UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC  20549
                                    FORM 10-K
(Mark One)
(X)X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 19931994
                                   OR
     ( )TRANSITIONTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from  . . . . . . . .  to  . . . . . . . .

Commission File Number 1-8957
                             ALASKA AIR GROUP, INC.
             (Exact name of registrant as specified in its charter)
                                        
           Delaware                                   91-1292054
(State or other jurisdiction of incorporation or organization)  (I.R.S.
Employer
                or organization) Identification No.)

             19300 Pacific Highway South, Seattle, Washington 98188
                    (Address of Principal Executive Offices)
       Registrant's telephone number, including area code: (206) 431-7040
                                        
Securities registered pursuant to Section 12(b) of the Act:

      Title of Each Class             Name of Each Exchange on Which Registered
Common Stock, $1.00 Par Value         New York Stock Exchange
Rights to Purchase Series A
 Participating Preferred Stock        New York Stock Exchange
7-3/4%Convertible Subordinated
 Debentures Due 2010                  Unlisted
6-7/8%Convertible Subordinated
 Debentures Due 2014                  New York Stock Exchange
7-1/4%Convertible Subordinated
 Notes Due 2006                       New York Stock Exchange
10.21%Series B Cumulative Redeemable
     Preferred Stock Due 1997         Unlisted

   As  of December 31, 1993,1994, common shares outstanding totaled 13,341,621.13,400,090.   The
aggregate  market value of the common shares of Alaska Air Group, Inc.  held  by
nonaffiliates, 13,228,83013,213,789 shares, was approximately $187$198 million (based  on  the
closing  price of these shares, $14.125,$15.00, on the New York Stock Exchange  on  such
date).

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

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of  Regulation  S-K is not contained herein, and will not be contained,  to  the
best  of  registrant's knowledge, in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ](   )

                    DOCUMENTS TO BE INCORPORATED BY REFERENCE
     Title of Document           Part Hereof Into Which Document to be
Incorporated
Definitive Proxy Statement Relating 1994to            Part III
1995 Annual Meeting of Shareholders                            Part III

Exhibit Index begins on page 40.33.
                                     PART I

ITEM 1.   BUSINESS1.BUSINESS

General
Alaska Air Group, Inc. (Air Group or the Company) is a holding company
incorporated in Delaware in 1985.  Its two principal subsidiaries are Alaska
Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon).  Both
subsidiaries operate as airlines.  However, each subsidiary's business plan,
competition and economic risks differ substantially due to the passenger capacity and range
of aircraft operated.substantially.  Alaska is a nationalmajor airline,
operates an all jet fleet, and its average passenger trip length is 860850 miles.
Horizon is a regional airline, primarily operates ajet and turboprop fleet,aircraft, and its
average passenger trip is 200210 miles. Business segment information is reported in Note 10 of
the Notes to Consolidated Financial Statements.  The Company's executive offices
are located at 19300 Pacific Highway South, Seattle, Washington 98188.

The business of the Company is somewhat seasonal.  Quarterly operating income
tends to peak during the third quarter.

Alaska
Alaska Airlines is an Alaska corporation, organized in 1937.  Alaska serves 3736
airports in six states (Alaska, Washington, Oregon, California, Nevada and
Arizona), fivethree cities in Mexico and three cities in Russia.  Over half of the U.S. airports served by Alaska
are located in the state of Alaska.  In each year since
1973, Alaska has carried more passengers between Alaska and the U.S. mainland
than any other airline.  Alaska Airlines also serves almost 60four smaller cities in
California, four in Washington, and many small communities in Alaska through
subcontracts with five local carriers.

In 1993,1994, Alaska carried 6.49.0 million passengers.  Passenger traffic within Alaska
and between Alaska and the U.S. mainland accounted for 29%25% of Alaska's total
revenue passenger miles, while West Coast traffic accounted for 59%65% and the
Mexico markets 12%10%.  Based on passenger enplanements, Alaska's leading airports
are Seattle, Portland, Anchorage and Los Angeles.  Based on revenues, its
leading nonstop routes were Seattle-Anchorage, Seattle-Los Angeles and Seattle-SanSeattle-
San Francisco.

Alaska's operating fleet at December 31, 19931994 consisted of 6672 jet aircraft.

Horizon
Horizon, a Washington corporation, began service in 1981 and was acquired by Air
Group in 1986.  It is the largest regional airline in the Pacific Northwest, and
serves 3336 airports in six states (Washington, Oregon, Montana, Idaho, Utah and
California) and two cities in Canada.  In 1993,1994, Horizon carried 2.83.5 million
passengers.  Based on passenger enplanements, Horizon's leading airports are
Seattle, Portland, Spokane and Boise.  Based on revenues, its leading nonstop
routes were Seattle-Spokane, Seattle-Portland, Seattle-Spokane, Seattle-Boise, Seattle-Vancouver,
B.C. and Portland-Boise.  At December 31, 1993,1994, Horizon's operating fleet
consisted of fiveten jet and 5155 turboprop aircraft.

Horizon flights are listed under the Alaska Airlines designator code in airline
computer reservation systems.  Certain Horizon flights are dual-designated in
these reservation systems as Northwest Airlines and Alaska Airlines.  Currently,
31%32% of Horizon's passengers connect to either Alaska or Northwest.

Airline Regulation
United States Department of Transportation (DOT) - The DOT has the authority to
regulate certain airline economic functions including financial and statistical
reporting, consumer protection, computerized reservations systems and essential
air transportation.  The DOT is also charged with determining which U.S.
carriers will receive the authority to provide service to international
destinations.  International operating authority is subject to bilateral
agreements between the United States and the respective countries.  The
countries establish the number of carriers to provide service, approve the
carriers which are selected to provide such service and the size of aircraft to be used.
The DOT reviews the carriers authorized under bilateral agreements every five
years.  Horizon's authority to operate the Seattle-Vancouver, route, the
Seattle-Victoria route
and the Portland-Vancouver routeroutes is to be reviewed in August 1997, May 1994March 1999
and JanuaryJuly 1995, respectively.  Alaska's authority to serve its various Mexico
destinations are to be reviewed during 1994, 1995 and 1996.  The bilateral agreement
with Russia will be reviewed in AprilDecember 1995.  The Company expects to be
granted authority to continue to operate its international routes.  During
January 1995, Alaska applied to the DOT to serve Oakland and San Diego from
Vancouver.

Federal Aviation Administration (FAA) - The FAA, an agency within the DOT, has
jurisdiction to regulate aviation safety generally, including: the licensing of
pilots and maintenance personnel; the establishment of minimum standards for
training and maintenance; and technical standards of flight, communications and
ground equipment.  All aircraft must have and maintain certificates of
airworthiness issued by the FAA.  Alaska and Horizon aircraft, maintenance
facilities and procedures are subject to inspection by the FAA.  The FAA has the
authority to suspend temporarily or revoke permanently the authority of an air
carrier or its licensed personnel for failure to comply with Federal Aviation
Regulations and to levy civil penalties for such failure.

Labor Relations - The air transportation industry is regulated under the Railway
Labor Act, which vests in the National Mediation Board certain regulatory powers
with respect to disputes between airlines and labor unions arising under
collective bargaining agreements.

Environmental - Special noise ordinances or agreements restrict the type of
aircraft, the timing and the number of flights operated by Alaska and other air
carriers at five Los Angeles area airports plus San Diego, Palm Springs, San
Francisco and Seattle.

In late 1990, Congress passed the Airport Noise and Capacity Act of 1990 (Act).  The
Act addressed the need to establish a national aviation noise policy and limit
the ability of airports and local communities to implement procedures that would
interfere with interstate commerce or the national air transportation system.
The Act also called for the phase out of Stage II airplanes (generally older
aircraft not meeting certain noise emission standards) in the contiguous 48
states by December 31, 1999.  The Stage II phase-out provisions of the Act do
not apply to aircraft operated solely within the state of Alaska.  To implement
the phase out within the contiguous 48 states, the FAA has proposed regulations
and a timetable.  Alaska believes that its current fleet plan will enable it to
comply with the FAA's proposed regulations.
Competition
Competition withinin the air transportation industry is intense.  Currently, any
domestic air carrier deemed fit by the U.S.
Department of Transportation (DOT)DOT is allowed to operate scheduled
passenger service in the United States.  Together, Alaska and Horizon carry less
than 2% of all U.S. passenger traffic.

Alaska and Horizon compete in the West Coast, Arizona and ArizonaNevada markets with
both established carriers (such asAmerican, America West, Delta, MarkAir, Reno Air, Shuttle by United, United Express,
Delta, American, MarkAir, and America West) and new low-cost
carriers (such as Morris Air and Reno Air).  In December 1993, Southwest
Airlines, purchased Morris Air.United and United Express.  Alaska also competes primarily with
United, Northwest, Delta and MarkAir in the Lower 48-
to-Alaska48-to-Alaska market.  Some of
these competitors are substantially larger than Alaska and Horizon, have greater
financial resources and have more extensive route systems.  Due to its shorthaul
markets, Horizon is subject to competition from surface transportation,
particularly the private automobile.

Alaska and Horizon integrate their flight schedules to provide numerous departures from smaller cities
to larger "hub" cities and, wherethe best possible
connecting flights to a
passenger's final West Coast destination.service between any two points served by their systems.  Both airlines
distinguish themselves from competitors by providing a higher level of customer
service.  The airlines' excellent service in the form of attention to customer
needs, high-quality food and beverage service, more legroom, well-maintained
aircraft and other amenities has been recognized by independent studies and
surveys of air travelers.  Alaska and Horizon maintainoffer competitive fares, offering discount or
promotional fares to the extent necessary to maintain market share.fares.

Most large U.S. carriers have developed, independently or in partnership with
others, large computerized reservation systems (CRS).  Since the deregulation of fares and schedules,Due to contractual
requirements imposed by CRSs, most travel agents
have contractedagencies contract with a single CRS to
use these systems in sellingsell tickets.  Airlines, including Alaska and Horizon, are charged industry-set
fees to have their flight schedules included in the various CRS displays.  These
systems have becomeare currently the predominant means of distributing airline tickets.  DueIn
order to their competitive importance,reduce anti-competitive practices, the DOT rules requireregulates the vendors of such systems to provide unbiased displaysdisplay of all
airline schedules and fares.  In 1992,Alaska is exploring alternatives to existing
distribution methods.  American Airlines, owner of the SABRE CRS, has filed suit
against Alaska to prevent Alaska from reducing its level of display purchased
from SABRE without also doing so in all other CRSs.  At Alaska's request, the
DOT adopted new rules in this
area to reduce anti-competitive practices.is seeking comment from interested parties on the subject.

Frequent Flyer Program
All major airlines have establisheddeveloped frequent flyer programs offering
incentives to maximize travel on that particular carrier.  Alaska
hasas a way of increasing
passenger loyalty.  Alaska's Mileage Plan (MP) that allows customersmembers to earn mileage credits whileby
flying on Alaska, Horizon and other participating airlines, and by using the
services of participating banks,non-airline partners which include a credit card, telephone
companies, hotels and car rental firms.agencies.  Alaska reservesis paid by non-airline
partners for the rightmiles it credits to member accounts.  Alaska has the ability to
change the MPMileage Plan terms, conditions, partners, mileage credits and/orand award
levels.

Mileage credits can be redeemed for free or discounted travel and for other travel
industry awards.  Upon accumulating the necessary mileage, credit, MP members notify Alaska
of their award selection.  Once selected, modificationsawards can be changed, subject to such awards are limited.a
change fee.  Over 90% of the flight awards selected are subject to blackout
dates and capacity-controlled seating.  Currently, creditsmiles earned must be redeemed
within three years, otherwise they expire.

As of the year end 19931994 and 1992,1993, Alaska estimates that 698,000662,000 and 585,000698,000
roundtrip flight awards could have been redeemed by MPMileage Plan members who
have mileage credits exceeding the 15,000 mile free ticket threshold.  However, atAt December 31, 1993,1994,
fewer than 14%27% of these flight awards were actually issued and outstanding.  Alaska accruesEffective
January 31, 1995, the incremental cost associated with flight awards
abovethreshold for a free round trip domestic award will be
increased from 15,000 miles to 20,000 miles.

For the 15,000 mile level.  In addition, a proportion of the
incremental cost of a flight award is accrued for 21% of the
accumulated mileage credits of MP members whose account balances are
less than 15,000 miles.  The resulting accrued liability covers 65%
of the total accumulated mileage credit.  At December 31,years 1994, 1993 and 1992, the accrued liability was $5.9 millionapproximately 226,000, 188,000 and $8.4 million,
respectively.

The incremental cost to transport a passenger on a free174,000
round trip
includes the cost of fuel, meals, and insurance.  The incremental
cost does not include any contribution to overhead, aircraft cost or
profit.

The number of roundtrip flight awards usedwere redeemed and flown on Alaska were 188,000,
174,000 and 119,000 for the years 1993, 1992 and 1991, respectively.Horizon.  These
awards represent approximately 5% of the total passenger miles flown for each
period.

Given this low usage, seat availabilityAlaska maintains a liability for its Mileage Plan obligation which is based on
its total miles outstanding, less an estimate for miles which will never be
redeemed.  The net miles outstanding are  allocated between those credited for
travel on Alaska, Horizon or other airline partners and seat restrictionsthose credited for using
the services of non-airline partners.  Miles credited for travel on popular flights, Alaska,
believes that
displacementHorizon or  other airline partners are accrued at Alaska's incremental cost of
revenue passengers by those using flight awardsproviding the air travel.  The incremental cost includes the cost of meals,
fuel, reservations and insurance.  The incremental cost does not include a
contribution to overhead, aircraft cost or profit.  A portion of the proceeds
from non-airline partners is minimal.

Selected Quarterly Consolidated Financial Information (Unaudited)

Selected financial dataalso deferred.  At December 31, 1994 and 1993, the
total liability for each quarter of 1993miles outstanding was  $17.4 million and 1992 is as
follows (in thousands,$14.7 million,
respectively.

Selected Quarterly Consolidated Financial Information (Unaudited)
Selected financial data for each quarter of 1994 and 1993 is as follows (in
millions, except per share):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1994 1993 19921994 1993 19921994 1993 19921994 1993 1992 Operating revenues $250,242 $258,208 $277,483 $277,145 $323,386 $321,087 $277,218 $258,938$280.4 $250.2 $330.5 $277.5 $386.8 $323.4 $318.0 $277.2 Operating income (loss) (16,846) (20,113) 2,082 (19,051) 20,687 3,793 (22,696) (59,470) Income (loss) before accounting change (15,033) (15,682) (3,589) (17,774) 8,028 (2,215) (20,324) (44,599) Accounting change - (4,567) - - - - - -(2.9) (16.8) 24.5 2.1 52.3 20.7 1.2 (22.7) Net income (loss) (15,033) (20,249) (3,589) (17,774) 8,028 (2,215) (20,324) (44,599) Primary earnings(6.3) (15.0) 9.7 (3.6) 24.3 8.0 (5.1) (20.3) Earnings (loss) per share: Income (loss) before accounting changePrimary (.47) (1.25) (1.31).72 (.33) (1.46)1.81 .60 (.29)(.38) (1.52) (3.47) Accounting change - (.34) - - - - - - Net income (loss) (1.25) (1.65) (.33) (1.46) .60 (.29) (1.52) (3.47) Fully diluted earnings per share * * .61 * * .47 *1.36 .53 * * * Anti-dilutive
Results for 4th Quarter 1993 include an after-tax special charge of $9.8 million to recognize the lower value of the Boeing 727 fleet and the acceleration of its retirement. The fully diluted earnings per share amounts shown for the first quarter 1992second and third quarters differ from thatthose previously reported duereported. The Company changed the earnings per share calculation to properly reflect the January 1, 1992 adoption of Financial Accounting Standards No. 106, "Accounting for Postretirement Benefits Other than Pensions." The cumulative effectdilution of the change in accounting is reported ininvestment options that remain outstanding after the first quarter1993 repurchase of 1992. The effect of the accounting change on subsequent quarters of 1992 is immaterial.convertible preferred stock. The total of the amounts shown as quarterly earnings per share may differ from the amount shown on the Consolidated Statement of Income because the annual computation is made separately and is based upon average number of shares and equivalent shares outstanding for the year. (See Note 1 of the Notes to Consolidated Financial Statements.) A discussion of the fourth quarter 1993 results is included in Management's Discussion and Analysis of Results of Operations and Financial Condition. Employees Alaska had 6,2436,901 active full-time and part-time employees at December 31, 1993,1994, of which approximately 85%87% are represented by labor unions. The unions and the number of Alaska employees represented by each as of December 31, 19931994 and the amendable dates of existing contracts are outlined below: Number of Union Employee Group Employees Contract Status International Association Mechanic, 1,493Rampservice 1,558 Amendable 9/1/97 Association of RampserviceMachinists and Machinists and related Aerospace Workers classifications Clerical, Office 1,843and 2,154 Amendable and Passenger 9/30/92 Passenger Service (In negotiation) Air Line Pilots Pilots 888874 Amendable Association 12/1/97 Association International Association of Flight Attendants 1,0111,335 Amendable 3/14/99 Flight Attendants 10/1/90 (In negotiation) Mexico Workers Mexico Airport 6680 Amendable 4/1/9495 Association Personnel of Air Personnel Transport Transport Workers Dispatchers 16 Amendable 4/24/96 Horizon had 2,4902,951 active full-time and part-time employees at December 31, 1993,1994, of which approximately 20% are represented by labor unions. The unions and the number of Horizon employees represented by each as of December 31, 19931994 and the amendable dates of existing contracts are outlined below: Number of Union Employee Group Employees Contract Status Transport Workers Mechanics and 234275 Amendable 1/1/95 Union of America related classifications (New contract is waiting to be ratified) Dispatchers 2616 In negotiation Association of Flight 189Attendants 249 Amendable 4/20/946/15/96 Flight Attendants Attendants Canadian Brotherhood Station 58personnel 53 Amendable 7/10/95 of Railway, personnelTransport in Transport and British Columbia and General Workers The Company's labor contracts currently in negotiation are not expected, when finalized, to have a material adverse impact on results of operations. ITEM 2. PROPERTIES Aircraft The following table describes the aircraft operated and their average age at December 31, 1993.1994. Passenger Average Passenger Age Aircraft Type Capacity Owned Leased Total in Years Alaska Airlines Boeing 727-100 12/92 1 - 1 27 Boeing 727-200 12/131 -737-200C 111 4 4 14 Boeing 737-200C 0/111 3 4 78 14 Boeing 737-400 10/126140 3 19 22 2 14 16 1 McDonnell Douglas MD-80 10/128 12140 16 26 3842 6 18 48 6623 49 72 6 Horizon Fairchild Metroliner III 18 5 18 23 28 89 Dornier 328 30 _ 9 9 1 de Havilland Dash 8 37 -_ 23 23 57 Fokker F-28 62 _ 10 10 21 5 60 65 - 5 5 22 5 51 56 8 Total 23 99 1229 Part II, Item 7., "Management's Discussion and Analysis of Results of Operations and Financial Condition," discusses future orders and options for additional aircraft. TwelveSixteen of the 1823 aircraft owned by Alaska as of December 31, 19931994 are subject to liens securing long-term debt. Alaska's leased Boeing 727-200s will all be retired by May 1994. The leased McDonnell Douglas MD-80 aircraft have expiration dates of 19941995 to 2013. The B737-400 leases expire in 2000-2001. In late 1993, Horizon took deliveryhave expiration dates of two Dornier 328 aircraft, which will be placed in service in early 1994.2002 to 2004. Horizon's leased Fairchild Metroliner III, de Havilland Dash 8, Fokker F-28 and Dornier 328 aircraft have base-term expiration dates of 19941995 to 2001, 1995 to 2006, 1996 to 1997, and 2008 to 2009, respectively. Alaska and Horizon have the option to extend most of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the then fair market value of the aircraft. The Company has the right to terminate each of the B737-400 leases on the third anniversary of an aircraft's delivery date for an average fee of $260,000. For information regarding obligations under capital leases and long-term operating leases, see Note 5Notes to the Consolidated Financial Statements. Ground Facilities and Services Alaska and Horizon lease ticket counters, gates, cargo and baggage, office space and other support areas at the majority of the airports they serve. Alaska also owns terminal buildings at various Alaska cities and Horizon owns its terminal at the Portland International Airport. Alaska has centralized operations in several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac) in Seattle, Washington. The owned buildings, including land unless located on leased airport property, include: a three-bay hangar facility with maintenance shops; a flight operations and training center; an air cargo facility; a reservation and office facility; a four-story office building; its corporate headquarters; and two storage warehouses. Alaska also leases a two-bay hangar/office facility at Sea-Tac. Alaska's other major facilities include: its Anchorage regional headquarters building and Phoenix reservations center; a leased two- baytwo-bay maintenance facility in Oakland; and a leased hangar/office facility in Anchorage. Horizon owns its Seattle corporate headquarters building and leases a maintenance facility at the Portland airport. ITEM 3. LEGAL3.LEGAL PROCEEDINGS In October 1991, Alaska gave notice of termination of its code sharing and frequent flyer relationship with MarkAir, an airline based in the state of Alaska. Both companies have filed suit against one another in connection with that termination alleging breach of contract and other causes of action under state law. In addition, MarkAir claimed that the termination was in violation of Federal Antitrust Laws. MarkAir filed for protection under Chapter 11 of the U.S. Bankruptcy Code in June 1992. In December 1993, MarkAir agreed to dismiss all antitrust claims against the Company. That agreement is awaiting final approval byIn 1994, the U.S. District Court which hashad jurisdiction over the case. MarkAir andcase approved the settlement. Discovery continues in a related Alaska will be freestate court case pertaining to pursue the breach of contract and other state law claims after dismissalclaims. The Company believes the ultimate resolution of this legal proceeding will not result in a material adverse impact on the financial position or results of operations of the antitrust suit.Company. In December 1992, the U.S. Department of Justice filed suit against most major domestic airlines, including the Company, alleging that they have violated the antitrust laws by conspiring to fix prices for domestic airline tickets in violation of Section 1 of the Sherman Act. TwoDuring 1994, six of the airlines, haveincluding the Company, entered into consent decrees with the U.S. Department of Justice. The Company believes the ultimate resolution of the above legal proceedings will not result in a material adverse impact on the financial position ofagreement requires no refunds or monetary cost to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Alaska Air Group, Inc., their positions and their respective ages (as of March 1, 1994)1995) are as follows: Officer Continuously Name Position Age Since Raymond J. VecciJohn F. Kelly Chairman, President and Chief 51 197950 1981 Executive Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc. Marjorie E. Laws Vice President/Corporate Affairs 5354 1983 and Corporate Secretary of Alaska Air Group, Inc. and Alaska Airlines, Inc. J. Ray VingoSteven G. Hamilton Vice President/Finance & ChiefLegal and General 55 1983 Financial Officer1988 Counsel of Alaska Air Group, Inc. and Alaska Airlines, Inc.; Treasurer Harry G. Lehr Senior Vice President/Planning 54 1986 and Finance of Alaska Air Group, Inc. Steven G. Vice President/Legal and General 54 1988 Hamilton Counsel of Alaska Air Group, Inc., and Alaska Airlines, Inc. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of December 31, 1993,1994, there were 13,341,62113,400,090 shares of common stock issued and outstanding and 6,5246,183 shareholders of record. The Company also held 3,153,589 treasury shares at a cost of $71.8 million. Cash dividends totaling $.15 per share were declared in 1992. In December 1992, the Company suspended the quarterly dividend on the common stock due to the 1992 net loss and the difficult economic environment. Air Group's common stock is listed on the New York Stock Exchange (symbol: ALK). The following table shows the trading range of Alaska Air Group common stock on the New York Stock Exchange for 19931994 and 1992.1993. 1994 1993 1992 High Low High Low First Quarter 18-7/8 13-5/8 18 15-5/8 23-7/8 18-1/4 Second Quarter 16-1/8 13-3/4 17-7/8 14-1/4 22 17-1/8 Third Quarter 17-7/8 14-3/8 15 12-1/4 19-1/2 17-1/4 Fourth Quarter 18 13-1/8 17-3/8 12-1/2 17-5/8 14-3/4 ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Year Ended December 31 1994 1993 1992 1991 1990 1989 FINANCIAL DATA (a) (In Millions, Except Per Share) Operating Revenues Passenger $1,170.2 $1,002.0 $1,000.6 $999.9 $953.2 Freight, mail and other 145.4 126.3 114.8 104.1 93.8 Total Operating Revenues 1,315.6 1,128.3 1,115.4 1,104.0 1,047.0 Operating Expenses 1,240.6 1,145.1 1,210.2 1,069.4 1,018.6 Operating Income (Loss) 75.0 (16.8) (94.8) 34.6 28.4 Interest expense, net of interest capitalized (46.6) (37.2) (37.1) (31.9) (11.2) Interest income 7.8 7.1 7.4 11.7 7.3 Other - net 4.8 1.1 (1.2) 1.8 3.4 Income (loss) before income tax expense and accounting change 41.0 (45.8) (125.7) 16.2 27.9 Income (loss) before accounting change 22.5 (30.9) (80.3) 10.3 17.2 Net Income (Loss) $ 22.5 $(30.9) $(84.8) $10.3 $17.2 Per Common Share Data: Average primary shares outstanding 13.4 13.3 13.3 13.4 13.7 Primary earnings per share before accounting change $1.68 $(2.51) $(6.53) $.27 $.82 Primary earnings per share(a)1.68 (2.51) (6.87) .27 .82 Fully diluted earnings per share(a) 1.62 (b) (b) (b) (b) Cash dividends per share _ _ .15 .20 .20 Book value per share $14.27 $12.51 $14.76 $21.50 $21.23 Balance Sheet Data: Working capital (deficit) $(147.1) $(61.3) $(85.2) $(10.9) $(128.3) Property and equipment,net 859.3 690.6 790.9 819.8 700.4 Total assets 1,315.8 1,135.0 1,208.4 1,225.4 1,021.4 Long-term debt and capital lease obligations 589.9 525.4 487.8 500.0 281.8 Redeemable preferred stock _ _ 61.2 60.9 60.7 Shareholders' equity $191.3 $166.8 $196.7 $284.4 $279.8 Return on average equity(c) 12.6% (18.4%) (38.0%) 1.3% 3.6% Ratio of earnings to fixed charges(d) 1.36 .51 (.37) .97 1.13 AIRLINE OPERATING DATA Revenue passengers (000) 12,439 9,189 8,629 7,889 7,274 Revenue passenger miles (000,000) 8,320 6,074 6,023 5,353 4,851 Available seat miles (000,000) 13,247 10,412 10,522 9,575 9,099 Revenue passenger load factor 62.8% 58.3% 57.2% 55.9% 53.3% Breakeven passenger load factor 60.0% 60.3% 63.7% 55.1% 51.8% Yield per passenger mile 14.1c 16.5c 16.6c 18.7c 19.6c Operating expenses per available seat mile 9.4c 11.0c 11.5c 11.2c 11.2c Average number of employees(e) 9,043 8,458 8,666 8,081 7,653 c=cents (a) (In Thousands, Except Per Share) Operating Revenues Passenger $1,001,975 $1,000,618 $999,859 $953,247 $833,847 Freight, mail and other 126,354 114,760 104,172 93,718 82,690 Total Operating Revenues 1,128,329 1,115,378 1,104,031 1,046,965 916,537 Operating Expenses 1,145,102 1,210,219 1,069,405 1,018,546 846,576 Operating Income (Loss) (16,773) (94,841) 34,626 28,419 69,961 Interest expense, net of interest capitalized (37,178) (37,121) (31,879) (11,242) (15,664) Interest income 7,088 7,374 11,698 7,312 12,661 Other - net 1,051 (1,118) 1,762 3,429 2,409 Income (loss) before income tax expense and accounting change $(45,812) $(125,706) $16,207 $27,918 $69,367 Income (loss) before accounting change $(30,918) $(80,270) $10,338 $17,167 $42,935 Net Income (Loss) $(30,918) $(84,837) $10,338 $17,167 $42,935 Per Common Share Data: Average shares outstanding- primary (000) 13,340 13,309 13,413 13,675 15,851 Primary earnings per share before accounting change $(2.51) $(6.53) $.27 $.82 $2.71 Primary earnings per share(a) $(2.51) $(6.87) $.27 $.82 $2.71 Fully diluted earnings per share(a) (b) (b) (b) (b) $2.51 Cash dividends per share - $.15 $.20 $.20 $.20 Book value per share $12.51 $14.76 $21.50 $21.23 $22.08 Working capital (deficit) $(61,317) $(85,233) $(10,868) $(128,265) $9,468 Property and equipment,net $690,606 $790,910 $819,787 $700,378 $536,503 Total assets $1,134,954 $1,208,358 $1,225,455 $1,021,404 $874,075 Long-term debt and capital lease obligations $525,418 $487,847 $499,971 $281,759 $227,044 Redeemable preferred stock - $61,235 $60,947 $60,665 - Shareholders' equity $166,833 $196,724 $284,447 $279,833 $341,872 Return on average shareholders' equity(c) (18.4%) (38.0%) 1.3% 3.6% 13.2% Ratio of earnings to fixed charges(d) .51 (.37) .97 1.13 2.30 AIRLINE OPERATING DATA Revenue passengers (000) 9,189 8,629 7,889 7,274 6,604 Revenue passenger miles (000,000) 6,074 6,023 5,353 4,851 4,376 Avialable seat miles (000,000) 10,412 10,522 9,575 9,099 7,926 Revenue passenger load factor 58.3% 57.2% 55.9% 53.3% 55.2% Breakeven passenger load factor 60.3% 63.7% 55.1% 51.8% 50.5% Yield per passenger mile (cents) 16.5 16.6 18.7 19.6 19.1 Operating expenses per available seat mile (cents) 11.0 11.5 11.2 11.2 10.7 Average number of employees(e) 8,458 8,666 8,081 7,653 6,661 (a) For 1992, primary earnings per share includes ($.34) for the $4.6 million cumulative effect of the postretirement benefits accounting change as of January 1, 1992. (b) Anti-dilutive. (c) For the 1990-1993 calculations, net income (loss) was reduced for preferred stock dividends and shareholders' equity excluded redeemable preferred stock. (d) For 1993, 1992 and 1991, earnings are inadequate to cover fixed charges by $50 million, $142.1 million and $2.4 million, respectively. (e) Full-time equivalents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Industry Conditions The Company's operating results improved in 1993, yetDuring 1994, the Company continued to post a net loss. The Company and the entire airline industry have been negatively impacted by a weak economy, over capacitycharacter of aircraft, continued operation of bankrupt carriers and low-cost, new entrants. These factors were particularly evidentcompetition changed on the West Coast due to the economic recession in CaliforniaDecember 1993 purchase of Morris Air by Southwest Airlines, and the growthOctober start-up of new entrant carriers. The result has beenShuttle by United. Low air fares are now a significant decrease in air fares.permanent part of the fare structure on the West Coast. The Company has responded to the changing industry environment by cutting costs, retiring olderaggressively matching competitors' air fares, increasing flight frequency, and improving utilization of aircraft, facilities, equipment and reducing capital spending. In 1993, the Company implemented a comprehensive cost- reduction program, which resulted in more than $80 million of annual cost savings.people. Results of Operations FOURTH QUARTER1994 COMPARED WITH 1993 AND 1992 The consolidatedConsolidated net income in 1994 was $22.5 million, or $1.68 per share (primary) and $1.62 per share (fully diluted), compared with a net loss for the fourth quarter 1993 was $20.3of $30.9 million, or $1.52$2.51 per share, comparedin 1993. The fully diluted calculation is based on 19.6 million shares, which gives effect to a lossthe 1993 repurchase of $44.6 million, or $3.47 per share, for fourth quarter 1992. Resultsthe convertible preferred stock. The results for 1993 and 1992 include an after-tax special chargescharge of $9.8 million and $16.6 million, respectively. Before these charges, the fourth quarter 1993 net loss was $10.5 million, or $.79 per share, compared to a loss of $28.0 million, or $2.23 per share, for the fourth quarter 1992. The special charges are to recognize the lower value of the Boeing 727 fleet and the acceleration of its retirement. Fourth quarterWithout such charge, the 1993 net loss would have been $21.1 million, or $1.77 per share. Operating income was $75.0 million compared to an operating loss of $16.8 million for 1993. The improved operating results reflect higher operating revenues, and the effects of cost reductions and productivity improvements. Operating revenues increased 17% to $1.316 billion. Passenger revenues, which accounted for 89% of total operating revenues, increased 17% on a 37% increase in passenger traffic. Traffic gains were $277.2due to a 27% increase in system capacity, lower fares that stimulated traffic throughout most of the system, and improvements in market share. The load factor increased from 58.3% in 1993 to 62.8%. Yields declined 15% to 14.1 cents in 1994. The static value of a one cent movement in yield is approximately $80 million upper year. However, in a dynamic, price-sensitive business, a one cent increase will not necessarily result in a revenue improvement of this magnitude. Freight and mail revenues increased $7.5 million or 9% due to a military charter contract in the state of Alaska, increased freight volumes, and increased freight rates, offset by lower mail volumes. The lower mail volumes resulted from Alaska's decision to not bid on certain U.S. mail contracts so that capacity could be made available for higher yielding freight. Other-net revenues rose by $11.6 million or 27% due to increased revenues from Alaska's frequent flyer program, maintenance contracts and inflight liquor sales. Operating Expenses Operating expenses increased 8% to $1.241 billion on a capacity increase of 27%. For the separate airlines, Alaska's operating expenses increased 7% from the $258.9to $998.7 million reportedon a 28% increase in capacity, and Horizon's operating expenses increased 14% to $244.0 million on an 18% increase in capacity. A discussion of operating expenses for the prior-year quarter. Passenger traffic was up 28%, but passenger yield (revenue per passenger mile) was down 17% from 17.9 centstwo airlines follows. Alaska Airlines The table below shows the major operating expense elements on a unit-cost basis for Alaska in 1992 to 14.8 cents in1994 and 1993. Fourth quarterAlaska Airlines Operating Expenses Per ASM (In Cents) % 1994 1993 operating expenses decreased 6% (3% excluding the special charges) to $299.9 million from $318.4 million for fourth quarter 1992.Change Change Wages and benefits 2.67 3.16 (.49) (16) Aircraft fuel 1.08 1.31 (.23) (18) Aircraft maintenance .34 .46 (.12) (26) Aircraft rent 1.13 1.35 (.22) (16) Commissions .61 .68 (.07) (10) Depreciation & amortization .39 .52 (.13) (25) Special charges _ .16 (.16) NM Other 2.05 2.24 (.19) (8) Alaska Airlines Total 8.27 9.88 (1.61) (16) Alaska's lower unit costs were due to an extensive cost reduction effort and better utilization of aircraft, facilities, equipment and people, as well as a 2% increase in average seats per aircraft. Average daily aircraft utilization increased 26% from 8.2 block hours to 10.3 block hours. Wages and benefits per ASM decreased $2.9 million (3%)16% primarily due to improved productivity The number of equivalent employees increased 5% while capacity increased 28% and traffic increased 38%. Effective May 1, 1994, Alaska and the Association of Flight Attendants began a new five-year contract, which is modeled after the contract used at Southwest Airlines and which provides flight attendants the opportunity to earn increased wages through increased flying. It also provides a lower starting rate of pay, more flexible work rules and reduced pension expenses. Fuel expense per ASM decreased 18% due to a 4%10% decrease in employees offsetthe price of fuel and the continued transition to more fuel efficient aircraft. The average cost per gallon declined 6.9 cents to 59.9 cents in 1994. Lower fuel prices reduced fuel expense by higher average wage rates.$15.1 million. Currently, a 1 cent change in fuel prices affects annual fuel costs by approximately $2.2 million. Maintenance expense per ASM decreased $6.7 million26% due to the replacement of oldolder aircraft duringand due to significant improvements in maintenance programs, techniques and efficiency. With an average age of less than six years at December 31, 1994, Alaska's fleet is believed to be one of the past year.youngest among U.S. jet airlines. Aircraft rent and depreciation expense increased $6.3 million (13%) with the addition of six new aircraft to the fleet over the past year. Excluding special charges, all other expensesper ASM decreased $4.3 million (3%). Increased flying combined with cost savings caused operating cost per available seat mile to decline from 12.2 cents to 10.6 cents, or 13% (excluding the special charges). Fourth quarter 1993 nonoperating net expense decreased $2.3 million16% primarily due to a substantial increase in utilization, offset by higher rents for new aircraft. Depreciation and amortization expense per ASM decreased 25% due to the retirement of the 727 fleet and increased utilization of the remaining aircraft. Other expense per ASM decreased 8% due to lower unit costs for advertising, food, building rentals and personnel expenses. Horizon Air The table below shows the major operating expense elements on a unit-cost basis for Horizon for 1994 and 1993. Horizon Air Operating Expenses Per ASM (In Cents) % 1994 1993 Change Change Wages and benefits 6.75 7.07 (.32) (5) Aircraft fuel 1.84 1.93 (.09) (5) Aircraft maintenance 2.33 2.41 (.08) (3) Aircraft rent 2.73 2.79 (.06) (2) Commissions 1.56 1.65 (.09) (5) Depreciation & amortization .75 .94 (.19) (20) Other 4.99 4.96 .03 1 Horizon Air Total 20.95 21.75 (.80) (4) Horizon's cost per ASM declined 4% to 20.95 cents due to the acquisition of higher capacity aircraft and cost reduction efforts. Other Income (Expense) Other Income (Expense) increased $5.0 million to $34.0 million. Interest expense was $9.3 million higher in 1994 due to higher interest rates on debt.variable debt and higher average debt balances. Other-net income increased $4.1 million due to gains on the early retirement of debt and vendor credits. 1993 COMPARED WITH 1992 The consolidated net loss for 1993 was $30.9 million, or $2.51 per share, compared with a net loss of $84.8 million, net loss, or $6.87 per share, forin 1992. The results include an after- taxafter-tax charge of $9.8 million in 1993 and $16.6 million in 1992 to recognizefor the lower valueearly retirement of the Boeing 727 fleet and the acceleration of its retirement.fleet. In addition, 1992 includes a $4.6 million charge related to a change in accounting for postretirement benefits. Without such charges, the 1993 net loss would have been $21.1 million, or $1.77 per share, compared with $63.6 million net loss, or $5.28 per share, for 1992. The operating loss for 1993 was $16.8 million, compared to an operating loss of $94.8 million for 1992. The improved operating results reflect lower operating expenses. Operating revenues increased 1% in 1993 towere $1.128 billion. Passenger revenues, which accounted for 89% of total operating revenues, increased slightly to $1.002 billion, while freight and mail revenues increased 9% to $84.0 million, and other revenues increased by 13% to $42.3 million.1% greater than the $1.115 billion posted in 1992. Passenger revenues were negatively impactedapproximately even with 1992 due to a 1% increase in 1993traffic, offset by aggressive fare discounting. Passenger yields were up 11% during the first half of 1993 but dropped significantly during the last half of 1993. For all of 1993, yields declined .1 cent from 16.6 centsa 1% decline in 1992 to 16.5 cents in 1993. A 1 cent change in yields affects annual revenues by approximately $60 million. Passenger traffic was down 12% during the first half of 1993 but lower fares stimulated traffic during the last half of 1993. For all of 1993, passenger traffic increased 1%.yields. Freight and mail revenues increased $6.7 million (9%) in 1993or 9% due to increased freight and mail rates and increased service in Alaska. Other-net revenues were uprose $4.9 million (13%) in 1993or 13% due to increased revenues from Alaska's frequent flyer program. Operating Expenses Operating expenses decreased 5% to $1.145 billion from $1.210 billion in 1992.billion. The $65 million reduction in expensesdecrease was primarily due to a cost reduction program initiated during the first quarter 1993. Operating expenses per ASM declined 4%, from 11.5 cents to 11.0 cents. The table below shows the major operating expense elements on a unit-cost basis for 1993 and 1992: Operating Expenses Per ASM (In Cents) Increase % 1993 1992 (Decrease) Change Wages and benefits 3.53 3.51 .02 1 Aircraft fuel 1.37 1.55 (.18) (12) Aircraft maintenance .65 .83 (.18) (22) Aircraft rent 1.49 1.18 .31 26 Commissions .77 .82 (.05) (6) Depreciation & amortization .56 .54 .02 4 Special charges .14 .25 (.11) NM Other 2.49 2.83 (.34) (12) Total 11.00 11.51 (.51) (4) Fuel expense per ASM decreased 12% due to the use of more fuel efficientfuel-efficient aircraft and a 3% decrease in the cost of fuel. The average cost per gallon during 1993 was 67.6 cents, down from 69.6 cents in 1992. Currently, a 1 cent change in fuel prices affects annual fuel costs by approximately $2.1 million. Maintenance expense per ASM declined 22% due to the replacement of old aircraft with newolder aircraft. With an average age of six years at year-end 1993, Alaska's fleet is the youngest among all U.S. jet airlines. Aircraft rent and depreciation expense increased 18% in 1993 primarilyper ASM rose 19% due to the addition of new aircraft. As of December 31, 1993, essentially all of Alaska's Boeing 727-200 aircraft had been retired. The last two will be retired in May 1994. This is an acceleration of the retirement schedule announced previously. This action resulted in a pretax special charge of $15 million in 1993 to recognize the lower value of the Boeing 727-200 fleet. It includes a provision for future excess lease costs and the write-down of capitalized overhauls and spare parts to net realizable value. 1992 results include a similar charge of $26 million, which resulted from the Company's decision to accelerate the retirement of the Boeing 727-200 from 1996 to the end of 1994. Other expenseexpenses per ASM decreased 12% due to lower expenditures for food, advertising, promotion, supplies and personnel expenses. Other Income (Expense) Nonoperating expense was $29.0 million in 1993 down fromcompared to $30.9 million in 1992. Interest expenseThe decrease was $5.6 million lower in 1993primarily due to lower interest rates. There was only $446,000 interest capitalized in 1993, compared to $6.1 million in 1992. Because of the two-year delay in expected delivery of the MD- 90 aircraft, interest capitalizationrates on the associated aircraft purchase deposits was discontinued in the fourth quarter 1992. 1992 COMPARED WITH 1991 Consolidated net loss for 1992 was $84.8 million, or $6.87 per share, compared with $10.3 million net profit, or $.27 per share, for 1991. 1992 results include an after-tax charge of $16.6 million to recognize the lower value of the Boeing 727 fleet and a $4.6 million charge related to a change in accounting for postretirement benefits. Operating loss was $94.8 million, compared to an operating profit of $34.6 million for 1991. The large operating loss was primarily due to a 13% increase in operating expenses but only a 1% increase in operating revenues. Operating revenues were $1.115 billion, 1% greater than the $1.104 billion posted a year earlier. Passenger traffic was up 13%, but was mostlydebt, offset by lower yields. Passenger yield for 1992 was 16.6 cents, down 11% from 1991's 18.7 cents. Freightless capitalized interest. Liquidity and mail revenues increased $7.7 million (11%) in 1992 primarily due to increased service in Alaska. Nonoperating expense was $30.9 million in 1992 compared to $18.4 million in 1991. The increase was primarily due to higher interest expense and less interest income. Operating expenses increased 13% (11% excluding the special charges) to $1.210 billion from $1.069 billion in 1991. The primary factor contributing to the increase was the 10% increase in available seat miles resulting from the net addition of 12 aircraft during 1992. Wages and benefits rose 11% in 1992 resulting from a 7% increase in employees and a 4% increase in wages and benefits per employee. Fuel expense rose 4% primarily due to a 6% increase in fuel consumed, offset by a 2% decrease in average cost per gallon. Fuel expense per ASM was down 5% due to the addition of 16 fuel- efficient, two-engine jet aircraft and retirement of eight three- engine jet aircraft during 1992. Aircraft rent and depreciation expense rose 17% due to the addition of new aircraft. Other operating expenses increased 14% primarily due to higher costs for food, landing fees, terminal rents and outside services. LIQUIDITY AND CAPITAL RESOURCESCapital Resources The table below showspresents the major indicators of financial condition and liquidity and the changes during 1993.liquidity. December 31, 1994 December 31, 1993 1992 Change (In millions, except ratios and per share)share amounts) Cash and marketable securities $101.1 $83.4 $17.7$104.9 $ 101.1 $ 3.8 Working capital (deficit) (147.1) (61.3) (85.2) 23.9(85.8) Total assets 1,315.8 1,135.0 1,208.4 (73.4)180.8 Long-term debt 589.9 525.4 487.8 37.6 Redeemable preferred stock - 61.2 (61.2)64.5 Shareholders' equity 191.3 166.8 196.7 (29.9)24.5 Book value per common share $12.51 $14.76 $(2.25)$14.27 $ 12.51 $ 1.76 Debt/equity ratio 76%:24% 74%76%:26% N/A 199324% NA 1994 FINANCIAL CHANGES The Company's cash and marketable securities portfolio increased by $17.7$4 million during 1993.1994. Operating activities provided $48.5$144 million of cash in 1993.1994. Additional cash was provided by $83.7$104 million from aircraft refinancingin new long-term debt and $20$25 million in short-term borrowings. Cash was used for debt paymentsthe purchase of four new MD-83 aircraft, one previously leased B737-400, one used B737-200C aircraft, and other capital expenditures ($79.4189 million), repurchasethe repayment of preferred stockdebt ($33.471 million), and capital expendituresthe repayment of short-term borrowings ($30.420 million). Like many airlines, the Company has a working capital deficit. The deficit increased during 1994 due to the cash purchase of two aircraft and an increase in current portion of capital lease obligations. The existence of such a working capital deficit has not in the past impaired the Company's ability to meet its obligations as they become due and it is not expected to do so in the future. Financing Arrangements During May 1993,1994, four MD-83 aircraft were financed under ten-year loan agreements which bear interest at rates which vary based on LIBOR. The principal amount financed was $104 million. In addition, capital lease obligations increased $57.9 million due to changes in the Company repurchased alllease agreements for two B737-400 aircraft that were previously classified as operating leases. During early 1995, Alaska's lines of its outstanding 10.21% redeemable preferred stock for $60.4 million, saving the Company more than $4 million annually after taxes. The seller provided a $27 million loan carrying a 7% interest rate to assist with the stock repurchase. In November 1993, Alaska entered into a financing agreement to refinance $47.2 million in borrowingscredit (which totalled $70 million) were replaced with a six-year$75 million credit facility with commercial banks. Advances under the new facility may either be for up to a 364-day term, loan. The $47.2 millionor up to a maximum maturity of borrowings had been classified asthree years. Borrowings may be used for aircraft acquisitions and other corporate purposes and they bear interest at a current obligation at December 31, 1992. Alaska has $70 million in lines of credit. Credit advances carry variable interest ratesrate which varies based uponon LIBOR. At December 31, 1993, there were no borrowings outstanding under these lines of credit. Commitments During 1993,1994, Alaska took delivery of six new B737-400 aircraft under eight-year operating leases. In addition, two MD-80s were sold and leased back under operating leases and restructured all 20 of 6-1/2 and 10 years, respectively. During 1993, Alaska subleased or terminated leases on 11 B727-200 aircraft. During 1993, Horizon restructured the Dornier 328 order and the number of firm ordersits B737-400 aircraft leases. As part of the aircraft has been reduced from 35 aircraft valued at $260 million torestructuring, Alaska purchased one of the 20 aircraft valued at $150 million.in 1994, agreed to purchase one each in 1995 and 1996, and received options to purchase up to four more of the 20 between 1997 and 1999. The numberfixed term of aircraft under optionthe leases was increased from 25eight years to 40 aircraft. Deliveryten years. As a result of the firmrestructuring, Alaska expects to save more than $6 million per year over the term of the leases. Also during 1994, Alaska further restructured its aircraft orders began in late 1993 andwith McDonnell Douglas, replacing an order for ten MD-90s plus options with an order for four MD-83s. This restructuring will continue through 1998. The option aircraft would be delivered during the years 1998 to 2003. Dornier has also agreed to provide Horizon with lease financing for the aircraft. The new aircraft are intended to replace Horizon's 18-seat Fairchild Metroliner III aircraft and should be sufficient to meet growth needs for the next decade. In addition, in 1993reduce future capital spending by $360 million. During 1994, Horizon took delivery of three usedseven new Dornier 328 aircraft under 15- year operating leases, ranging from one to three years.and five used Fokker F-28 aircraft under three-year operating leases. At December 31, 1993,1994, the Company had firm orders for 4017 aircraft with a total valuecost of approximately $1.1 billion$293 million as set forth below. Delivery Period - Firm Orders Aircraft 1994 1995 1996 1997 1998 Total Boeing B737-400 6 6 Dornier 328 51 2 3 2 6 1811 McDonnell Douglas MD-80 42 2 2 6 McDonnell Douglas MD-90 1 9 10 Total 153 4 4 11 6 40 Value17 Cost (Millions) $388$78 $85 $73 $465$85 $45 $1,056$293 Operating leases have been completed for the B737-400 and Dornier 328 orders. The Company expects to finance the other aircraft through new long-term debt leases and internally generated cash. The Company accrues the costs associated with returning leased aircraft over the lease period. At December 31, 1993, $30.71994, $26 million was reserved for leased aircraft returns. This reserve should be sufficient to cover the costs related to the phase-out of the Boeing 727 fleet and the obligations due at the end of the contractual rent period for other aircraft. Deferred Taxes At December 31, 1993,1994, net deferred tax liabilities were $9$19 million, which includes $69$82 million of net temporary differences, offset by $44$38 million of net operating loss (NOL) carryforwards and $16$25 million related toof Alternative Minimum Tax (AMT) credit carryforwards. The Company believes that all of theits deferred tax assets, including the NOL and AMT credit carryforwards, will be realized through the reversal of existing temporary differences or tax planning strategies such as the sale of aircraft. 1993 FINANCIAL CHANGES Cash and marketable securities increased by $18 million in 1993. Operations generated $49 million, proceeds from aircraft financing were $84 million, and short-term borrowings added $20 million. Cash was used for the repayment of debt ($79 million), the repurchase of preferred stock ($33 million), and capital expenditures ($30 million). During 1993, the Company repurchased all of its outstanding redeemable preferred stock for $60 million, saving the Company more than $4 million annually after taxes. The seller provided a $27 million loan to assist with the stock purchase. 1992 FINANCIAL CHANGES Despite the $84.8 million net loss, operating activities provided $20.2$20 million of cash in 1992. During 1992, capital spending totaled $277.9$278 million for six MD-80MD-83 and two B737-400 aircraft, other equipment and deposits for future flight equipment. These capital expenditures were financed through debt ($47.247 million), sale/leasebacks ($214.6215 million) and internally generated cash. 1991 FINANCIAL CHANGES Operations generated $82.5 million and net proceeds from the sale of convertible subordinated notes added $115 million. The $82.5 million generated by operations was lower than the $103.2 million for 1990 due to the smaller profit in 1991 and discount fares, which resulted in a high level of advance ticket sales in 1990. Liquidity was also improved by obtaining long-term financing for $48 million of short-term borrowings. The borrowings had been used to acquire two aircraft in late 1990. In 1991, long-term debt financing of $27.6 million was obtained for one aircraft, and the other aircraft was sold for $30.0 million and leased back for 19 years under an operating lease. During 1991, the Company expended approximately $213.4 million for four MD-80 aircraft, other equipment and deposits for future flight equipment. Long-term debt financing of $102.4 million was obtained for these aircraft. EFFECT OF INFLATION Inflation and specific price changes do not have a significant effect on the Company's operating revenues, operating expenses and operating income, because such revenues and expenses generally reflect current price levels. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the consolidated financial statements and supplementary data appearing on the pages of this report set forth below. Page(s) Selected Quarterly Consolidated Financial Information 4 (Unaudited) Consolidated Balance Sheet as of December 31, 1993 and 1992 21-22 Consolidated Statement of Income for the years ended December 31, 1993, 1992 and 1991 23 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991 24 Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991 25 Notes to Consolidated Financial Statements 26-33 Report of Independent Public Accountants 20See Item 14. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See "Election of Directors," incorporated herein by reference from the definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be held on May 17, 1994.16, 1995. See "Executive Officers of the Registrant" in Part I following Item 4 for information relating to executive officers. ITEM 11. EXECUTIVE COMPENSATION See "Executive Compensation," incorporated herein by reference from the definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be held on May 17, 1994.16, 1995. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See "Security Ownership of Certain Beneficial Owners and Management," incorporated herein by reference from the definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be held on May 17, 1994.16, 1995. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Transactions with Management and Others," incorporated herein by reference from the definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be held on May 17, 1994.16, 1995. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Consolidated Financial Statements See Item 8. (2)Statements: Page(s) Selected Quarterly Consolidated Financial Information (Unaudited) 4 Consolidated Balance Sheet as of December 31, 1994 and 1993 18-19 Consolidated Statement Schedulesof Income for the years ended December 31, 1994, 1993 and 1992 20 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1994, 1993 and 1991 Page(s)1992 21 Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993 and 1992 22 Notes to Consolidated Financial Statements 23-30 Report of Independent Public Accountants 31 Consolidated Financial Statement Schedule III - Condensed Financial Information 34-36 Schedule V - Property and Equipment 37 Schedule VI - Accumulated Depreciation and Amortization 38 Schedule VIII -II, Valuation and Qualifying Accounts, 39 Schedule IX - Short-Term Borrowings 35 Schedule X - Supplementary Income Statement Information 38 All other schedules have been omitted, sincefor the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present. (3) Exhibitsyears ended December 31, 1994, 1993 and 1992 32 See Exhibit Index on page 40.33. (b) Alaska Air Group did not file any reports on Form 8-K during the fourth quarter of 1993.1994. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALASKA AIR GROUP, INC. By: /s/ Raymond J. VecciJohn F. Kelly Date: January 31, 1994 Raymond J. Vecci,February 9, 1995 John F. Kelly, Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on January 31, 1994February 9, 1995 on behalf of the registrant and in the capacities indicated. /s/ Raymond J. VecciJohn F. Kelly Chairman, Chief Executive Officer, Raymond J. Vecci President and Director John F. Kelly /s/ J. Ray VingoHarry G. Lehr Senior Vice President/Planning and Finance Treasurer, J. Ray Vingo ChiefHarry G. Lehr (Principal Financial Officer and DirectorOfficer) /s/ Kathleen H. IskraBradley D. Tilden Controller Bradley D. Tilden (Principal Accounting Officer) Kathleen H. Iskra /s/ William H. Clapp Director William H. Clapp /s/ Ronald F. Cosgrave Director Ronald F. Cosgrave /s/ Mary Jane Fate Director Mary Jane Fate /s/ John F. Kelly Director John F. KellyBruce R. Kennedy Director Bruce R. Kennedy /s/ R. Marc Langland Director R. Marc Langland /s/ Bruce R. McCaw Director Bruce R. McCaw /s/ Byron I. Mallott Director Byron I. Mallott /s/ Robert L. Parker, Jr. Director Robert L. Parker, Jr. /s/ Richard A. Wien Director Richard A. Wien REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Alaska Air Group, Inc.: We have audited the accompanying consolidated balance sheet of Alaska Air Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alaska Air Group, Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 7 to the financial statements, effective January 1, 1992, the Company changed its method of accounting for postretirement benefits other than pensions. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen & Co. ARTHUR ANDERSEN & CO. Seattle, Washington January 25, 1994 CONSOLIDATED BALANCE SHEET Alaska Air Group, Inc. ASSETS As of December 31 (In Thousands) 1993 1992 Current Assets Cash and cash equivalents (Note 1) $27,179 $6,880 Marketable securities (Note 2) 73,970 76,551 Receivables - less allowance for doubtful accounts (1993-$2,621,000; 1992-$3,214,000) 75,274 84,409 Inventories and supplies (Note 1) 41,269 42,099 Prepaid expenses and other assets 56,498 40,546 Total Current Assets 274,190 250,485 Property and Equipment (Notes 1 and 3) Flight equipment 614,717 692,345 Other property and equipment 217,967 217,162 Deposits for future flight equipment 79,765 81,686 912,449 991,193 Less accumulated depreciation and amortization 247,145 227,693 665,304 763,500 Capital leases (Note 5) Flight and other equipment 44,381 44,381 Less accumulated amortization 19,079 16,971 25,302 27,410 Total Property and Equipment - Net 690,606 790,910 Intangible Assets-Subsidiaries (Note 1) 67,711 69,751 Other Assets (Note 2) CONSOLIDATED BALANCE SHEET Alaska Air Group, Inc.
ASSETS As of December 31 (In Thousands) 1994 1993 Current Assets Cash and cash equivalents $11,605 $27,179 Marketable securities 93,337 73,970 Receivables - less allowance for doubtful accounts (1994 - $2,285; 1993 - $2,621) 70,055 75,274 Inventories and supplies 40,250 41,269 Prepaid expenses and other assets 57,396 56,498 Total Current Assets 272,643 274,190 Property and Equipment Flight equipment 776,551 614,717 Other property and equipment 208,502 217,967 Deposits for future flight equipment 52,885 79,765 1,037,938 912,449 Less accumulated depreciation and amortization 260,001 247,145 777,937 665,304 Capital leases Flight and other equipment 103,076 44,381 Less accumulated amortization 21,676 19,079 81,400 25,302 Total Property and Equipment - Net 859,337 690,606 Intangible Assets - Subsidiaries 65,671 67,711 Other Assets 118,120 102,447 97,212 Total Assets $1,315,771 $1,134,954 See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEET Alaska Air Group, Inc. LIABILITIES AND SHAREHOLDERS' EQUITY As of December 31 (In Thousands) 1994 1993 Current Liabilities Accounts payable $48,592 $45,582 Accrued aircraft rent 43,762 39,119 Other accrued liabilities 59,591 46,679 Accrued wages, vacation pay and payroll taxes 47,364 40,192 Short-term borrowings (Interest rate: 1994 - 6.0%; 1993 - 4.25%) 25,000 20,000 Air traffic liability 123,433 108,360 Current portion of long-term debt and capital lease obligations 72,005 35,575 Total Current Liabilities 419,747 335,507 Long-Term Debt and Capital Lease Obligations 589,904 525,418 Other Liabilities and Credits Deferred income taxes 28,585 20,998 Deferred income 23,018 25,827 Other liabilities 63,239 60,371 114,842 107,196 Commitments Shareholders' Equity Preferred stock, $1 par value Authorized: 5,000,000 shares - - Common stock, $1 par value Authorized: 30,000,000 shares Issued: 1994 - 16,553,679 shares 1993 - 16,495,210 shares 16,554 16,495 Capital in excess of par value 152,756 152,017 Treasury stock,at cost:1994-3,153,589 shares 1993 - 3,153,589 shares (71,807) (71,807) Deferred compensation (4,697) (5,813) Retained earnings 98,472 75,941 191,278 166,833 Total Liabilities and Shareholders' Equity $1,315,771 $1,134,954 $1,208,358 See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEET Alaska Air Group, Inc. LIABILITIES AND CAPITAL As of December 31 (In Thousands) 1993 1992 Current Liabilities Accounts payable $ 45,582 $ 47,503 Accrued aircraft rent 39,119 38,189 Other accrued liabilities 46,679 48,370 Accrued wages, vacation pay and payroll taxes 40,192 36,425 Short-term borrowings 20,000 - Air traffic liability 108,360 96,791 Current portion of long-term debt and capital lease obligations 35,575 68,440 Total Current Liabilities 335,507 335,718 Long-Term Debt and Capital Lease Obligations (Notes 3 and 5) 525,418 487,847 Other Liabilities and Credits Deferred income taxes (Note 9) 20,998 29,111 Deferred income (Note 1) 25,827 36,423 Other liabilities 60,371 61,300 107,196 126,834 Commitments (Note 5) Redeemable Preferred Stock (Note 4) - 61,235 Shareholders' Equity (Notes 4 and 6) Common stock, $1 par value Authorized: 30,000,000 shares Issued: 1993 - 16,495,210 shares 1992 - 16,482,610 shares 16,495 16,483 Capital in excess of par value 152,017 151,845 Treasury stock, at cost: 1993 - 3,153,589 shares 1992 - 3,153,576 shares (71,807) (71,807) Deferred compensation (Note 7) (5,813) (10,181) Retained earnings 75,941 110,384 166,833 196,724 Total Liabilities and Capital $1,134,954 $1,208,358
CONSOLIDATED STATEMENT OF INCOME Alaska Air Group, Inc.
Year Ended December 31 (In Thousands except Per Share Amounts) 1994 1993 1992 Operating Revenues Passenger $1,170,201 $1,001,975 $1,000,618 Freight and mail 91,545 84,048 77,311 Other - net 53,874 42,306 37,449 Total Operating Revenues 1,315,620 1,128,329 1,115,378 Operating Expenses Wages and benefits 401,700 368,152 370,567 Aircraft fuel 152,320 142,572 162,768 Aircraft maintenance 68,306 67,438 87,687 Aircraft rent 168,516 154,879 123,732 Commissions 91,850 80,108 86,335 Depreciation and amortization 56,591 58,407 56,757 Special charges - 15,000 26,000 Other 301,339 258,546 296,373 Total Operating Expenses 1,240,622 1,145,102 1,210,219 Operating Income (Loss) 74,998 (16,773) (94,841) Other Income (Expense) Interest income 7,779 7,088 7,374 Interest expense (46,960) (37,624) (43,223) Interest capitalized 353 446 6,102 Loss on sale of assets (1,016) (649) (2,339) Other - net 5,807 1,700 1,221 (34,037) (29,039) (30,865) Income (loss) before income tax expense (credit) and accounting change 40,961 (45,812) (125,706) Income tax expense (credit) 18,430 (14,894) (45,436) Income (loss) before accounting change 22,531 (30,918) (80,270) Cumulative effect of accounting change - - (4,567) Net Income (Loss) $22,531 $(30,918) $(84,837) Primary Per Share Amounts: Earnings (loss) before accounting change $1.68 $(2.51) $(6.53) Cumulative effect of accounting change - - (.34) Net earnings (loss) per common share $1.68 $(2.51) $(6.87) Fully Diluted Earnings Per Share $1.62 * * Shares used for computation: Primary 13,378 13,340 13,309 Fully diluted 19,598 * * * Anti-dilutive See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF INCOME Alaska Air Group, Inc. Year Ended December 31 (In Thousands) 1993 1992 1991 Operating Revenues Passenger $1,001,975 $1,000,618 $999,859 Freight and mail 84,048 77,311 69,590 Other - net 42,306 37,449 34,582 Total Operating Revenues 1,128,329 1,115,378 1,104,031 Operating Expenses Wages and benefits 368,152 370,567 332,041 Aircraft fuel 142,572 162,768 156,491 Aircraft maintenance 67,438 87,687 82,983 Aircraft rent 154,879 123,732 102,279 Commissions 80,108 86,335 84,345 Depreciation and amortization 58,407 56,757 51,767 Special charges (Note 8) 15,000 26,000 - Other 258,546 296,373 259,499 Total Operating Expenses 1,145,102 1,210,219 1,069,405 Operating Income (Loss) (16,773) (94,841) 34,626 Other Income (Expense) Interest income 7,088 7,374 11,698 Interest expense (37,624) (43,223) (40,180) Interest capitalized 446 6,102 8,301 Loss on sale of assets (649) (2,339) (1,148) Other - net 1,700 1,221 2,910 (29,039) (30,865) (18,419) Income (loss) before income tax expense (credit) and accounting change (45,812) (125,706) 16,207 Income tax expense (credit) (Note 9) (14,894) (45,436) 5,869 Income (loss) before accounting change (30,918) (80,270) 10,338 Cumulative effect of accounting change (Note 7) - (4,567) - Net Income (Loss) $(30,918) $(84,837) $10,338 Earnings (Loss) Per Common Share: (Note 1) Primary - Income (loss) before accounting change $(30,918) $(80,270) $10,338 Preferred stock dividends (2,525) (6,688) (6,671) Income (loss) before accounting change applicable to common shares (33,443) (86,958) 3,667 Cumulative effect of accounting change - (4,567) - Net income (loss) applicable to common shares $(33,443) $(91,525) $3,667 Average shares outstanding (000) 13,340 13,309 13,413 Earnings (loss) per common share: Income before accounting change $(2.51) $(6.53) $0.27 Cumulative effect of accounting change - (0.34) - Net income (loss) per share $(2.51) $(6.87) $0.27 The dilutive effect of the Company's common stock equivalents and convertible securities was anti-dilutive for 1993, 1992 and 1991. See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Alaska Air Group, Inc.
Common Stock Capital in Treasury Deferred $1 Par Excess of Stock Compen- Retained (In Thousands) Value Par Value at Cost sation Earnings Total Balances at December 31, 1990 $16,323 $149,697 $(71,601) $(17,469) $202,883 Net income for 1991 10,338 Cash dividends on common stock$16,384 $150,478 ($.20 per share) (2,643) Preferred stock dividends and accretion (6,671) Stock issued under stock plans 61 781 Treasury stock purchase (206) Employee Stock Ownership Plans shares allocated 2,954 Balances at December 31, 1991 16,384 150,478 (71,807) (14,515) 203,90771,807) ($14,515) $203,907 $284,447 Net loss for 1992 (84,837) (84,837) Cash dividends on common stock ($.15 per share) (1,998) (1,998) Preferred stock dividends and accretion (6,688) (6,688) Stock issued under stock plans 99 1,367 1,466 Employee Stock Ownership Plans shares allocated 4,334 4,334 Balances at December 31, 1992 16,483 151,845 (71,807) (10,181) 110,384 196,724 Net loss for 1993 (30,918) Preferred stock(30,918) Preferred stock dividends and early redemption premium (3,525) (3,525) Stock issued under stock plans 12 172 184 Employee Stock Ownership Plans shares allocated 4,368 4,368 Balances at December 31, 1993 $16,495 $152,017 $(71,807) $(5,813) $75,94116,495 152,017 (71,807) (5,813) 75,941 166,833 Net income for 1994 22,531 22,531 Stock issued under stock plans 59 739 798 Employee Stock Ownership Plans shares allocated 1,116 1,116 Balances at December 31, 1994 $16,554 $152,756 ($71,807) ($4,697) $98,472 $191,278 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS Alaska Air Group, Inc. Year Ended December 31 (In Thousands) 1993 1992 1991 Cash and cash equivalents at beginning of year $6,880 $19,086 $28,865 Cash flows from operating activities: Income (loss) before accounting change (30,918) (80,270) 10,338 Adjustments to reconcile income to cash: Depreciation and amortization 58,407 56,757 51,767 Amortization of airframe and engine overhauls 29,402 34,265 33,759 Special charges 15,000 26,000 - Loss (gain) on disposition of assets and debt retirement (315) 2,339 (504) Increase (decrease) in deferred income taxes (8,113) (25,797) 725 Decrease (increase) in accounts receivable 9,135 (23,118) 4,098 Decrease (increase) in other current assets (15,122) (7,370) (11,470) Increase (decrease) in air traffic liabliity 11,569 19,500 (16,368) Increase in other current liabilities 1,085 19,826 9,704 Interest on zero coupon notes 9,881 9,203 6,125 Leased aircraft return payments and other-net (31,554) (11,101) (5,631) Net cash provided by operating activities 48,457 20,234 82,543 Cash flows from investing activities: Proceeds from disposition of assets 7,193 793 1,331 Purchases of marketable securities (552,175) (564,787) (389,583) Sales and maturities of marketable securities 554,756 571,985 329,318 Restricted deposits (4,045) (3,007) (19,095) Future flight equipment deposits returned 2,685 3,321 - Additions to future flight equipment deposits (764) (16,873) (69,302) Additions to property and equipment (29,605) (261,073) (144,109) Payments received on loans to ESOPs 4,128 4,747 3,402 Net cash used in investing activities (17,827) (264,894) (288,038) Cash flows from financing activities: Proceeds from short-term borrowings 20,000 96,303 15,000 Repayment of short-term borrowings - (96,303) (62,953) Proceeds from sale and leaseback transactions 36,500 214,590 29,970 Proceeds from issuance of long-term debt 47,200 84,700 245,030 Long-term debt and capital lease payments (79,375) (59,904) (27,841) Proceeds from issuance of common stock 184 1,466 842 Repurchase of preferred stock (33,375) - - Cash dividends (2,429) (8,398) (9,026) Gain on debt retirement 964 - 1,652 Other - - 3,042 Net cash provided by (used in) financing activities (10,331) 232,454 195,716 Net increase in cash and cash equivalents 20,299 (12,206) (9,779) Cash and cash equivalents at end of year $27,179 $6,880 $19,086 Supplemental disclosure of cash paid during the year for: Interest (net of amount capitalized) $33,622 $38,952 $28,983 Income taxes - 1,369 10,338 CONSOLIDATED STATEMENT OF CASH FLOWS Alaska Air Group, Inc.
Year Ended December 31 (In Thousands) 1994 1993 1992 Cash and cash equivalents at beginning of year $27,179 $6,880 $19,086 Cash flows from operating activities: Income (loss) before accounting change 22,531 (30,918) (80,270) Adjustments to reconcile income to cash: Depreciation and amortization 56,591 58,407 56,757 Amortization of airframe and engine overhauls 20,954 29,402 34,265 Special charges - 15,000 26,000 Loss (gain) on disposition of assets and debt retired (1,072) (315) 2,339 Increase (decrease) in deferred income taxes 7,587 (8,113) (25,797) Decrease (increase) in accounts receivable 5,219 9,135 (23,118) Decrease (increase) in other current assets 121 (15,122) (7,370) Increase in air traffic liability 15,073 11,569 19,500 Increase in other current liabilities 27,737 1,085 19,826 Interest on zero coupon notes 9,946 9,881 9,203 Leased aircraft return payments and other-net (20,554) (31,554) (11,101) Net cash provided by operating activities 144,133 48,457 20,234 Cash flows from investing activities: Proceeds from disposition of assets 6,504 7,193 793 Purchases of marketable securities (76,129) (150,636) (111,768) Sales and maturities of marketable securities 56,762 153,217 118,966 Restricted deposits (5,955) (4,045) (3,007) Flight equipment deposits returned 5,460 2,685 3,321 Additions to flight equipment deposits (1,085) (764) (16,873) Additions to property and equipment (187,543) (29,605) (261,073) Payments received on loans to ESOPs 1,313 4,128 4,747 Net cash used in investing activities (200,673) (17,827) (264,894) Cash flows from financing activities: Proceeds from short-term borrowings 25,000 20,000 96,303 Repayment of short-term borrowings (20,000) - (96,303) Proceeds from sale and leaseback transactions - 36,500 214,590 Proceeds from issuance of long-term debt 104,000 47,200 84,700 Long-term debt and capital lease payments (70,920) (79,375) (59,904) Proceeds from issuance of common stock 798 184 1,466 Repurchase of preferred stock - (33,375) - Cash dividends - (2,429) (8,398) Gain on debt retirement 2,088 964 - Net cash provided by (used in) financing activities 40,966 (10,331) 232,454 Net increase (decrease) in cash and cash equivalents (15,574) 20,299 (12,206) Cash and cash equivalents at end of year $11,605 $27,179 $6,880 Supplemental disclosure of cash paid during the year for: Interest (net of amount capitalized) $44,786 $33,622 $38,952 Income taxes (refunds) 2,204 (18,554) (2,168) Noncash investing and financing activities: 1994 - Capital lease obligations of $57.9 million were incurred due to changes in lease agreements. 1993 - The preferred stock was repurchased in exchange for a $27 million note payable and a $33.4 million cash payment. 1992 and 1991 - None See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Alaska Air Group, Inc. December 31, 19931994 Note 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Alaska Air Group, Inc. (Company or Air Group) and its subsidiaries, the principal subsidiaries being Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). All significant intercompany transactions are eliminated. Both subsidiaries operate as airlines. However, each subsidiary's business plan, competition and economic risks differ substantially due to the passenger capacity and range of aircraft operated. Alaska is a nationalmajor airline, operates an all jet fleet and its average passenger trip is 860850 miles. Horizon is a regional airline, primarily operates aboth jet and turboprop fleetaircraft, and its average passenger trip is 200210 miles. See Note 10 for business segment information. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less. They are carried at cost, which approximates market. Inventories and Supplies Expendable and repairable aircraft parts, as well as materials and supplies, relating to flight equipment are stated at average cost. Except for the B727 fleet,For repairable parts, an allowance for obsolescence of flight equipment repairable parts is accrued on a straight-line basis over the estimated useful lives of the aircraft. ForInventories related to the retired B727 fleet which is being retired, the inventory cost less the allowance for obsolescence is statedare carried at net realizable value. The allowance at December 31, 1994 and 1993 and 1992for all inventories was $8.3$12.1 million and $6.3$8.3 million, respectively. Property, Equipment and Depreciation Property and equipment are recorded at cost and depreciated using the straight-linestraight- line method over their estimated useful lives, which are as follows: Aircraft and other flight equipment 8-20 years Buildings 10-30 years Capitalized leases and leasehold improvements Term of lease Flight equipment 10-20 years Other equipment 3-15 years Assets and related obligations for equipmentitems financed under capital leases are initially recorded at an amount equal to the present value of the future minimum lease payments using interest rates implicit within the leases. Interest expense is accrued on the outstanding balancepayments. The cost of capital lease obligations. Costs ofmajor airframe andoverhauls, engine overhauls, and other modifications which extend the life or improve the usefulness of aircraft are capitalized, when incurred and amortized over their estimated period of use. Costs of ordinaryOther repair and maintenance and repairscosts are expensed aswhen incurred. Capitalized Interest Construction period interestInterest is capitalized on flight equipment purchase deposits and ground facilities progress payments as an additionala cost of the related asset and is depreciated over the estimated useful life of the asset. Interest capitalization is suspended during periods ofwhen there is a substantial delay in aircraft deliveries. Intangible Assets-Subsidiaries The excess of purchase price over the fair value of net assets related to previous acquisitionsacquired is recorded as an intangible asset and is being amortized over 40 years. Accumulated amortization at December 31, 1994 and 1993 and 1992 was $15$17 million and $12.9$15 million, respectively. Deferred Income Deferred income results from the sale and leaseback of aircraft, the receipt of manufacturer or vendor credits, related to aircraft, and from the sale of foreign tax benefits. IncomeThis income is reported on the Statement of Incomerecognized over the term of the applicable agreements or asset useful life.agreements. Passenger Revenues Passenger revenues are considered earned at the time transportation service is provided. Tickets sold but not yet used are included in air traffic liability. Frequent Flyer Awards Alaska operates a frequent flyer award program that provides travel awards to members based on accumulated mileage. The estimated incremental cost of providing free travel is recognized as a liability and reported as expense as miles are accumulated. Alaska also defers recognition of income on a portion of the payments it receives from travel partners associated with its frequent flyer program. The incremental cost liability and deferred partner revenues are relieved as travel awards are used. Income Taxes In January 1992, Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes," was adopted. FAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Earnings Per Share Primary earnings per share is calculated by dividing net income after reduction for preferred stock dividends by the average number of common shares and dilutive common equivalent shares outstanding, net of treasury shares.stock equivalents outstanding. Common equivalent sharesstock equivalents result from the assumed exercise of stock options. Fully diluted earnings per share gives effect to the conversion of convertible debentures and notesdebt (after elimination of related interest expense, net of income tax effect). Derivative Financial Instruments The differential to be paid or received on interest rate swap agreements is accrued as interest rates change and redeemable preferred stock.is recognized currently in the income statement. The Company enters into hedge agreements to reduce its exposure to fluctuations in the price of jet fuel. A gain or loss is recorded quarterly if the fuel index average exceeds the ceiling price or falls below the floor price. Reclassifications Certain reclassifications have been made in prior years' financial statements to conform to the 19931994 presentation. Note 2. Marketable Securities and Other Assets Marketable securities are investments that are readily convertible to cash, but whose original maturity dates exceed three months. The securitiesThey are carried at cost, which approximates fair value. Marketable securitiesclassified as available for sale and consisted of the following at December 31 (in thousands): 1994 1993 1992Cost: U.S. governmentgovt securities $78,045 $66,744 $72,658 Other 15,292 7,226 3,893$93,337 $73,970 $76,551Fair value: U.S. govt securities $76,558 $66,665 Other 15,069 7,224 $91,627 $73,889 Gross unrealized holding gains: U.S. govt securities $ _ $71 Other _ 3 $ _ $74 Gross unrealized holding losses: U.S. govt securities $1,487 $150 Other 223 5 $1,710 $155 Of the marketable securities on hand at December 31, 1994, 55% will mature during 1995 and the remainder will mature during 1996. Based on specific identification of securities sold, the following occurred in 1994 (in thousands): Proceeds from sales $56,762 Gross realized gains $ 40 Gross realized losses $ 499 The above gains and losses are included in 1994 interest income of $7.8 million. Note 3. Other Assets Other assets consisted of the following at December 31 (in thousands): 1994 1993 1992 Restricted deposits $66,858 $60,903 $56,858 Leasehold rights 14,075 16,923 24,195 Deferred costs 15,942 16,938 16,159 Interest receivableReceivables 21,245 7,683 -$118,120 $102,447 $97,212 At December 31, 1993 and 1992, the fair value of restricted deposits was approximately $75 million and $63 million, respectively, based on market prices of similar investments. At December 31, 1993, the fair value of interest receivable from a financial institution under an interest rate swap agreement was approximately $7 million. Purchased leaseholdLeasehold rights and deferred costs are amortized over the term of the related lease or contract. DeferredAt December 31, 1994, deferred costs include $6.2 million of capitalized training costs associated with the B737-400 aircraft. These costs are being amortized over a five-year period beginningwhich began in April 1992. Note 3.4. Long-Term Debt and Capital Lease Obligations At December 31, 19931994 and 1992,1993, long-term debt and capital lease obligations were as follows (in thousands): 1994 1993 1992 7.1%7.4%* notes payable due through 2009 $375,908 $308,700 $305,692 7-3/4% convertible subordinated debentures due 2005-2010 14,63814,354 14,638 6-7/8% convertible subordinated debentures due 2002-20142004-2014 54,041 60,181 66,614 7-1/4% zero coupon, convertible subordinated notes due 2006 129,369 143,754 133,873 Long-term debt 573,672 527,273 520,817 Capital lease obligations 88,237 33,720 35,470 Less current portion (72,005) (35,575) (68,440)$589,904 $525,418 $487,847 * Weightedweighted average for 1993 Borrowings1994 At December 31, 1994, borrowings of $286.2$362.4 million are secured by flight equipment and real property. During 1994, the Company repurchased $6.4 million of its 7-3/4% and 6-7/8% convertible subordinated debentures for a $1.1 million pretax gain. The remaining 7-3/4% and 6-7/8% debentures are convertible into common stock at $28.25 and $33.60 per share, respectively, subject to adjustments in certain events. Also, during 1994, the Company repurchased 55,922 of its 7-1/4% notes, which had a book value of $24.3 million, for a $1.0 million pretax gain. Each of the 7-1/4%remaining notes can be converted into 12.4 shares of common stock. The holderHolders of these notes hashave a put option to require the Company to purchase each note on April 18, 1996 forat their then accreted value of $490.58. The Company may elect to pay in cash or shares of common stock or in any combination thereof. At December 31, 1994, Alaska hashad $70 million in lines of credit, none of which were being used, with commercial banks includingbanks. In early 1995, these credit agreements were replaced with a $75 million credit facility with commercial banks. Advances under the new $20 million line obtained in June 1993. Credit advances carry variablefacility may either be for up to a 364-day term, or up to a maximum maturity of three years. Borrowings may be used for aircraft acquisitions or other corporate purposes, and they bear interest ratesat a rate which varies based on LIBOR. At December 31, 1993, there were no borrowings under these lines of credit. Certain Alaska loan agreements contain provisions that require maintenance of specific levels of net worth, leverage and fixed charge coverage, and limit dividends, investments, lease obligations, sales of assets and additional indebtedness. At December 31, 1993,1994, the Company was in compliance with all loan provisions, and under the most restrictive loan provisions, Alaska had $27.3$28.5 million of excess net worth and its cash dividend payments to Air Groupabove the minimum. During 1994, four MD-83 aircraft were limited to $19 million. During 1993, the Company entered into anfinanced with $104 million in ten-year loans at variable interest rate swap agreement to reduce the interest expense on its 7-1/4% zero-coupon notes. The agreement, which expires in 1996, effectively changes the Company's interest rate on the notes from a fixed 7-1/4% to a floating raterates based on LIBOR. In addition, capital lease obligations increased $57.9 million due to changes in the lease agreements for two B737-400 aircraft that were previously classified as operating leases. At December 31, 1993,1994, long-term debt obligationsprincipal payments for the next five years were (in thousands): 1994 $33,734 1995 $33,104$ 40,762 1996* $29,615$ 37,621 1997 $26,321$ 34,795 1998 $27,282$ 35,736 1999 $ 35,967 * Excludes the effect of a put option on the 7-1/4% notes. At December 31, 1993 and 1992, the fair value of long-term debt was approximately $521 million and $494 million, respectively, based on quoted market prices for the same or similar debt or on the current rates offered to the Company for debt of comparable remaining maturities. Note 4. Redeemable Preferred Stock Air Group has 5,000,000 shares of preferred stock authorized. During 1990, the Company sold 1,187,500 shares of voting, convertible Series B Cumulative Redeemable Preferred Stock (preferred stock) to International Lease Finance Corporation (ILFC), which paid $50 per share and received the dividend and voting rights. A management group purchased nontransferable investment options for $2.63 per share and received the rights to purchase and convert the preferred stock to common stock. In May 1993, the Company repurchased the preferred stock from ILFC for $60.4 million, which included a $1.0 million early redemption premium. At December 31, 1993, the 1,187,500 shares of preferred stock are held in treasury and remain subject to the investment options. The investment options of $3.1 million remain outstanding, are subject to mandatory redemption in January 1997 and are included with other liabilities on the Balance Sheet. Each share of preferred stock is convertible into common stock at $27 per share, subject to adjustments in certain events. A total of 2,314,815 shares of common stock has been reserved for such conversion. In the event of a change in control of the Company, all outstanding investment options become exercisable. The holders of the preferred stock have the right to require the Company to redeem such shares. Note 5. Commitments Lease Commitments Lease contracts for 101109 aircraft have remaining lease terms of one to 1918 years. The majority of airport and terminal facilities are also leased. Total rent expense was $196.9 million, $180.4 million and $149.7 million, in 1994, 1993 and $124 million, in 1993, 1992, and 1991, respectively. Future minimum lease payments under capital leases and long-term operating leases as of December 31, 19931994 are shown below (in thousands): Capital Leases Operating Leases Total Real Aircraft Property Aircraft & Other 1994 $ 4,145 $ 163,830 $ 14,745 $ 182,720 1995 4,143 152,090 13,069 169,302$38,200 $170,871 $14,190 $223,261 1996 4,146 141,502 11,150 156,79833,560 157,983 12,207 203,750 1997 4,140 128,217 9,987 142,344143,159 10,971 158,270 1998 4,138 121,969 9,611 135,718134,285 10,556 148,979 1999 4,136 128,775 10,444 143,355 Thereafter 23,203 581,209 47,421 651,83319,068 676,998 36,304 732,370 Total lease payments 43,915 $1,288,817 $105,983 $1,438,715103,242 $1,412,071 $94,672 $1,609,985 Less amount representing interest 10,19515,005 Present value of capital lease payments $33,720$88,237 Aircraft Commitments The Company has firm orders for 40 aircraft. The aircraft on order consist of: six B737-400s to be delivered during 1994; 1811 Dornier 328s to be delivered between 19941995 and 1998;1998, and six MD-80sMD-83s to be delivered during 1994 and 1995; and ten MD90-30s to be delivered during 1996between 1995 and 1997. The total amount of these commitments is approximately $1.1 billion.$293 million. As of December 31, 1993,1994, deposits related to the future equipment deliveries were $66.3$43.2 million. Operating lease agreements are completed for six B737-400s being delivered during 1994 and DornierThe manufacturer has agreed to provide lease financing for all of the Dornier 328s. In addition to the ordered aircraft, the Company holds purchase options on 20 MD90-30s, 40 Dornier 328s, and lease options on four B737-400s.328s. Note 6. Stock Option Plans Air Group has three stock option plans, which provide for the purchase of Air Group common stock at its market price on the date of grant by certain officers and key employees of Air Group and its subsidiaries. Under the plans, the incentive and nonqualified stock options granted have terms of up to approximately ten years. Up to half of the options provide for stock appreciation rights. Changes in the number of shares subject to option are summarized as follows: 1994 1993 1992 1991 Outstanding, beginning of year 770,420 885,720 923,816 Granted(a) 172,200 43,100 54,100 Exercised (12,600) (98,400) (61,353) Surrendered - - (6,593) Canceled (68,658) (60,000) (24,250) Outstanding, end of year 861,362 770,420 885,720 Granted(a) 330,200 172,200 43,100 Exercised (58,469) (12,600) (98,400) Canceled (88,950) (68,658) (60,000) Outstanding, end of year 1,044,143 861,362 770,420 Exercisable, end of year(b) 644,843 542,012 450,845 395,143 Available for granting in future periods 409,000 701,867 805,409 138,509 Average price of options: Exercised during the year $13.65 $14.65 $14.89 $13.72 Outstanding at year-endyear- end $17.15 $17.06 $17.32 $17.02 (a) The average price of the options granted in 19931994 was $16.34.$16.53 (b) Options exercisable at year end 19931994 expire between July 1994June 1995 and December 2002.June 2004. In addition, 2,273,700 shares of common stock are subject to nontransferable investment options held by management employees, for which the Company received $3.1 million, which is included with other liabilities on the Balance Sheet. These options are subject to mandatory redemption at $3.1 million in February 1997, and they allow the holder to purchase common stock at $27 per share until that date. Note 7. Employee Benefit Plans Pension Plans Four defined benefit and sixfive defined contribution retirement plans cover various employee groups of Air GroupAlaska and its subsidiaries.Horizon. The defined benefit plans provide benefits based on an employee's term of service and average compensation for a specified period of time before retirement. Contributions for the defined contribution plans are based on a percentage of participants' earnings. Pension costs are funded as required by the Employee Retirement Income Security Act of 1974 (ERISA). Alaska and Horizon also maintain an unfunded, noncontributory benefit plan for certain elected officers. The present value of unfunded benefits for these plans was accrued as of December 31, 1993. Net pension expense for the defined benefit plans included the following components for 1993, 1992 and 1991 (in thousands): 1993 1992 1991 Service cost (benefits earned during the period) $10,041 $8,395 $7,333 Interest cost on projected benefit obligation 10,449 8,883 7,984 Actual return on assets (14,123) (9,079) (17,501) Net amortization and deferral 2,244 (2,171) 9,779 Net pension expense $8,611 $6,028 $7,595 The actuarial present value of the projected benefit obligation for 1993, 1992 and 1991 was calculated using weighted average discount rates of 7.9%, 8.75% and 9.0%, respectively. The calculation assumed a 10% long-term rate of return on assets in 1993 and 1992 and a 9.5% rate in 1991. The calculation also assumed a 5.2% weighted average rate of increase for future compensation levels for 1993 and 1992 and 7.7% for 1991. The defined benefit plan assets are primarily invested in common stocks and fixed income securities. Plan assets exceeded liabilities forthe accumulated plan benefitsbenefit obligation at December 31, 19931994 and 1992.1993. The following table sets forth the funded status of the plans at December 31, 19931994 and 19921993 (in thousands): 1994 1993 1992 Benefit obligation - Vested $ 114,861 $126,341 $92,846 Nonvested 15,820 12,687 9,539 Accumulated benefit obligation $ 130,681 $139,028 $102,385 Plan assets at fair value $ 144,102 $145,974 $116,380 Projected benefit obligation 147,200 159,529 117,556 Plan assets less projected benefit obligation (3,098) (13,555) (1,176) Unrecognized net assets at year-end amortized over 13 yearstransition asset (1,374) (1,658) (1,941) Unrecognized prior service cost 3,521 1,576 988 Unrecognized loss 15,839 26,684 5,702 Prepaid pension cost $ 14,888 $13,047 $3,573 TotalThe weighted average discount rate used to determine the projected benefit obligation was 9.0% and 7.9% as of December 31, 1994 and 1993, respectively. The calculation also assumed a 5.2% weighted average rate of increase for future compensation levels for 1994 and 1993. The expected long-term rate of return on plan assets used in 1994 and 1993 was 10%. Net pension expense for all retirementthe defined benefit plans includingincluded the following components for 1994, 1993 and 1992 (in thousands): 1994 1993 1992 Service cost (benefits earned during the period) $12,351 $10,041 $8,395 Interest cost on projected benefit obligation 11,859 10,449 8,883 Actual return on assets (2,061) (14,123) (9,079) Net amortization and deferral (10,810) 2,244 (2,171) Net pension expense $ 11,339 $8,611 $6,028 The defined contribution plans officer benefitare deferred compensation plans andunder section 401(k) of the Internal Revenue Code. Some of these plans require Company 401(k) matching contributions was $19.8 million, $18.8 million and $16.3 million, respectively, in 1993, 1992 and 1991. Alaska and Horizon have employee profit sharing plans. Distributions for 1993, 1992 and 1991 were $2.3 million, $1.6 million and $1.6 million, respectively. Certain employee benefit plans (Plans) havebased on a percentage of participants' contributions. One plan has an Employee Stock Ownership Plan (ESOP) feature. The ESOPs ownESOP owns Air Group common shares which are held in trust for eligible employees. The Company has recorded deferred compensation to reflect the value of the shares not yet allocated to eligible employees' accounts. As these shares are allocated to employees, compensation expense is recorded and deferred compensation is reduced. Alaska and Horizon also maintain an unfunded, noncontributory benefit plan for certain elected officers. The present value of unfunded benefits for this plan was accrued as of December 31, 1994 and 1993. Total expense for all pension plans was $22.5 million, $19.8 million and $18.8 million, respectively, in 1994, 1993 and 1992. Profit Sharing Plans Alaska and Horizon have employee profit sharing plans. Profit sharing expense for 1994, 1993 and 1992 was $3.6 million, $2.3 million and $1.6 million, respectively. Other Postretirement Benefits The Company allows retirees to continue their medical, dental and vision benefits by paying the respective active employee plan premium until age 65. This results in a subsidy to retirees because the premiums paidreceived by the Company are less than the actual cost of the retirees' claims. Effective January 1, 1992, Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," was adopted. The new standard requires that the cost of postretirement employee benefits other than pensions be recognized during an employee's active service period. Prior to 1992, the cost of these benefits was expensed as claims were incurred. The cumulative effect of the accounting change for years prior to January 1, 1992 was an after-tax charge of $4.6 million. The new accounting standard requires the cost of postretirement employee benefits other than pensions be recognized during employees' active service period. Prior to 1992, the cost of these benefits was expensed as claims were incurred. The following table sets forth the status of the postretirement benefit obligation at December 31, 19931994 and 19921993 (in thousands): 1994 1993 1992 Accumulated postretirement benefit obligation (APBO): Retirees $ 913 $309 $259 Active plan participants eligible for retirement 1,675 2,193 1,943 Active plan participants not eligible for retirement 4,933 6,391 6,402 Unrecognized prior service cost (326) (381) - Unrecognized actuarial gain 3,244 980 - Accrued postretirement benefit cost $ 10,439 $9,492 $8,604 The Company's APBO is unfunded. Net annual postretirement benefit costs for 1994, 1993 and 1992 include the following components (in thousands): 1994 1993 1992 Service cost - benefits attributed to service during the period $682 $655 $855 Interest on APBO 596 591 643 Net amortization and deferral (12) (38) _ Net postretirement benefit cost $1,266 $1,208 $1,498 A 12.5%An 8.5% health care cost trend rate was assumed for 1994; the1995. The rate was assumed to decrease by 1%1/2% annually to 6%5.5% for 2001 and remain at that level thereafter. Increasing the rate by 1 percentage point in each year would increase the APBO as of December 31, 19931994 by $1.1 million and the net periodic postretirement benefit cost for 19931994 by $222,000.$228,000. The weighted-averageweighted- average discount rates used in determining the APBO for 1994 and 1993 were 9.0% and 1992 were 7.9% and 9%, respectively. Note 8. Special Charges Results for 1993 and 1992 include special charges of $15 million and $26 million, respectively, to recognize an impairment of the value of the Boeing B727 fleet. The special charges include reserves for future excess lease costs and the write-down of capitalized overhauls and spare parts to net realizable value. The 1993 charge reflects the Company's intent, at the end of 1993, to retire this aircraft type by May 1994. The 1992 charge reflected the Company's intent, at the end of 1992, to retire this aircraft type by the end of 1994 rather than 1996. Note 9. Income Taxes The components of income tax expense (credit) were as follows (in thousands): 1994 1993 1992 1991 Current tax expense (credit): Federal $8,044 $(4,907) $(21,057) $4,637 State 72 (253) (1,714) 507 Total current 8,116 (5,160) (22,771) 5,144 Deferred tax expense (credit): Federal 8,032 (8,164) (19,451) 561 State 2,282 (1,570) (3,214) 164 Total deferred 10,314 (9,734) (22,665) 725 Total before accounting change 18,430 (14,894) (45,436) 5,869 Deferred income tax credit cumulative effect of FAS 106 -_ _ (2,613) - Total tax expense (credit)expense(credit) $18,430 $(14,894) $(48,049) $5,869 The actual income tax expense (credit) reported differs from the "expected" tax expense (credit) (computed by applying the federal corporate tax rate of 35% for 1994 and 1993 and 34% for 1992 and 1991)1992) as follows (in thousands): 1994 1993 1992 1991 Income (loss) before income tax $40,961 $(45,812) $(125,706) $16,207 Computed "expected"Expected tax expense (credit) $14,336 $(16,035) $(42,740) $5,510 Nondeductible expense 2,386 1,210 1,068 1,116 Federal rate change _ 1,016 - -_ Tax-exempt interest income -_ (170) (327) State income tax 1,531 (1,185) (3,252) 568 Other - net 177 100 (342) (998) Actual tax expense (credit) $18,430 $(14,894) $(45,436) $5,869 Effective tax rate 33% 36% 36%45.0% 32.5% 36.1% Deferred income taxes result from temporary differences in the timing of recognition of revenue and expense for tax and financial reporting purposes. The major sources of deferredDeferred tax assets and liabilities (assets) are comprised ofcomprise the following at December 31 (in thousands): 1994 1993 1992 1991 Excess of tax over book depreciation $88,203 $94,835 $75,374$117,085 $95,499 Training expense 2,218 3,167 1,953 (59) Capitalized leases 3,681 2,943 2,274 Other - net 1,252 358 2,212 613 Gross deferred tax liabilities 95,409 101,943 78,202120,555 99,024 Loss carryforward (38,275) (43,798) (24,573) - Alternative minimum tax (24,502) (16,346) (22,931) (11,925)Capital leases (4,507) (3,615) Pricing adjustment (1,190) (1,083) (3,018) (1,002) Travel awardsFrequent flyer program (6,518) (5,576) (5,872) (4,361) Employee benefits (11,812) (9,567) (8,761) (9,700) Aircraft maintenance (7,681) (8,231) (8,282) 79 Gain on sale of assets (5,456) (2,125) (10,090) (7,599)Capitalized interest (1,617) _ Gross deferred tax assets (86,726) (83,527) (34,508)(101,558) (90,341) Net deferred tax liabilities $18,997 $8,683 $18,416 $43,694Current deferred tax asset $(9,588) $(12,315) Noncurrent deferred tax liability 28,585 20,998 Net deferred tax liabilities $18,997 $8,683 The 1993 taxbook income and temporary differences for 1994 resulted in taxable income of $12 million, which was offset by net operating loss (NOL) benefit of $21 million will be carried forward to offset taxes in future years. $7 million of alternative minimum tax was carried back to recover taxes paidlosses generated in prior years. Note 10. Business Segment Information Financial information for the Company's national airline (Alaska)Alaska and regional airline (Horizon)Horizon follows (in thousands): 1994 1993 1992 1991 Operating revenues from unaffiliated customers:revenues: Alaska $906,806 $908,286 $921,519$ 1,061,594 $ 906,806 $ 908,286 Horizon $223,333 $208,149 $183,142$ 256,905 $ 223,333 $ 208,149 Operating income (loss): Alaska $(24,313) $(101,013) $28,283$ 62,872 $ (24,313) $ (101,013) Horizon $8,757 $7,305 $7,897$ 12,922 $ 8,757 $ 7,305 Total assets: Alaska $1,037,546 $1,088,090 $1,103,289$ 1,244,985 $ 1,037,546 $ 1,088,090 Horizon $141,940 $147,076 $149,286$ 152,263 $ 141,940 $ 147,076 Depreciation and amortization expense: Alaska $48,953 $47,140 $41,917$ 47,684 $ 48,953 $ 47,140 Horizon $9,276 $9,564 $9,840$ 8,681 $ 9,276 $ 9,564 Capital expenditures: Alaska $21,116 $258,556 $186,857$ 173,093 $ 21,116 $ 258,556 Horizon $8,800 $16,389 $26,554$ 15,535 $ 8,800 $ 16,389 Note 11. Fuel Hedge AgreementFinancial Instruments The estimated fair values of the Company's financial instruments were as follows (in thousands): December 31, 1994 Carrying Fair Amount Value Cash and cash equivalents $11,605 $11,605 Marketable securities 93,337 91,627 Restricted deposits 66,858 66,858 Long-term receivables 21,245 21,245 Long-term debt 573,672 549,000 December 31, 1993 Carrying Fair Amount Value Cash and cash equivalents $27,179 $27,179 Marketable securities 73,970 73,889 Restricted deposits 60,903 75,000 Long-term receivables 7,683 7,683 Long-term debt 527,273 521,000 The fair value of cash equivalents approximates carrying value due to the short maturity of these instruments. The fair value of marketable securities is based on quoted market prices. The fair values of restricted deposits and long-term receivables approximate the carrying amounts. The fair value of publicly traded long-term debt is based on quoted market prices, and the fair value of other debt approximates carrying value. During 1993, the Company entered into an interest rate swap agreement to reduce the interest expense on a portion of its fixed rate debt. The agreement, which expires in 1996, effectively changes the Company's interest rate on the debt from a fixed rate to a floating rate based on LIBOR. Variable interest payments are paid to a financial institution semi- annually based on a notional principal amount of $201 million. In 1996, the Company will receive a $33.2 million payment from the financial institution. At December 31, 1994, $18.3 million of this amount is shown as a receivable in other assets. The Company is exposed to higher interest payments if LIBOR increases and is exposed to credit loss in the event of nonperformance by the financial institution. Through December 31, 1994, this swap has resulted in a $1.1 million reduction in interest expense. The Company enters into hedge agreements to reduce its exposure to fluctuations in the price of jet fuel hedge agreement that establishesfuel. The agreements establish a high- end fuelceiling price and a low-end fuelfloor price, through December 1994. The agreement covers 30 million gallons per quarter which is less than each quarter's expected fuel requirement. The Company will record income or lossand they provide for quarterly ifmeasurements of the average costprice of fuel, as determined by an index,index. The Company records a gain or loss if a quarterly average exceeds the high-end fuel priceceiling or falls below the low- endfloor. The fuel hedges had no material effect on 1994 operating results. At December 31, 1994, the Company had a fuel hedge agreement in place with a ceiling price respectively. CONDENSED FINANCIAL INFORMATIONof 65 cents covering approximately 50% of the expected fuel usage through July 1995, and a floor price of 44 cents covering approximately 50% of the expected fuel usage through July 1995. At December 31, 1994, the fuel index was at 50 cents. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Alaska Air Group, Inc. (Parent Company Only) Schedule III BALANCE SHEET As: We have audited the accompanying consolidated balance sheet of December 31 (In Thousands) 1993 1992 ASSETS Current Assets Cash $38 $98 Receivables from subsidiaries 77,390 90,847 Income tax receivable 7,623 20,283 Other current assets 1,205 187 Total Current Assets 86,256 111,415 Other Assets Investment in subsidiaries 353,707 378,496 Interest receivable 7,683 - Other 5,118 4,614 366,508 383,110 Total Assets $452,764 $494,525 LIABILITIES AND CAPITAL Current Liabilities Accounts payable and accrued liabilities $2,002 $687 Payable to subsidiaries 47,025 24,663 Current portion of long-term debt 9,000 - Total Current Liabilities 58,027 25,350 Long-Term Debt 7-3/4% convertible subordinated debentures due 2005-2010 14,638 14,638 6-7/8% convertible subordinated debentures due 2002-2014 60,181 66,614 7-1/4% zero coupon, convertible subordinated notes due 2006 143,754 133,873 7% term note; $2,250,000 payable quarterly beginning August 1993 13,500 - 232,073 215,125 Deferred Income Taxes (7,236) (3,909) Other Liabilities 3,067 - Redeemable Preferred Stock - 61,235 Shareholders' Equity Common stock, par value $1 per share Authorized: 30,000,000 shares Issued: 1993 - 16,495,210 shares; 1992 - 16,482,610 shares 16,495 16,483 Capital in excess of par value 152,017 151,845 Treasury stock, at cost (1993 - 3,153,589 shares; 1992 - 3,153,576 shares) (71,807) (71,807) Deferred compensation (5,813) (10,181) Retained earnings 75,941 110,384 166,833 196,724 Total Liabilities and Capital $452,764 $494,525 This schedule should be read in conjunction with the Consolidated Financial Statements and Notes thereto. CONDENSED FINANCIAL INFORMATION Alaska Air Group, Inc. (Parent Company Only) Schedule III STATEMENT OF INCOME Year Ended(a Delaware corporation) and subsidiaries as of December 31, (In Thousands)1994 and 1993, 1992 1991 Operating Revenues $ - $ - $ - Operating Expenses 1,391 1,442 1,613 Operating Loss (1,391) (1,442) (1,613) Other Income (Expense) Interestand the related consolidated statements of income, from subsidiaries 5,435 5,714 5,355 Other interest income - - 1,015 Interest expenseshareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to subsidiaries - - (140) Other interest expense (14,024) (14,917) (12,518) Other - net 451 (321) 1,399 (8,138) (9,524) (4,889) Loss before income tax creditexpress an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and subsidiaries' earnings (9,529) (10,966) (6,502) Income tax credit (3,400) (3,613) (2,444) (6,129) (7,353) (4,058) Earnings (Loss) - Subsidiaries (24,789) (77,484) 14,396 Net Income (Loss) $(30,918) $(84,837) $10,338 This schedule should be readperform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in conjunction with the Consolidated Financial Statementsfinancial statements. An audit also includes assessing the accounting principles used and Notes thereto. CONSOLIDATED SHORT-TERM BORROWINGS Schedule IXsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alaska Air Group, Inc. Maximum Average Weighted Category Weighted Amount Amount Averageand subsidiaries as of Aggregate Balance Average Outstanding Outstanding Interest Rate Short-Term at End Interest DuringDecember 31, 1994 and 1993, and the During the During the Borrowingsresults of Year Rate Year Year (1) Year (2) (Dollars in Thousands) Notes Payable: 1993 $20,000 4.25% $20,000 $ 1,538 4.25% 1992 $ - - $46,303 $ 7,408 4.6% 1991 $ - - $62,954 $24,517 7.3% (1) Computed by dividing the sumtheir operations and their cash flows for each of the beginningthree years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the year balance and the 12 month-end balances by 13. (2) Computed by dividing annual interest expense by the weighted average amount outstanding during the year. CONDENSED FINANCIAL INFORMATION Alaska Air Group, Inc. (Parent Company Only) Schedule III STATEMENT OF CASH FLOWS Year Ended December 31 (In Thousands) 1993 1992 1991 Cash at beginning of year $98 $3 $27,432 Cash flows from operating activities: Net income (loss) (30,918) (84,837) 10,338 Adjustment to reconcile net income to cash: Undistributed loss (earnings) of subsidiaries 24,789 77,484 (14,396) Gain on retirement of debt (964) - (1,652) Decrease in deferred income taxes (3,327) (3,639) (549) Decrease (increase) in receivables 26,117 (7,817) (77,013) Decrease (increase) in other current assets (1,018) 174 (2,450) Increase in current liabilities 23,677 11,728 7,385 Interest on zero coupon notes 9,881 9,203 6,125 Other-net (6,836) (16) (72) Net cash provided by (used in) operating activities 41,401 2,280 (72,284) Cash flows from investing activities: Purchases of marketable securities - - (162,326) Sales and maturities of marketable securities - - 182,257 Restricted deposits - - 4,298 Payments received on loans to ESOPs 4,128 4,747 3,402 Net cash provided by investing activities 4,128 4,747 27,631 Cash flows from financing activities: Loan payments from subsidiaries - - 9,000 Proceeds from issuance of long-term debt - - 114,742 Long-term debt payments (10,933) - (11,436) Proceeds from issuance of common stock 184 1,466 842 Repurchase of preferred stock (33,375) - - Acquisition of treasury stock - - (206) Cash dividends (2,429) (8,398) (9,026) Gain on retirement of debt 964 - 1,652 Investment in subsidiary - - (88,344) Net cash provided by (used in) financing activities (45,589) (6,932) 17,224 Net increase (decrease) in cash (60) 95 (27,429) Cash at end of year $38 $98 $3 Supplemental disclosure of cash paid during the year for: Interest (net of amount capitalized) $10,237 $14,880 $12,727 Income taxes - 1,119 9,325 Noncash investing and financing activities: 1993 - The preferred stock was repurchased in exchange for a $27 million note payable and a $33.4 million cash payment. 1992 and 1991 - Nonebasic financial statements. This schedule shouldhas been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be readset forth therein in conjunction withrelation to the Consolidated Financial Statements and Notes thereto. CONSOLIDATED PROPERTY AND EQUIPMENT Alaska Air Group, Inc. Schedule V
Balance at Balance Beginning Additions at End (In Thousands) of Period at Cost Retirements Transfers Other of Period Year Ended December 31, 1991 Flight equipment $567,603 $121,523 $(37,254) $19,968 $(19,498)(A) $652,342 Other property and equipment 179,851 22,586 (1,282) - - 201,155 Deposits for future flight equipment 76,207 69,302 - (19,968) - 125,541 823,661 213,411 (38,536) - (19,498) 979,038 Capital leases 44,381 - - - - 44,381 $868,042 $213,411 $(38,536) $ - $(19,498) $1,023,419 Year Ended December 31, 1992 Flight equipment $652,342 $243,755 $(204,631) $25,959 $(19,228)(A) $692,345 (5,852)(B) Other property and equipment 201,155 17,318 (2,847) 1,536 - 217,162 Deposits for future flight equipment 125,541 16,873 - (27,495) (33,233)(C) 81,686 979,038 277,946 (207,478) - (58,313) 991,193 Capital leases 44,381 - - - - 44,381 $1,023,419 $277,946 $(207,478) $ - $(58,313) $1,035,574 Year Ended December 31, 1993 Flight equipment $692,345 $22,164 $(84,213) $(15,579)(A) $614,717 Other property and equipment 217,162 7,441 (6,636) - 217,967 Deposits for future flight equipment 81,686 764 - (2,685)(C) 79,765 991,193 30,369 (90,849) (18,264) 912,449 Capital leases 44,381 - - - 44,381 $1,035,374 $30,369 $(90,849) $(18,264) $956,830 (A) Amortization of airframe and engine overhauls charged to maintenance expense. (B) Transfers to other assets. (C) Deposits returned.
ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT Alaska Air Group, Inc. Schedule VI
Additions Balance at Charged to Transfers Balance Beginning Costs and to Other at End (In Thousands) of Period Expenses Retirements Assets of Period Year Ended December 31, 1991 Flight equipment $100,814 $30,279 $(8,156) $122,937 Other property and equipment 54,095 12,162 (425) 65,832 154,909 42,441 (8,581) 188,769 Capital leases 12,755 2,108 - 14,863 $167,664 $44,549 $(8,581) $203,632 Year Ended December 31, 1992 Flight equipment $122,937 $37,378 $(5,831) $(3,836) $150,648 Other property and equipment 65,832 13,107 (1,894) - 77,045 188,769 50,485 (7,725) (3,836) 227,693 Capital leases 14,863 2,108 - - 16,971 $203,632 $52,593 $(7,725) $(3,836) $244,664 Year Ended December 31, 1993 Flight equipment $150,648 $39,165 $(30,429) $159,384 Other property and equipment 77,045 14,027 (3,311) 87,761 227,693 53,192 (33,740) 247,145 Capital leases 16,971 2,108 - 19,079 $244,664 $55,300 $(33,740) $266,224
CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION Schedule X Alaska Air Group, Inc. Charged to costs and expenses Year Ended December 31 (In Thousands) 1993 1992 1991 Aircraft maintenance $67,438 $87,687 $82,983 Depreciation and amortization of intangible assets, preoperating costs and similiar deferrals * * * Taxes, other than payroll and income taxes $13,417 $12,881 $10,101 Royalties * * * Advertising and promotion $17,046 $34,179 $32,021 * Less than 1% of total revenues.basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Seattle, Washington January 25, 1995 VALUATION AND QUALIFYING ACCOUNTS Alaska Air Group, Inc.
Schedule VIII II Additions Balance at Charged Beginning to Balance Beginning Costs and at end of(A) Ending (In Thousands) of Period Expenses Deductions(A) PeriodBalance Expense Deductions Balance Year Ended December 31, 1991 (a) Reserve deducted from asset to which it applies: Allowance for doubtful accounts $2,365 $725 $(534) $2,556 Obsolescence allowance for flight equipment spare parts $2,971 $794 $ - $3,765 (b) Reserve recorded as other long- term liabilities: Leased aircraft return provision $8,785 $14,533 $(1,789) $21,529 Year Ended December 31, 1992 (a) Reserve deducted from asset to which it applies: Allowance for doubtful accounts $2,556 $1,237 $(579) $3,214 ObsolescenceObsolesence allowance for flight equipment spare parts $3,765 $2,578 $ - $6,343 (b) Reserve recorded as other long- termlong-term liabilities: Leased aircraft return provision $21,529 $32,230 $(13,956) $39,803 Year Ended December 31, 1993 (a) Reserve deducted from asset to which it applies: Allowance for doubtful accounts $3,214 $912 $(1,505) $2,621 ObsolescenceObsolesence allowance for flight equipment spare parts $6,343 $1,994 $ -$0 $8,337 (b) Reserve recorded as other long- termlong-term liabilities: Leased aircraft return provision $39,803 $22,324 $(31,394) $30,733 Year Ended December 31, 1994 (a) Reserve deducted from asset to which it applies: Allowance for doubtful accounts $2,621 $944 $(1,280) $2,285 Obsolesence allowance for flight equipment spare parts $8,337 $4,401 $(663) $12,075 (b) Reserve recorded as other long-term liabilities: Leased aircraft return provision $30,733 $9,007 $(14,180) $25,560 (A) Deduction from reserve for purpose for which reserve was created.
EXHIBIT INDEX Certain of the following exhibits are filed herewith. Certain other of the following exhibits have heretofore been filed with the Commission and are incorporated herein by reference from the document described in parenthesis. Certain others are filed herewith. 3.(i) Certificate of Incorporation of Alaska Air Group, Inc. as amended through May 20, 1987 (Exhibit 3-01 to 1987 10-K). *3.3.(ii) Bylaws of Alaska Air Group, Inc., as amended through September 14, 1993.1993 (Exhibit 3.(ii) to 1993 10K) 4.1 Indenture dated June 15, 1985, between Alaska Airlines, Inc. and Bankamerica Trust Company of New York, including form of Debenture (Exhibit 4-02 to Registration Statement No. 2-98555). 4.2 Rights Agreement dated as of December 2, 1986 between Alaska Air Group, Inc. and The First National Bank of Boston, as Rights Agent (Exhibit No. 1 to Form 8A filed December 12, 1986). 10.1 Lease and Assignment of Sublease Agreement dated February 1, 1979 between Alaska Airlines, Inc. and the Alaska Industrial Development Authority (Exhibit 10-15 to Registration Statement No. 2-70742). 10.2 Lease and Assignment and Sublease Agreement dated April 1, 1978 between Alaska Airlines, Inc. and the Alaska Industrial Development Authority (Exhibit 10-16 to Registration Statement No. 2-70742). 10.3 Alaska Air Group, Inc. 1975 Stock Option Plan, as amended through May 7, 1991. 10.4 Management Incentive Plan (1992 Alaska Air Group, Inc. Proxy Statement). 10.5 Loan Agreement dated as of December 1, 1984, between Alaska Airlines, Inc. and the Industrial Development Corporation of the Port of Seattle (Exhibit 10-38 to 1984 10-K). 10.6 Amended and Restated Credit Agreement dated as of April 1, 1986 between Alaska Airlines, Inc. and The Long Term Credit Bank of Japan (Exhibit 10-28 to 1986 10-K). 10.7 Alaska Air Group, Inc. 1984 Stock Option Plan, as amended through May 7, 1992. 10.810.7 Supplemental retirement plan arrangement between Horizon Air Industries, Inc. and John F. Kelly (1992 Alaska Air Group, Inc. Proxy Statement). 10.910.8 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended through May 19, 1992 (Registration Statement No. 33- 523242)33-523242). 10.1010.9 Purchase Agreement between McDonnell Douglas Corporation and Alaska Airlines, Inc. DAC 88-36-D, dated October 14, 1988 (Exhibit 10-17 to 1988 10-K). 10.1110.10 Capital Performance Plan (Exhibit 4.3 to Registration Statement 33-33087). #10.12#10.11 Purchase Agreement dated March 30, 1990 between McDonnell Douglas Corporation and Alaska Airlines, Inc. for the purchase of up to 40 MD90-30 aircraft (Exhibit 10-13 to 1990 10-K) #10.13#10.12 Lease Agreement dated January 22, 1990 between International Lease Finance Corporation and Alaska Airlines, Inc. for the lease of a B737-400 aircraft, summaries of 19 substantially identical lease agreements for 19 additional B737-400 aircraft and Letter Agreement #1 dated January 22, 1990 (Exhibit 10-14 to 1990 10-K) #10.16#10.13 Purchase Agreement dated as of May 15, 1991, between Horizon Air Industries, Inc. and Dornier Luftfahrt GmbH for the purchase of up to 60 Dornier 328 aircraft (Exhibit 10-19 to May 30, 1991 8-K)8- K). #10.17#10.14 Amendment dated as of June 25, 1993 to the Purchase Agreement dated as of May 15, 1991, between Horizon Air Industries, Inc. and Dornier Luftfahrt GmbH for the purchase of up to 60 Dornier 328 aircraft (Exhibit 10-19a to Second Quarter 1993 10-Q). *11 Computation of Earnings Per Common Share. *12 Calculation of Ratio of Earnings to Fixed Charges and Preferred Dividends. 21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10- K)10-K). *23 Consent of Arthur Andersen & Co. *27 Financial Data Schedule * Filed herewith. # Confidential treatment was granted as to a portion of this document.