
240

 
$

 
$
240

(a) 
The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain income and charges.
(b) 
Includes mark-to-market fuel-hedge accounting charges.

Total assets were as follows (in millions):
 
March 31,
2016
 
December 31,
2015
Alaska(a)
$
8,630

 
$
8,127

Horizon
717

 
717

Parent company
4,929

 
4,734

Elimination of inter-company accounts
(7,447
)
 
(7,048
)
Consolidated
$
6,829

 
$
6,530

(a) 
There are no assets associated with capacity purchase flying at Alaska.

NOTE 11. SUBSEQUENT EVENTS

See discussion of the pending acquisition of Virgin America at Note 2.

On April 11, 2016 Horizon placed an order for 30 Embraer E 175 regional aircraft (E175s), with the option to purchase an additional 33. The E175s will be flown by Horizon exclusively for Alaska beginning in 2017. An estimate of the future financial impacts related to the purchase agreement is included in our forward looking capital expenditures table within Item 2, MD&A.



18



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 segment operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated 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, the risks mentioned in Item 1A. "Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015, and Item 1A "Risk Factors" included herein. This overview summarizes the MD&A, which includes the following sections:
 
First Quarter Review—highlights from the first quarter of 2016 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 our revenues by segment and our expenses from a consolidated perspective for the three months ended March 31, 2016. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2016
  
Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

FIRST QUARTER REVIEW

Our consolidated pretax income was $292 million during the first quarter of 2016, compared to $240 million in the first quarter of 2015. The increase of $52 million was mainly due to increased revenues of $78 million and lower aircraft fuel expense by $68 million, partially offset by an increase in non-fuel expenses of $94 million.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

Operations Performance

During the first quarter, both Alaska and Horizon continued their strong on-time performance, reporting that 87.5% and 87.9% of their flights arrived on time, respectively. For the twelve months ended February 2016, Alaska maintained its ranking as the top carrier among the six largest U.S. airlines for on-time performance, according to the U.S. Department of Transportation.

New Markets

New routes launched and announced are as follows:
New Non-Stop Routes Launched in Q1
New Non-Stop Routes Announced (Launch Dates)
Reno, Nevada to Orange County, California
San Diego, California to San Jose, California (6/8/16)
Orange County, California to Santa Rosa, California
Orange County, California to San Jose, California (6/8/16)
 
Bellingham, Washington to Kona, Hawaii (11/12/16)

Shareholder Return

During the first quarter of 2016, we paid cash dividends of $34 million and we repurchased 1.7 million shares of our common stock for $127 million under the $1 billion repurchase program authorized by our Board of Directors in August 2015. Since 2007, we have repurchased 58 million shares of common stock under such programs for $1.5 billion for an average price of $25.14 per share. During the month of April, we repurchased 682 thousand shares of our common stock for $53 million, resulting in 123.3 million shares outstanding at April 30, 2016. Prior to the announcement of our pending acquisition of Virgin

19



America, we had planned to return a greater amount to shareholders in 2016 through dividends and stock repurchases than we did in 2015. Given the pending acquisition, we now expect to return approximately $325 million to shareholders in 2016, reflecting a reduction in the number of shares we had previously expected to repurchase under our $1 billion share repurchase program.

Outlook

On April 4, 2016, we announced plans to acquire Virgin America. If approved by Virgin America shareholders and regulators, we believe the combination of Virgin America and Alaska will create the premier airline for travelers on the West Coast, offering a premium product to our customers at the low fares both airlines are known for. The combined airline will provide 1,200 daily departures to our customers, greatly expanding the flight offerings to current Alaska and Virgin America customers, creating increased utility in the the combined network. We will also gain additional access to hard to come by landing slots and constrained gates at destinations such as New York (JFK), Newark, San Francisco, and Los Angeles. We believe that combining our loyalty programs and networks will provide greater benefits for our West Coast customers, and will expand our partner portfolio giving our customers an expansive global reach. The larger platform for growth, and the synergies the combined airline is expected to generate, will allow us to create greater value for our stakeholders. We have agreed to pay $57 per share, or approximately $2.6 billion, in cash for the outstanding common stock of Virgin America. We currently expect the acquisition will close by January 1, 2017, which would significantly impact our financial position and results.

We expect our own organic growth to continue in 2016, adding approximately 8% system-wide capacity in the current year. Over the past few years, we have seen competitive capacity increase significantly in our markets, especially in our hometown of Seattle. We expect to see even more competitive capacity in 2016. Current schedules indicate competitive capacity will be 14% higher in both the second and third quarters of 2016.

Our current expectations for capacity and CASM excluding fuel and special items, and excluding the impact of the pending acquisition of Virgin America, are summarized below:
 
Forecast
Q2 2016
 
Change
Y-O-Y
 
Forecast
Full Year 2016
 
Change
Y-O-Y
Consolidated:
 
 
 
 
 
 
 
ASMs (000,000) "capacity"
11,000 - 11,050
 
~ 11%
 
43,100 - 43,200
 
~ 8%
CASM excluding fuel (cents)
8.00¢ - 8.05¢
 
~ (1)%
 
8.25¢ - 8.30¢
 
~ (0.5)%
 
 
 
 
 
 
 
 
Mainline:
 
 
 
 
 
 
 
ASMs (000,000) "capacity"
9,825 - 9,875
 
~ 9.5%
 
38,250 - 38,350
 
~ 6.5%
CASM excluding fuel (cents)
7.05¢ - 7.10¢
 
~ (1.5)%
 
7.35¢ - 7.40¢
 
~ (0.5)%

RESULTS OF OPERATIONS
 
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2016 COMPARED TO THREE MONTHS ENDED MARCH 31, 2015

Our consolidated net income for the first quarter of 2016 was $184 million, or $1.46 per diluted share, compared to net income of $149 million, or $1.12 per diluted share, in the first quarter of 2015.

ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings, excluding the impact of mark-to-market gains or losses or other individual revenues or expenses, is useful information to investors because:

By eliminating fuel expense and certain special items from our unit metrics, we believe that we have better visibility into the results of operations and 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 operating costs 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.

20




Cost per ASM (CASM) 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.

Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all Alaska and Horizon employees.

CASM 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 mark-to-market hedging adjustments, 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 passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues 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.

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude these amounts are non-recurring, infrequent, or unusual in nature.

Excluding the impact of mark-to-market fuel hedge adjustments, our adjusted consolidated net income for the first quarter of 2016 was $183 million, or $1.45 per diluted share, compared to an adjusted consolidated net income of $149 million, or $1.12 per diluted share, in the first quarter of 2015.
 
Three Months Ended March 31,
 
2016
 
2015
(in millions, except per share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Net income and diluted EPS as reported
$
184

 
$
1.46

 
$
149

 
$
1.12

Mark-to-market fuel hedge adjustments, net of tax
(1
)
 
(0.01
)
 

 

Non-GAAP adjusted income and per-share amounts
$
183

 
$
1.45

 
$
149

 
$
1.12


Our operating costs per ASM are summarized below:
 
Three Months Ended March 31,
(in cents)
2016
 
2015
 
% Change
Consolidated:
 
 
 
 
 
CASM

10.11
¢
 

11.14
¢
 
(9.2
)%
Less the following components:
 
 
 

 
 

Aircraft fuel, including hedging gains and losses
1.60

 
2.53

 
(36.8
)%
CASM excluding fuel

8.51
¢
 

8.61
¢
 
(1.2
)%
 
 
 
 
 
 
Mainline:
 
 
 
 
 
CASM

9.01
¢
 

10.09
¢
 
(10.7
)%
Less the following components:
 
 
 

 
 

Aircraft fuel, including hedging gains and losses
1.52

 
2.43

 
(37.4
)%
CASM excluding fuel

7.49
¢
 

7.66
¢
 
(2.2
)%


21



OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
 
Three Months Ended March 31,
 
2016
 
2015
 
Change
Consolidated Operating Statistics:(a)
 
 
 
 
 
Revenue passengers (000)
7,835
 
7,316
 
7.1%
Revenue passenger miles (RPM) (000,000) "traffic"
8,571
 
7,723
 
11.0%
Available seat miles (ASM) (000,000) "capacity"
10,453
 
9,257
 
12.9%
Load factor
82.0%
 
83.4%
 
(1.4) pts
Yield
13.22¢
 
14.08¢
 
(6.1)%
Passenger revenue per ASM (PRASM)
10.84¢
 
11.74¢
 
(7.7)%
Revenue per ASM (RASM)
12.88¢
 
13.71¢
 
(6.1)%
Operating expense per ASM (CASM) excluding fuel(b)
8.51¢
 
8.61¢
 
(1.2)%
Economic fuel cost per gallon(b)
$1.29
 
$1.98
 
(34.8)%
Fuel gallons (000,000)
132
 
119
 
10.9%
ASMs per fuel gallon
79.2
 
77.8
 
1.8%
Average full-time equivalent employees (FTEs)
14,357
 
13,274
 
8.2%
 
 
 
 
 
 
Mainline Operating Statistics:
 
 
 
 
 
Revenue passengers (000)
5,642
 
5,236
 
7.8%
RPMs (000,000) "traffic"
7,716
 
6,994
 
10.3%
ASMs (000,000) "capacity"
9,354
 
8,347
 
12.1%
Load factor
82.5%
 
83.8%
 
(1.3) pts
Yield
12.01¢
 
12.88¢
 
(6.8)%
PRASM
9.91¢
 
10.79¢
 
(8.2)%
RASM
11.99¢
 
12.75¢
 
(6.0)%
CASM excluding fuel(b)
7.49¢
 
7.66¢
 
(2.2)%
Economic fuel cost per gallon(b)
$1.28
 
$1.97
 
(35.0)%
Fuel gallons (000,000)
113
 
103
 
9.7%
ASMs per fuel gallon
82.8
 
81.0
 
2.2%
Average FTEs
11,123
 
10,380
 
7.2%
Aircraft utilization
10.6
 
10.6
 
—%
Average aircraft stage length
1,237
 
1,199
 
3.2%
Operating fleet
152
 
137
 
15 a/c
 
 
 
 
 
 
Regional Operating Statistics:(c)
 
 
 
 
 
Revenue passengers (000)
2,192
 
2,080
 
5.4%
RPMs (000,000) "traffic"
855
 
728
 
17.4%
ASMs (000,000) "capacity"
1,100
 
910
 
20.9%
Load factor
77.7%
 
80.0%
 
(2.3 pts)
Yield
24.09¢
 
25.58¢
 
(5.8)%
PRASM
18.72¢
 
20.46¢
 
(8.5)%
Operating fleet
67
 
60
 
7 a/c
(a) 
Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b) 
See reconciliation of operating expenses excluding fuel, a reconciliation of economic fuel costs in the accompanying pages.
(c) 
Data presented includes information related to flights operated by Horizon and third-party carriers.





22




Glossary of Terms

Aircraft Utilization - block hours per day; this represents the average number of hours our aircraft are flying

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures (shown as Total property and equipment additions on the statement of cash flows).

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737 jets and all associated revenues and costs

PRASM - passenger revenue per ASM; commonly called “passenger unit revenue”

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile




23



OPERATING REVENUES

Total operating revenues increased $78 million, or 6%, during the first quarter of 2016 compared to the same period in 2015. The changes are summarized in the following table:
 
Three Months Ended March 31,
(in millions)
2016
 
2015
 
% Change
Passenger
 
 
 
 
 
Mainline
$
927

 
$
901

 
3
%
Regional
206

 
186

 
11
%
Total passenger revenue
1,133

 
1,087

 
4
%
Freight and mail
24

 
23

 
4
%
Other - net
190

 
159

 
19
%
Total operating revenues
$
1,347

 
$
1,269

 
6
%

Passenger Revenue – Mainline

Mainline passenger revenue for the first quarter of 2016 increased by 3% due to a 12.1% increase in capacity, largely offset by a decrease of 8.2% in PRASM compared to the first quarter of 2015. The increase in capacity was driven primarily by new routes and larger aircraft added to our fleet since the first quarter of 2015. The decrease in PRASM was driven by a 6.8% decline in ticket yield and a 1.3-point reduction in load factor compared to the prior-year quarter. The decrease in ticket yield was primarily due to increased competitive capacity in the markets we serve, and our own growth. Furthermore, the significant decline in fuel prices has contributed to lower ticket prices. The decline in load factor was also a result of increased capacity.

Passenger Revenue – Regional

Regional passenger revenue increased 11% compared to the first quarter of 2015 due to a 20.9% increase in capacity, partially offset by a 8.5% decrease in PRASM. The increase in capacity is due to an increase in departures, and average aircraft stage length as well as the annualization of new routes introduced over the past twelve months. The decrease in PRASM is due to a 5.8% decline in ticket yield, as well as a decrease in load factor of 2.3 points. The decrease in yield is due to an increase in competitive capacity in our regional markets and our own growth as we strengthen our network utility in the Pacific Northwest.

Other – Net

Other - net revenue increased $31 million, or 19%, from the first quarter of 2015, primarily due to increases in Mileage Plan revenue. Mileage Plan revenue increased $27 million, or 36%, due to increased miles sold and higher rates paid by our affinity credit card partner beginning January 1, 2016 as a result of a contract extension.

OPERATING EXPENSES

Total operating expenses increased $26 million, or 3%, compared to the first quarter of 2015. 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:
 
Three Months Ended March 31,
(in millions)
2016
 
2015
 
% Change
Fuel expense
$
167

 
$
235

 
(29
)%
Non-fuel expenses
890

 
796

 
12
 %
Total Operating Expenses
$
1,057

 
$
1,031

 
3
 %

Significant operating expense variances from 2015 are more fully described below.


24



Wages and Benefits

Wages and benefits increased during the first quarter of 2016 by $30 million. The primary components of wages and benefits are shown in the following table:
 
Three Months Ended March 31,
(in millions)
2016
 
2015
 
% Change
Wages
$
251

 
$
230

 
9
 %
Pension - Defined benefit plans
6

 
7

 
(14
)%
Defined contribution plans
16

 
15

 
7
 %
Medical and other benefits
44

 
38

 
16
 %
Payroll taxes
19

 
16

 
19
 %
Total wages and benefits
$
336

 
$
306

 
10
 %

Wages increased 9% with a 8.2% increase in FTEs. The increase in wages is primarily attributable to increased FTEs to support the growth in our business. In addition, we recognized pilot and flight attendant bonuses of approximately $3 million and severance costs of approximately $4 million at Horizon related to organizational restructuring.

Medical and other benefits increased 16% compared to the same period in the prior year. The increase is primarily due to an increase in medical claims with growth in the number of employees an