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


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


For the quarterly period ended September 30, 20172020
 
OR


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


For the transition period from                      to                      


Commission File Number 1-8957

ALASKA AIR GROUP, INC.
 
Delaware91-1292054
(State of Incorporation)(I.R.S. Employer Identification No.)


19300 International Boulevard,Seattle, Washington WA98188
Telephone: (206) 392-5040


Telephone:(206)392-5040

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTicker SymbolName of each exchange on which registered
Common stock, $0.01 par valueALKNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒  No ¨☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerx
☒
Accelerated filer  ¨
☐
Non-accelerated filer   ¨

(Do not check if a smaller reporting company)
☐
Smaller reporting company  ¨
☐
Emerging growth company  ¨☐


If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨☐ No x☒
 
The registrant has 123,044,897123,663,778 common shares, par value $0.01, outstanding at October 31, 2017.

30, 2020.


This document is also available on our website at http://investor.alaskaair.com.
1

ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 20172020


TABLE OF CONTENTS


PART I.
4
ITEM 1.
4
ITEM 2.
2126
ITEM 3.
4347
ITEM 4.
4348
4449
ITEM 1.
4449
ITEM 1A.
4449
ITEM 2.
4451
ITEM 3.
4451
ITEM 4.
4452
ITEM 5.
4452
ITEM 6.
4553
4553


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

2



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are:


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

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and otherour risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2016,2019, and Item 1A. "Risk Factors" included herein.of Part II of this Form 10-Q. Please consider our forward-looking statements in light of those risks as you read this report.




3

PART I

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


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions)September 30, 2020December 31, 2019
ASSETS  
Current Assets  
Cash and cash equivalents$1,855 $221 
Marketable securities1,904 1,300 
Total cash and marketable securities3,759 1,521 
Receivables - net321 323 
Inventories and supplies - net57 72 
Prepaid expenses, assets held-for-sale, and other current assets328 121 
Total Current Assets4,465 2,037 
Property and Equipment  
Aircraft and other flight equipment7,851 8,549 
Other property and equipment1,395 1,306 
Deposits for future flight equipment595 533 
 9,841 10,388 
Less accumulated depreciation and amortization3,460 3,486 
Total Property and Equipment - Net6,381 6,902 
Operating lease assets1,516 1,711 
Goodwill1,943 1,943 
Intangible assets - net107 122 
Other noncurrent assets337 278 
Other Assets3,903 4,054 
Total Assets$14,749 $12,993 


4

(in millions)September 30, 2017 December 31, 2016
ASSETS   
Current Assets   
Cash and cash equivalents$144
 $328
Marketable securities1,596
 1,252
Total cash and marketable securities1,740
 1,580
Receivables—net301
 302
Inventories and supplies—net57
 47
Prepaid expenses and other current assets116
 121
Total Current Assets2,214
 2,050
    
Property and Equipment 
  
Aircraft and other flight equipment7,590
 6,947
Other property and equipment1,187
 1,103
Deposits for future flight equipment531
 545
 9,308
 8,595
Less accumulated depreciation and amortization3,078
 2,929
Total Property and Equipment—Net6,230
 5,666
    
Goodwill1,934
 1,934
Intangible assets135
 143
Other noncurrent assets226
 169
Other Assets2,295
 2,246
    
Total Assets$10,739
 $9,962

See accompanying notes to condensed consolidated financial statements.


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)September 30, 2020December 31, 2019
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current Liabilities  
Accounts payable$93 $146 
Accrued wages, vacation and payroll taxes541 470 
Air traffic liability1,071 900 
Other accrued liabilities406 431 
Deferred revenue663 750 
Current portion of operating lease liabilities283 269 
Current portion of long-term debt1,150 235 
Total Current Liabilities4,207 3,201 
Long-Term Debt, Net of Current Portion2,672 1,264 
Noncurrent Liabilities  
Long-term operating lease liabilities, net of current portion1,320 1,439 
Deferred income taxes499 715 
Deferred revenue1,520 1,240 
Obligation for pension and postretirement medical benefits601 571 
Other liabilities476 232 
 4,416 4,197 
Commitments and Contingencies
Shareholders' Equity  
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, NaN issued or outstanding0 0 
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2020 - 133,011,377 shares; 2019 - 131,812,173 shares, Outstanding: 2020 - 123,661,433 shares; 2019 - 123,000,307 shares1 1 
Capital in excess of par value366 305 
Treasury stock (common), at cost: 2020 - 9,349,944 shares; 2019 - 8,811,866 shares(674)(643)
Accumulated other comprehensive loss(450)(465)
Retained earnings4,211 5,133 
 3,454 4,331 
Total Liabilities and Shareholders' Equity$14,749 $12,993 

5
(in millions, except share amounts)September 30, 2017 December 31, 2016
LIABILITIES AND SHAREHOLDERS' EQUITY   
Current Liabilities   
Accounts payable$97
 $92
Accrued wages, vacation and payroll taxes345
 397
Air traffic liability1,103
 849
Other accrued liabilities886
 878
Current portion of long-term debt334
 319
Total Current Liabilities2,765
 2,535
    
Long-Term Debt, Net of Current Portion2,367
 2,645
Other Liabilities and Credits 
  
Deferred income taxes682
 463
Deferred revenue682
 640
Obligation for pension and postretirement medical benefits323
 331
Other liabilities429
 417
 2,116
 1,851
Commitments and Contingencies

 

Shareholders' Equity 
  
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding—
 —
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2017 - 129,860,836 shares; 2016 - 129,189,634 shares, Outstanding: 2017 - 123,387,158 shares; 2016 - 123,328,051 shares1
 1
Capital in excess of par value156
 110
Treasury stock (common), at cost: 2017 - 6,473,678 shares; 2016 - 5,861,583 shares(494) (443)
Accumulated other comprehensive loss(289) (305)
Retained earnings4,117
 3,568
 3,491
 2,931
Total Liabilities and Shareholders' Equity$10,739
 $9,962

See accompanying notes to condensed consolidated financial statements.


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(in millions, except per share amounts)2020201920202019
Operating Revenues    
Passenger revenue$572 $2,211 2,362 6,038 
Mileage Plan other revenue84 118 266 346 
Cargo and other45 60 130 169 
Total Operating Revenues701 2,389 2,758 6,553 
Operating Expenses  
Wages and benefits495 608 1,579 1,732 
Variable incentive pay42 46 65 125 
Payroll support program grant wage offset(398)0 (760)0 
Aircraft fuel, including hedging gains and losses125 486 568 1,408 
Aircraft maintenance84 106 244 341 
Aircraft rent74 82 229 247 
Landing fees and other rentals109 143 323 388 
Contracted services36 72 138 214 
Selling expenses24 77 83 236 
Depreciation and amortization105 106 320 317 
Food and beverage service14 57 70 159 
Third-party regional carrier expense29 42 92 125 
Other89 137 310 411 
Special items - merger-related costs1 5 5 39 
Special items - impairment charges and other121 0 350 0 
Special items - restructuring charges322 0 322 0 
Total Operating Expenses1,272 1,967 3,938 5,742 
Operating Income (Loss)(571)422 (1,180)811 
Nonoperating Income (Expense)  
Interest income7 11 23 31 
Interest expense(34)(18)(64)(60)
Interest capitalized4 4 8 11 
Other—net5 (3)16 (20)
Total Nonoperating Income (Expense)(18)(6)(17)(38)
Income (Loss) Before Income Tax(589)416 (1,197)773 
Income tax (benefit) expense(158)94 (320)185 
Net Income (Loss)$(431)$322 $(877)$588 
Basic Earnings (Loss) Per Share:$(3.49)$2.61 $(7.12)$4.76 
Diluted Earnings (Loss) Per Share:$(3.49)$2.60 $(7.12)$4.74 
Shares used for computation: 
Basic123.647 123.280 123.255 123.330 
Diluted123.647 124.067 123.255 124.051 

6
 Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except per share amounts)2017 2016 2017 2016
Operating Revenues       
Passenger       
Mainline$1,562
 $1,073
 $4,390
 $3,036
Regional262
 249
 725
 682
Total passenger revenue1,824
 1,322
 5,115
 3,718
Freight and mail32
 31
 88
 82
Other—net264
 213
 768
 607
Total Operating Revenues2,120
 1,566
 5,971
 4,407
        
Operating Expenses     
  
Wages and benefits475
 340
 1,392
 1,008
Variable incentive pay40
 31
 98
 95
Aircraft fuel, including hedging gains and losses368
 225
 1,051
 593
Aircraft maintenance88
 64
 271
 197
Aircraft rent70
 25
 204
 80
Landing fees and other rentals124
 89
 338
 232
Contracted services76
 63
 234
 183
Selling expenses91
 58
 269
 162
Depreciation and amortization95
 101
 275
 281
Food and beverage service50
 31
 145
 93
Third-party regional carrier expense30
 25
 84
 72
Special items—merger-related costs24
 22
 88
 36
Other150
 92
 424
 267
Total Operating Expenses1,681
 1,166
 4,873
 3,299
Operating Income439
 400
 1,098
 1,108
        
Nonoperating Income (Expense)     
  
Interest income9
 7
 25
 20
Interest expense(26) (11) (77) (33)
Interest capitalized5
 6
 13
 21
Other—net—
 —
 (1) (2)
 (12) 2
 (40) 6
Income before income tax427
 402
 1,058
 1,114
Income tax expense161
 146
 397
 414
Net Income$266
 $256
 $661
 $700
        
Basic Earnings Per Share:$2.15
 $2.08
 $5.35
 $5.66
Diluted Earnings Per Share:$2.14
 $2.07
 $5.31
 $5.63
Shares used for computation:       
Basic123.467
 123.149
 123.501
 123.648
Diluted124.220
 123.833
 124.341
 124.393
        
Cash dividend declared per share:$0.30
 $0.275
 $0.90
 $0.825
See accompanying notes to condensed consolidated financial statements.

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(in millions)2020201920202019
Net Income (Loss)$(431)$322 $(877)$588 
Other Comprehensive Income (Loss):
Related to marketable securities:
Unrealized holding gain (loss) arising during the period2 4 32 31 
Reclassification of (gain) loss into Other - net nonoperating income (expense)(2)(5)(11)(3)
Income tax effect0 0 (5)(7)
Total0 (1)16 21 
Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense)7 8 22 24 
Income tax effect(1)(2)(5)(6)
Total6 6 17 18 
Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period2 (5)(25)(17)
Reclassification of loss into Aircraft rent1 1 2 2 
Income tax effect(1)0 5 3 
Total2 (4)(18)(12)
Other Comprehensive Income (Loss)8 1 15 27 
Comprehensive Income (Loss)$(423)$323 $(862)$615 




7
 Three Months Ended September 30, Nine Months Ended September 30,
(in millions)2017 2016 2017 2016
Net Income$266
 $256
 $661
 $700
        
Other Comprehensive Income (Loss):       
Related to marketable securities:       
Unrealized holding gain (loss) arising during the period1
 (2) 5
 17
Reclassification of (gain) loss into Other—net nonoperating income (expense)(1) —
 —
 (1)
Income tax effect—
 —
 (2) (6)
Total—
 (2) 3
 10
        
Related to employee benefit plans:       
Reclassification of net pension expense into Wages and benefits5
 5
 16
 15
Income tax effect(2) (1) (5) (5)
Total3
 4
 11
 10
        
Related to interest rate derivative instruments:       
Unrealized holding gain (loss) arising during the period—
 1
 (2) (6)
Reclassification of (gain) loss into Aircraft rent2
 1
 4
 4
Income tax effect(1) (1) (1) 1
Total1
 1
 1
 (1)
        
Other Comprehensive Income4
 3
 15
 19
        
Comprehensive Income$270
 $259
 $676
 $719

See accompanying notes to condensed consolidated financial statements.


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)

(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2019123.000$1 $305 $(643)$(465)$5,133 $4,331 
Net loss— — — — — (232)(232)
Other comprehensive income (loss)— — — — (17)— (17)
Common stock repurchase(0.538)— 0 (31)— — (31)
Stock-based compensation— — 9— — — 9 
Cash dividend declared
($0.375 per share)
— — — — — (45)(45)
Stock issued under stock plans0.123— 0 — — — 0 
Balances at March 31, 2020122.585$1 $314 $(674)$(482)$4,856 $4,015 
Net loss— — — — — (214)(214)
Other comprehensive income (loss)— — — — 24 — 24 
Stock-based compensation— — 2— — — 2 
CARES Act warrant issuance— — 7— — — 7 
Stock issued for employee stock purchase plan1.000 — 27 — — — 27 
Stock issued under stock plans0.054— — — — — 0 
Balances at June 30, 2020123.639$1 $350 $(674)$(458)$4,642 $3,861 
Net loss— — — — — (431)(431)
Other comprehensive income (loss)— — — — 8— 8 
Stock-based compensation— — 7 — 7 
CARES Act warrant issuance— — 9 — — — 9 
Stock issued under stock plans0.022 — — — — — 0 
Balances at September 30, 2020123.661$1 $366 $(674)$(450)$4,211 $3,454 

8

(in millions)Common Stock OutstandingCommon StockCapital in Excess of Par ValueTreasury StockAccumulated Other Comprehensive Income (Loss)Retained EarningsTotal
Balances at December 31, 2018123.194 $1 $232 $(568)$(448)$4,534 $3,751 
Cumulative effect of accounting changes(a)
— — — — 0 3 3 
Net income— — — — — 4 4 
Other comprehensive income (loss)— — — — 15 — 15 
Common stock repurchase(0.215)— 0 (13)— — (13)
Stock-based compensation— — 12 — — — 12 
Cash dividend declared
($0.35 per share)
— — — — — (43)(43)
Stock issued for employee stock purchase plan0.391 — 20 — — — 20 
Stock issued under stock plans0.134 — (3)— — — (3)
Balances at March 31, 2019123.504 $1 $261 $(581)$(433)$4,498 $3,746 
Net income— — — — — 262 262 
Other comprehensive income (loss)— — — — 11 — 11 
Common stock repurchase(0.194)— — (12)— — (12)
Stock-based compensation— — 9 — — — 9 
Cash dividend declared
($0.35 per share)
— — — — — (43)(43)
Stock issued under stock plans0.028 — 0 — — — 0 
Balances at June 30, 2019123.338 $1 $270 $(593)$(422)$4,717 $3,973 
Net income— — — — — 322 322 
Other comprehensive income (loss)— — — — 1 — 1 
Common stock repurchase(0.465)— 0 (28)— — (28)
Stock-based compensation— — 7 — — — 7 
Cash dividend declared
($0.35 per share)		— — — — — (43)(43)
Stock issued for employee stock purchase plan0.394 — 20 — — — 20 
Stock issued under stock plans0.011 — 0 — — — 0 
Balances at September 30, 2019123.278 $1 $297 $(621)$(421)$4,996 $4,252 

(a)Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.
9

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30,
(in millions)20202019
Cash flows from operating activities:  
Net income (Loss)$(877)$588 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:  
Depreciation and amortization320 317 
Stock-based compensation and other14 20 
Special items - impairment charges and other350 0 
Special items - restructuring charges322 0 
Payroll support program grant wage offset(760)0 
Changes in certain assets and liabilities:
Payroll support program grant funding753 0 
Changes in deferred tax provision(220)187 
Increase in air traffic liability171 244 
Increase in deferred revenue193 97 
Pension contribution0 (65)
Other - net(150)(7)
Net cash provided by operating activities116 1,381 
Cash flows used in investing activities:  
Property and equipment additions:  
Aircraft and aircraft purchase deposits(61)(286)
Other flight equipment(49)(125)
Other property and equipment(94)(116)
Total property and equipment additions, including capitalized interest(204)(527)
Purchases of marketable securities(2,092)(1,446)
Sales and maturities of marketable securities1,520 1,228 
Other investing activities9 37 
Net cash used in investing activities(767)(708)
Cash flows from financing activities:  
Proceeds from issuance of debt2,581 356 
Common stock repurchases(31)(752)
Dividends paid(45)(53)
Long-term debt payments(238)(129)
Other financing activities19 40 
Net cash provided by (used in) financing activities2,286 (538)
Net increase in cash, cash equivalents, and restricted cash1,635 135 
Cash, cash equivalents, and restricted cash at beginning of year232 114 
Cash, cash equivalents, and restricted cash at end of the period$1,867 $249 
Cash paid during the period for:
Interest (net of amount capitalized)$38 $48 
Income taxes0 2 
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents$1,855 $237 
Restricted cash included in Prepaid expenses, assets held-for-sale and other current assets12 12 
Total cash, cash equivalents, and restricted cash at end of the period$1,867 $249 

10
 Nine Months Ended September 30,
(in millions)2017 2016
Cash flows from operating activities:   
Net income$661
 $700
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Depreciation and amortization275
 281
Stock-based compensation and other43
 19
Changes in certain assets and liabilities:   
Changes in deferred tax provision217
 47
Increase in air traffic liability254
 116
Increase in deferred revenue46
 60
Other—net(139) (17)
Net cash provided by operating activities1,357
 1,206
    
Cash flows from investing activities: 
  
Property and equipment additions: 
  
Aircraft and aircraft purchase deposits(679) (408)
Other flight equipment(70) (35)
Other property and equipment(92) (66)
Total property and equipment additions, including capitalized interest(841) (509)
Purchases of marketable securities(1,408) (775)
Sales and maturities of marketable securities1,069
 638
Other investing activities38
 5
Net cash used in investing activities(1,142) (641)
    
Cash flows from financing activities: 
  
Proceeds from issuance of debt—
 1,546
Long-term debt payments(265) (93)
Common stock repurchases(50) (193)
Dividends paid(111) (102)
Other financing activities27
 22
Net cash provided (used) by financing activities(399) 1,180
Net increase (decrease) in cash and cash equivalents(184) 1,745
Cash and cash equivalents at beginning of year328
 73
Cash and cash equivalents at end of the period$144
 $1,818
    
Supplemental disclosure: 
  
Cash paid during the period for:   
Interest (net of amount capitalized)$68
 $12
Income taxes129
 321


See accompanying notes to condensed consolidated financial statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization and Basis of Presentation
 
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska Horizon,and Horizon. The condensed consolidated financial statements also include McGee Air Services and, starting December 14, 2016, Virgin America.(McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP")(GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2016.2019. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 20172020 and the results of operations for the three and nine months ended September 30, 20172020 and 2016.2019. Such adjustments were of a normal recurring nature.


In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses.expenses, including impairment charges. Due to the impacts of the novel coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, 20172020 are not necessarily indicative of operating results for the entire year.


Recently IssuedAdopted Accounting PronouncementsPronouncement


In May 2014,June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers"ASU 2016-13, "Financial Instruments - Credit Losses (Topic 606), which326): Measurement of Credit Losses on Financial Instruments." The ASU requires the use of an entity to recognize"expected credit loss model" on certain financial instruments. The ASU also amends the amountimpairment model for available-for-sale debt securities, and requires the estimation of revenue to which it expectscredit losses to be entitled for the transferrecorded as allowances instead of promised goods or servicesreductions to customers. This comprehensive new standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issuedamortized cost. The ASU 2016-08, "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" to clarify the guidance on determining whether the Company is considered the principal or the agent in a revenue transaction where a third party is providing goods or services to a customer. Entities are permitted to use either a full retrospective or cumulative effect transition method, and are required to adopt all parts of the new revenue standard using the same transition method. The new standard iswas effective for the Company onbeginning January 1, 2018.

At this time, the Company believes the most significant impact to the financial statements will be to Mileage Plan™ revenues2020, and liabilities. The Company currently uses the incremental cost approach for miles earned through travel. As this approach will be eliminated with the standard, the Company will be required to allocate a portion of the ticket price through a relative selling price model and defer revenue recognition until the ticket is flown or unused mileage credits expire. Additionally, unused companion certificates that were previously recognized at expiration will be subject to advanced breakage under the new standard. The Company estimates a net increase to Mileage Plan deferred revenues of approximately $340 million to $380 million at the time of adoption. The allocated value to miles earned through travel will offset passenger revenue during the period they are issued, rather than recorded using the incremental cost approach. As the program is growing significantly, the Company expects revenue recognized under Topic 606 will be less on an annual basis than current accounting practice.

The adoption of the new standard is also expected to result in a change in income statement classification of the majority of ancillary revenues from Other revenue to Passenger revenue. This will affect common industry metrics, such as PRASM and RASM. Certain commission revenue from interline arrangements that were previously offset against related expense will now be classified as Other revenue, which will impact RASM and CASM. Unused ticket revenue that was previously recorded at the time of expiration will now be recorded at the original departure date if that ticket has not been changed or refunded prior to that date, based on estimates of expected expiration. This concept is referred to as ticket breakage. The Company estimates the change in ticket breakage methodology willadopted prospectively, but it did not have a significant impact on the Company's financial statements of operations, but will decrease air traffic liability by approximately $70 million to $80 million.and disclosures.


NOTE 2. COVID-19 PANDEMIC

The public health and economic crises resulting from the outbreak of COVID-19 beginning in the first quarter of 2020 has had an unprecedented impact on the Company. Travel restrictions, event cancellations and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March. Although the Company continues to evaluate and modelhas experienced several months of modest improvement in demand, traffic remains well below 2019 levels. It is uncertain when the full impactimpacts of the standardcrisis may resolve and will apply the full retrospective transition method. The overall impactwhen demand may return to equity as of the beginning of the retroactive reporting period, including the changes discussed above, as well as other less material changes, is expected to be between $160 million and $190 million.normal levels.




In February 2016,response to the FASB issued ASU 2016-02, "Leases" (Topic 842), which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use-asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. At this time,COVID-19 pandemic, the Company believesimplemented a "Peace-of-Mind" waiver, which allows travelers to book tickets for travel for a specified period of time that can be changed or canceled without incurring change fees. In the most significant impactthird quarter, the waiver was extended to the financial statementscover all ticketed travel purchased through December 31, 2020, and beginning in 2021, all change fees will relate to the recordingbe eliminated for first class and main cabin fares. Cancellations and postponement of a right-of-use asset associated with leased aircraft. Other leases, including airportstravel exceeded new bookings in March and real estate, equipment, softwareApril, and other miscellaneous leases continue to be assessed for impact of the ASU. The new standard is effective for the Company on January 1, 2019. Early adoption of the standard is permitted. The Company has determined that it will not early adopt the standard.

In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation" (Topic 718), which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU was adopted prospectively as of January 1, 2017. Prior periods have not been adjusted. The adoption of the standard did not havehad a material impact on second and third quarter passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.

The Company has taken decisive action to reduce costs and preserve cash and liquidity. In the first quarter, the Company implemented a company-wide hiring freeze, reduced salaries of senior management and hours for management employees, suspended annual pay increases and solicited voluntary leaves of absence. In addition to these payroll saving measures, the Company has actively negotiated with vendor partners to reduce contractual minimums and spending in line with the reduction in demand. In the third quarter, management made the difficult decision to reduce the Company's statementsworkforce through voluntary and involuntary leaves.

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With demand dramatically depressed, the Company has significantly reduced its planned flying capacity. As a result, many aircraft have been parked or removed from service. As of operationsSeptember 30, 2020, 64 mainline aircraft were temporarily grounded. The Company made the decision in the first quarter of 2020 to permanently remove 12 Airbus aircraft from the operating fleet. In the third quarter of 2020, an additional 8 Airbus aircraft were permanently removed from the operating fleet. As of September 30, 2020, all operating regional aircraft were in service.

Valuation of long-lived assets

The Company reviews its long-lived assets for impairment whenever events or financial position.changes indicate that the total carrying amount of an asset or asset group may not be recoverable.


To determine if impairment exists, a recoverability test is performed comparing the sum of estimated undiscounted future cash flows expected to be directly generated by the assets to the asset carrying value. Assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company developed estimates of future cash flows utilizing historical results, adjusted for the current operating environment, including the impact of parked aircraft.

Given the temporary and permanent parking of certain aircraft described above, the Company performed impairment tests on certain long-lived assets in each of the quarters of 2020. All individual fleets passed the recoverability test, except for the Q400 fleet and the permanently parked Airbus aircraft, which did not pass in the first and third quarters of 2020.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwillfirst quarter, the Company recorded an impairment charge of $83 million for the 12 permanently parked Airbus aircraft, which was comprised of operating lease right of use assets, estimable return costs, and Other" (Topic 350),related leasehold improvements. In the second quarter, the Company identified additional estimable return costs relating to those permanently parked aircraft, and recorded an additional $70 million charge.

Also in the first quarter, the Company recorded an impairment charge of $58 million reflecting the amount for which eliminates step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the impliedcarrying value exceeded fair value of a reporting unit’s goodwill with the Q400 fleet. The Company also recorded additional impairment charges relating to 2 non-operating Q400 aircraft, which remain parked and held-for-sale, in the first quarter of 2020.

In the third quarter, the Company determined that ten owned Airbus A320 aircraft were impaired, as those aircraft have been specifically identified for retirement prior to the end of their expected useful lives. The Company decided to permanently park eight of these aircraft as of September 30, 2020. As such, the Company recorded an impairment charge of $121 million, representing the amount by which carrying amount of that goodwill. The ASU is effectivevalue exceeded fair value for the Company beginning January 1, 2019. Early adoptionaircraft and related capital improvements and spare parts inventory. The adjusted net book value of the standard is permitted. Beginning in fiscal 2017, the Company will be required to perform an impairment test for goodwill arising from its acquisition of Virgin America and has adopted the standard effective January 1, 2017.

In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits" (Topic 715), which will require the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statements of operations. All other components of net periodic benefit cost will be required to be presented in Nonoperating income (expense) in the statements of operations. These components will not be eligible for capitalization in assets.  The ASU is effective for the Company beginning January 1, 2018. Changes to the statements of operations under the ASU are applicable retrospectively. The adoption of this standard will have no impact on Income before income tax or Net income for the periods subject to retrospective reclassification. See Note 6 for the current components of the Company's net periodic benefit costs.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact and has not yet determined whether it will early adopt.

NOTE 2. ACQUISITION OF VIRGIN AMERICA

Virgin America

On December 14, 2016, the Company acquired 100% of the outstanding common shares and voting interest of Virgin America for $57 per share, or total cash consideration of $2.6 billion. Virgin America offers scheduled air transportation throughout the United States and Mexico primarily from its hub cities of Los Angeles, San Francisco and, to a lesser extent, Dallas Love Field, to other major business and leisure destinations in North America. The Company believes the acquisition of Virgin America will provide broader national reach and position it to better serve guests living on the West Coast. The combined airline has approximately 1,200 daily departures and leverages Alaska's strength in the Pacific Northwest with Virgin America's strength in California. The Company believes that combining loyalty programs and networks will provide greater benefits for its guests and expand its international partner portfolio, giving guests an even more expansive global reach.

Merger-related costs

The Company incurred pretax merger-related costs of $24 million and $22$219 million for the three months ended September 30, 20178 aircraft that have been permanently parked and 2016, respectively,the 2 Q400 aircraft mentioned above has been transferred to held-for-sale assets in Other current assets on the condensed consolidated balance sheet.

A summary of the impairment charges recorded for aircraft and $88 million and $36 millionother flight equipment for the nine months ended September 30, 20172020 is as follows (in millions):
Airbus AircraftQ400 AircraftTotal Impairment
Aircraft and other flight equipment, net$132 $58 $190 
Operating lease assets62 0 62 
Inventory and supplies - net2 0 2 
Prepaid expenses and other current assets0 3 3 
Other accrued liabilities78 0 78 
Total impairment charges - Long-lived assets$274 $61 $335 
The Company will continue to evaluate the need for further impairment of long-lived assets as expectations of future demand, market conditions and 2016, respectively. Costs classifiedfleet decisions evolve.

Valuation of intangible assets and goodwill

The Company reviews definite- and indefinite-lived intangible assets and goodwill for impairment on an annual basis in the fourth quarter, or more frequently should events or circumstances indicate that an impairment may exist.

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Given the strain in the general economic environment and a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types at the end of each quarter in 2020. As a result of these analyses, indefinite-lived intangible assets and goodwill were deemed recoverable, and no impairment charges were recorded. Of the company’s definite-lived intangibles, leased gates at Dallas-Love Field (DAL Gates) were deemed not recoverable and an impairment charge of $10 million was recorded in the first quarter. No additional impairment charges were identified for definite-lived intangibles as merger-related are directly attributablea result of the second and third quarter impairment tests.

Workforce restructuring

The Company expects that demand will remain depressed into 2021 and expects to merger activitiesrebuild capacity levels to approximately 80% by summer 2021. Accordingly, the Company reduced its workforce in the third quarter of 2020 to better align with the expected size of the business. To mitigate the need for involuntary furloughs, various early-out and arevoluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots and mechanics. Through these programs over 600 employees took permanent early-outs, and over 3,300 employees took voluntary or incentive leaves. As a result of the participation in these mitigation programs, the involuntary furloughs that became effective October 1, 2020 were limited to approximately 400 employees. The Company recalled approximately 220 flight attendants on November 1, 2020. In addition to these furloughs, the Company permanently eliminated approximately 300 non-union management positions.

As a result of these programs, the Company recorded as "Special items—merger-related costs" withinexpense of $322 million to Special items - restructuring charges in the statementscondensed consolidated statement of operations.operations in the third quarter of 2020. The charge is primarily comprised of wages for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage, and lump-sum termination payments.

Other considerations

The Company evaluated outstanding receivable balances for risk of non-payment. The Company identified a $5 million receivable from a vendor that filed for bankruptcy during the first quarter. The Company expects to continuefile a bankruptcy claim but, as the note is unsecured, management determined that collectability is not probable. Therefore, the full $5 million was reserved and charged to incur merger-related costsSpecial items - impairment charges and other in the future ascondensed consolidated statement of operations in the integration continues.first quarter.






Fair values of the assets acquired and the liabilities assumed

The transaction has been accounted for as a business combination using the acquisition method of accounting, which requires, among other things, assets acquired and liabilities assumed to be recognized on the balance sheet at their fair values as of the acquisition date. As of September 30, 2017 the fair values of property and equipment and certain liabilities, included in other accrued liabilities and other liabilities, goodwill, intangible assets and deferred income taxes have been prepared on a preliminary basis and are subject to further adjustments as the Company completes its analysis. There were no significant fair value adjustments made duringFor the three and nine months ended September 30, 2017.2020, the Company concluded that the use of a year-to-date effective tax rate estimate was more appropriate than the annual effective tax rate method as estimates of the Company's full-year tax loss are not reliable at this time given the uncertainty of the travel demand environment.

Although it is not certain when the impacts of COVID-19 will subside and demand for air travel will return, the Company has implemented meaningful plans to reduce expenses, build liquidity and preserve cash. At September 30, 2020, given the balance of cash, cash equivalents and marketable securities, as well as anticipated access to liquidity and cash flows from future operations, the Company expects it will meet all cash obligations, as well as remain in compliance with the financial debt covenants in its existing financing arrangements, for the next 12 months. Refer to Note 5. Long-Term Debt for further information regarding liquidity obtained in response to the COVID-19 crisis.

CARES Act Funding

During the second quarter, Alaska, Horizon, and McGee finalized agreements with the U.S. Department of the Treasury (the Treasury) through the payroll support program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under the PSP and associated agreements, Alaska and Horizon received $992 million in the second quarter. In the third quarter of 2020, Alaska and Horizon were informed by the Treasury of $29 million in additional funds available under the PSP. Similarly, McGee entered into an agreement to receive a total of $30 million, which was received in three installments in the second and third quarters.

Total funds of approximately $1.1 billion are to be used exclusively toward continuing to pay employee salaries, wages and benefits. Upon receipt of the funds, the Company is subject to various conditions, including, but not limited to, refraining from conducting involuntary furloughs or reducing employee rates of pay through September 30, 2020 and placing limits on executive compensation. Other conditions also prohibit the Company from repurchasing common stock and from paying dividends until September 30, 2021, and required the Company to continue to maintain essential air service as directed by the U.S. Department of Transportation through September 30, 2020.

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The funds received took the form of debt, warrants and a grant. The unsecured debt portion of $290 million was recorded at par, and warrants of $8 million were recorded on the condensed consolidated balance sheet at fair value determined using the Black-Scholes model. The residual amount of $753 million was recorded as grant proceeds. The grant will be recognized into earnings as eligible wages, salaries and benefits are incurred. During the three and nine months ended September 30, 2020, the Company recognized $398 million and $760 million of the PSP grant proceeds as a wage offset. Included within the third quarter total offset is approximately $17 million in credits for employer taxes, as stipulated in the CARES Act. The Company will finalizeexpects to record an additional $10 million in wage offset in the amounts recognized by December 14, 2017.fourth quarter.


Fair valuesIn the third quarter of 2020, the Company reached an agreement with the Treasury to participate in the CARES Act loan program. The loan agreement provides for a secured term loan facility, which allows Alaska to borrow up to $1.3 billion. In October 2020, the amount of the assets acquiredloan available was increased to $1.9 billion. In September the Company borrowed $135 million under the loan facility. Refer to Note 5. Long-Term Debt and the liabilities assumed asNote 8. Shareholders' Equity for further details regarding terms of the acquisition dateCARES loan agreement.

NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of December 14, 2016, at September 30, 2017the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues, such as bag fees, on-board food and December 31, 2016 werebeverage, ticket change fees, and certain revenue from the frequent flyer program. In the third quarter of 2020, the Company announced beginning on January 1, 2021 it would no longer collect change fees from those guests traveling on main cabin or first class fares. Mileage Plan other revenue includes brand and marketing revenue from the Company's co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as followslounge membership and certain commissions.

The Company disaggregates revenue by segment in Note 9. The details within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Passenger ticket revenue, including ticket breakage and net of taxes and fees$459 $1,868 $1,894 $5,099 
Passenger ancillary revenue49 157 196 428 
Mileage Plan passenger revenue64 186 272 511 
Total Passenger revenue$572 $2,211 $2,362 $6,038 

Mileage Plan™ Loyalty Program

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Passenger revenue$64 $186 $272 $511 
Mileage Plan other revenue84 118 266 346 
Total Mileage Plan revenue$148 $304 $538 $857 

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 September 30, 2017 December 31, 2016
Cash and cash equivalents$645
 $645
Receivables54
 44
Prepaid expenses and other current assets18
 16
Property and equipment—provisional561
 560
Intangible assets—provisional141
 143
Goodwill—provisional1,934
 1,934
Other assets89
 84
Total assets3,442
 3,426
 
  
Accounts payable22
 22
Accrued wages, vacation and payroll taxes54
 51
Air traffic liabilities172
 172
Other accrued liabilities—provisional197
 196
Current portion of long-term debt125
 125
Long-term debt, net of current portion360
 360
Deferred income taxes—provisional(307) (304)
Deferred revenue126
 126
Other liabilities—provisional97
 82
Total liabilities846
 830
 
  
Total purchase price$2,596
 $2,596
Cargo and Other


Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Cargo revenue$31 $36 $83 $104 
Other revenue14 24 47 65 
Total Cargo and other revenue$45 $60 $130 $169 

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of$484 million and $582 million from the prior year-end air traffic liability balance for the nine months ended September 30, 2020 and 2019.

Given the reduction in demand for air travel stemming from the COVID-19 pandemic, advance bookings and associated cash receipts have been significantly depressed. The Company also experienced elevated cancellations beginning in March 2020, which led to cash refunds or the issuance of credits for future travel. Since March, the Company has issued cash refunds of approximately $475 million and credits for future travel of $850 million. At September 30, 2020, such credits, which are included in the air traffic liability balance, totaled $617 million, net of breakage. In April 2020, the Company announced updated expiration terms for these credits, extending to July 2021. At this time, the Company is unable to estimate how and when the air traffic liability will be recognized in earnings given ongoing uncertainty around the return in demand for air travel.

Mileage PlanTM assets and liabilities

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $45 million of such receivables as of September 30, 2020 and $105 million as of December 31, 2019. Consistent with the significant cancellation activity outlined above, the Company experienced incremental redeposits in the third quarter. Given the uncertainty around the return in demand for air travel, the Company is unable to determine how and when mileage credits will be recognized in earnings.

The table below presents a roll forward of the total frequent flyer liability (in millions):
Nine Months Ended September 30,
20202019
Total Deferred Revenue balance at January 1$1,990 $1,874 
Travel miles and companion certificate redemption - Passenger revenue(272)(511)
Miles redeemed on partner airlines - Other revenue(21)(84)
Increase in liability for mileage credits issued486 692 
Total Deferred Revenue balance at Sept 30$2,183 $1,971 
NOTE 3.4. FAIR VALUE MEASUREMENTS


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



Fair Value of Financial Instruments on a Recurring Basis


As of September 30, 2017,2020, total cost basis for all marketable securities was $1.6$1.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

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Fair values of financial instruments on the consolidated balance sheet (in millions):
September 30, 2020December 31, 2019
Level 1Level 2TotalLevel 1Level 2Total
Assets
Marketable securities
U.S. government and agency securities$479 $0 $479 $330 $0 $330 
Equity mutual funds6 0 6 6 0 6 
Foreign government bonds0 20 20 0 31 31 
Asset-backed securities0 232 232 0 211 211 
Mortgage-backed securities0 262 262 0 176 176 
Corporate notes and bonds0 859 859 0 523 523 
Municipal securities0 46 46 0 23 23 
Total Marketable securities485 1,419 1,904 336 964 1,300 
Derivative instruments
Fuel hedge—call options0 7 7 0 11 11 
Interest rate swap agreements0 0 0 0 3 3 
Total Assets$485 $1,426 $1,911 $336 $978 $1,314 
Liabilities
Derivative instruments
Interest rate swap agreements0 (29)(29)0 (10)(10)
Total Liabilities$0 $(29)$(29)$0 $(10)$(10)
September 30, 2017Level 1 Level 2 Total
Assets     
Marketable securities     
U.S. government and agency securities$359
 $—
 $359
Foreign government bonds—
 48
 48
Asset-backed securities—
 232
 232
Mortgage-backed securities—
 113
 113
Corporate notes and bonds—
 828
 828
Municipal securities—
 16
 16
Total Marketable securities359
 1,237
 1,596
Derivative instruments     
Fuel hedge call options—
 10
 10
Interest rate swap agreements—
 8
 8
Total Assets359
 1,255
 1,614
      
Liabilities     
Derivative instruments     
Interest rate swap agreements—
 (11) (11)
Total Liabilities—
 (11) (11)
December 31, 2016Level 1 Level 2 Total
Assets     
Marketable securities     
U.S. government and agency securities$287
 $—
 $287
Foreign government bonds—
 36
 36
Asset-backed securities—
 138
 138
Mortgage-backed securities—
 89
 89
Corporate notes and bonds—
 691
 691
Municipal securities—
 11
 11
Total Marketable securities287
 965
 1,252
Derivative instruments     
Fuel hedge call options—
 20
 20
Total Assets287
 985
 1,272
      
Liabilities     
Derivative instruments     
Interest rate swap agreements—
 (5) (5)
Total Liabilities—
 (5) (5)


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




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


Activity and Maturities for Marketable Securities


Activity forUnrealized losses from marketable securities (in millions):  
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Proceeds from sales and maturities$528
 $280
 $1,069
 $638

Maturities for marketable securities (in millions):
September 30, 2017Cost Basis Fair Value
Due in one year or less$193
 $193
Due after one year through five years1,367
 1,367
Due after five years through 10 years36
 36
Due after 10 years—
 —
Total$1,596
 $1,596

are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairmentsare the result of expected credit losses based on its evaluation of available information as of September 30, 2017.2020.


Maturities for marketable securities (in millions):
September 30, 2020Cost BasisFair Value
Due in one year or less$702 $704 
Due after one year through five years1,108 1,139 
Due after five years through 10 years54 55 
Total$1,864 $1,898 

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Fair Value of Other Financial Instruments


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


Cash, and Cash Equivalents and Restricted Cash: CarriedCash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at amortized cost, which approximates fair value.


The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The carrying amountadjustment is amortized over the life of the Company's variable-rateassociated debt. All other fixed-rate debt approximatesis carried at cost. To estimate the fair value. Forvalue of all fixed-rate debt as of September 30, 2020, the Company uses the income approach to determine the estimated fair value, calculated as the sum of futureby discounting cash flows discounted ator estimation using quoted market prices, utilizing borrowing rates for comparable debt over the weightedremaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 2, except for $732 million, which is classified as Level 3, as certain inputs used are unobservable.


Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
September 30, 2020December 31, 2019
Fixed-rate debt at cost$1,889 $473 
Non-recurring purchase price accounting fair value adjustment2 2 
Total fixed-rate debt$1,891 $475 
Estimated fair value$1,960 $483 
 September 30, 2017 December 31, 2016
Carrying amount$1,024
 $1,179
Fair value1,034
 1,199


Assets and Liabilities Measured at Fair Value on Nonrecurring Basis


Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. NoRefer to Note 2 for discussion regarding impairment was recognized incharges recorded during the three and nine months ended September 30, 2017 or2020. No material impairment charges were recorded during the three and nine months ended September 30, 2016.2019.



NOTE 4. FREQUENT FLYER PROGRAMS

Frequent flyer program deferred revenue and liabilities included in the consolidated balance sheets (in millions):
 September 30, 2017 December 31, 2016
Current Liabilities:   
Other accrued liabilities$509
 $484
Other Liabilities and Credits:   
Deferred revenue682
 638
Other liabilities24
 21
Total$1,215
 $1,143
Frequent flyer program revenue included in the consolidated statements of operations (in millions):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Passenger revenues$94
 $73
 $276
 $215
Other—net revenues122
 107
 369
 318
Total$216
 $180
 $645
 $533


NOTE 5. LONG-TERM DEBT
 
Long-term debt obligations on the condensed consolidated balance sheet (in millions):
 September 30, 2020December 31, 2019
Fixed-rate notes payable due through 2029$427 $475 
Fixed-rate PSP notes payable due through 2030290 0 
Fixed-rate EETC payable due through 2025 & 20271,174 0 
Variable-rate notes payable due through 20291,966 1,032 
Less debt issuance costs and unamortized debt discount(35)(8)
Total debt3,822 1,499 
Less current portion1,150 235 
Long-term debt, less current portion$2,672 $1,264 
Weighted-average fixed-interest rate4.3 %3.3 %
Weighted-average variable-interest rate1.9 %2.9 %

17

 September 30, 2017 December 31, 2016
Fixed-rate notes payable due through 2028$1,024
 $1,179
Variable-rate notes payable due through 20281,693
 1,803
Less debt issuance costs(16) (18)
Total debt2,701
 2,964
Less current portion334
 319
Long-term debt, less current portion$2,367
 $2,645
    
Weighted-average fixed-interest rate4.3% 4.4%
Weighted-average variable-interest rate2.6% 2.4%
Approximately $642 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2020.


During the nine months ended September 30, 2017,2020, the Company madeobtained proceeds from issuance of debt of $2.6 billion from multiple lenders and sources. New proceeds are comprised of $1.2 billion in Enhanced Equipment Trust Certificates (EETC), $589 million from secured debt financing backed by a total of 32 aircraft, $290 million in an unsecured loan from the PSP, and $135 million from the CARES Act loan program. Also included in proceeds from issuance of debt is $400 million drawn on existing lines of credit. Details around these issuances are more fully described below. Issuances of debt are offset by $238 million in debt payments.

In the third quarter of 2020, the Company obtained $1.2 billion in private funding through the issuance of Enhanced Equipment Trust Certificates (EETC). The EETC are collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft. Principal and interest payments are due semiannually, beginning on February 15, 2021.

The $290 million PSP note is an unsecured senior term loan with a 10-year term, bearing an interest rate of $265 million.1% in years 1 through 5, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus 2% in years 6 through 10. The loan is prepayable at par at any time. Alaska and Horizon PSP proceeds were deposited into an account which will be drawn down over time for payroll expenses. That account and the balance of the proceeds will serve as the only collateral for the loan.


At CARES Act Loan Program

In the third quarter of 2020, the Company finalized an agreement with the Treasury to obtain up to $1.3 billion via a secured term loan facility. In October 2020, the Company was informed by the Treasury that the total loan available would increase to $1.9 billion. Following the October upsize, obligations of the Company under the loan agreement are secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 34 aircraft and 15 spare engines.

As of September 30, 2017,2020, the Company has drawn $135 million available under the agreement, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021, after a required initial draw of 10%. All proceeds drawn must be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act.

In conjunction with the initial draw, the Company granted the Treasury 427,080 warrants to purchase ALK common stock at a strike price of $31.61. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in stockholders' equity, with an offsetting debt discount to the CARES Loan issuance.

Debt Maturity

At September 30, 2020 long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 Total
Remainder of 2020$73 
20211,201 
2022393 
2023357 
2024265 
Thereafter1,568 
Total$3,857 
 Total
Remainder of 2017$55
2018350
2019422
2020449
2021422
Thereafter1,016
Total$2,714



Bank Lines of Credit
 
The Company has three3 credit facilities with availability totaling $475 million.$461 million as of September 30, 2020. All three3 facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility increased from $100 million tofor $250 million expires in June 2017. It expires in June 2021 and is secured by aircraft. TheA second credit facility, increasedwhich was renegotiated in September 2020, resulting in decreased capacity from $52$150 million to $75$120 million, in September 2017. It expires in September 2018 with a mechanism for annual renewal and is secured by aircraft. The third credit facility increased from $100 million to $150 million in March 2017. It expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The third credit facility for $91 million expires in June 2021, with a mechanism for annual renewal, and is secured by aircraft.

18

During the nine months ended September 30, 2020, the Company drew $400 million on the first 2 existing facilities, of which a total of $37 million has since been repaid. The Company has an outstanding balance of $363 million from the first two facilities, and the outstanding balance is classified as short-term on the condensed consolidated balance sheet. The Company also has secured letters of credit against the $75$91 million facility, but has no plans to borrow using either of the two other facilities.facility. All three3 credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million.$500 million. The Company iswas in compliance with this covenant at September 30, 2017.2020.


NOTE 6. EMPLOYEE BENEFIT PLANS


Net periodic benefit costs for the qualified defined-benefit plans includedinclude the following components (in millions): 
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Service cost$11 $11 $37 $32 
Pension expense included in Wages and benefits11 11 37 32 
Interest cost19 23 57 67 
Expected return on assets(28)(24)(83)(71)
Amortization of prior service cost (credit)(1)(1)(1)(1)
Recognized actuarial loss9 9 26 27 
Pension expense included in Nonoperating Income (Expense)$(1)$7 $(1)$22 

In the third quarter of 2020, the Company also recorded $16 million of pension expense within Special items - restructuring charges for those pilots accepting certain furlough mitigation programs, which is not reflected in the table above.
19
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Service cost$10
 $9
 $30
 $27
Interest cost19
 18
 55
 55
Expected return on assets(27) (27) (80) (81)
Amortization of prior service cost (credit)(1) (1) (1) (1)
Recognized actuarial loss (gain)7
 7
 20
 19
Total$8
 $6
 $24
 $19


The Company contributed $15 million to the defined-benefit pension plan during the three months ended September 30, 2017.

NOTE 7. COMMITMENTS AND CONTINGENCIES


Future minimum payments for commitments as of September 30, 20172020 (in millions):
Aircraft Commitments(a)
Capacity Purchase Agreements (b)
Aircraft Maintenance Deposits
Remainder of 2020$343 $36 $7 
2021549 166 35 
2022333 174 45 
2023192 179 24 
202421 184 6 
Thereafter25 880 2 
Total$1,463 $1,619 $119 
 Aircraft Leases Facility Leases Aircraft Purchase Commitments 
Capacity Purchase Agreements (a)
 Aircraft Maintenance Deposits Aircraft Maintenance and Parts Management
Remainder of 2017$77
 $34
 $168
 $21
 $15
 $8
2018342
 73
 956
 118
 61
 32
2019344
 65
 806
 151
 65
 35
2020317
 63
 352
 158
 68
 37
2021280
 55
 273
 165
 63
 40
Thereafter1,263
 204
 355
 1,250
 90
 —
Total$2,623
 $494
 $2,910
 $1,863
 $362
 $152
(a)Includes all non-aircraft lease costs associated with capacity purchase agreements.

Lease Commitments

Aircraft lease(a)Includes non-cancelable contractual commitments include future obligations for all of the Company's operating airlines—Alaska, Virgin America and Horizon, as well as aircraft leases operated by third-parties. At September 30, 2017, the Company had lease contracts for 10 Boeing 737 ("B737") aircraft, 55 Airbus aircraft, 15 Bombardier Q400 aircraft, and 21 Embraer 175 ("E175") with SkyWest Airlines, Inc. ("SkyWest"). The Company has an additional eight scheduled lease deliveries of A321neo aircraft through 2018, as well as 14 scheduled lease deliveries of E175 aircraft through 2018 to be flown by Skywest. All lease contracts have remaining non-cancelable lease terms ranging from 2017 to 2030. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft deliveries in 2020. Options to lease are not reflected in the commitments table above.



Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $145 millionengines, aircraft maintenance and $82 million for the three months ended September 30, 2017 and 2016, and $406 million and $226 million forparts management.
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.

During the nine months ended September 30, 20172020 the Company renegotiated scheduled payments with certain lessors and 2016.vendor partners, including the reduction of minimum obligations and rates. The impact of those negotiations on our leases was not material to the operating lease liability. The Company has also deferred the payment of remaining 2020 contractual aircraft commitments, including those related to the B737 MAX9, to periods beyond 2020.


Aircraft Purchase Commitments
 
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 2017, the Company2020, Alaska had commitments to purchase 48 B737 aircraft (16 B737 NextGen aircraft and 32 B737 MAX9 aircraft, with contracted deliveries between 2020 and 2023. As a result of the grounding order mandated by the FAA on March 13, 2019, the delivery schedule for these MAX aircraft with deliveries inis subject to change. Future minimum contractual payments for these aircraft have been updated to reflect the remainder of 2017 through 2023) and 23possible delivery timing, but are also subject to change. Horizon also has commitments to purchase 3 E175 aircraft with deliveries in 2018 through 2019, which reflects Horizon's deferral of three E175 aircraft from 2017 to 2018. The Company also2023. Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 20202024 through 2022.2026. In addition, the CompanyAlaska has options to purchase 37 B737 MAX aircraft, and Horizon has options to purchase 30 E175 aircraft. Alaska also has the option to increase capacity flown by SkyWest with 8 additional E175 aircraft with deliveries in 2022.

The cancelable purchase commitments and option payments are not reflected in the table above.

Capacity Purchase Agreements ("CPAs")
At September 30, 2017, Alaska had CPAs with three carriers, including Given the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA with Alaska. In addition, Alaska has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada and with Peninsula Airways, Inc. ("PenAir") to fly certain routes in the state of Alaska. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.

Aircraft Maintenance Deposits

Virgin America is contractually required to make maintenance deposit payments to aircraft lessors, which represent maintenance reserves made solely to collateralize the lessor for future maintenance events shouldCOVID-19 pandemic, the Company not perform required maintenance. Most lease agreements provide that maintenance reserves are reimbursable upon completion of the major maintenance eventis in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance reserves held by the lessor associateddiscussion with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event.aircraft manufacturers regarding these purchase commitments and delivery timelines.

Aircraft Maintenance and Parts Management

Through its acquisition of Virgin America, the Company has a separate maintenance-cost-per-hour contract for management and repair of certain rotable parts to support airframe and engine maintenance and repair. This agreement requires monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft, and, in turn, the agreement transfers certain risks to the third-party service provider. There are minimum payments under this agreement. Accordingly, payments could differ materially based on actual aircraft utilization.

Subsequent to September 30, 2017, Alaska entered into a similar contract for maintenance on its B737-800 aircraft engines. Payments under this agreement are not reflected in the table above.


Contingencies


The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.


In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Plaintiffs receivedThe court certified a class certificationof approximately 1,800 flight attendants in November 2016. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds. In January 2017, the Court denied in part and granted in part Virgin America’s motion. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
20


In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend thisthe lawsuit.


Management believesThe Company is involved in other litigation around the ultimate dispositionapplication of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these matters is not likely to materially affect the Company's financial position or results of operations. additional disputes are material.

This forward-looking statement is based on management's current understanding of the relevant lawlaws and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries.




NOTE 8. SHAREHOLDERS' EQUITY

Dividends

During the three months ended September 30, 2017, the Company declared and paid cash dividends of $0.30 per share, or $37 million. During the nine months ended September 30, 2017, the Company declared and paid cash dividends of $0.90 per share, or $111 million.


Common Stock Repurchase


In August 2015, the Board of Directors authorized a $1 billion share repurchase program. The program was paused inAs of September 30, 2020, the second quarter of 2016 in anticipation ofCompany has repurchased 7.6 million shares for $544 million under this program. In March 2020, the acquisition of Virgin America. The Company resumedsuspended the share repurchase program inindefinitely.
CARES Act Warrant Issuance
As additional taxpayer protection required under the second quarter of 2017. As ofPSP, during the nine months ended September 30, 2017,2020 the Company has repurchased 4.7 milliongranted the Treasury a total of 915,930 warrants to purchase Alaska Air Group (ALK) common stock at a strike price of $31.61, based on the closing price on April 9, 2020. The warrants are non-voting, freely transferable, may be settled as net shares for $363 million under this program. Subsequent to September 30, 2017,or in cash at Alaska's option, and have a five year term.
Additionally, in connection with the execution of the CARES Act loan agreement, the Company repurchasedagreed to issue warrants to the Treasury to purchase up to an aggregate of 4,115,786 shares of ALK common stock (the Warrant Agreement). Under the Warrant Agreement, warrants will be granted to the Treasury in conjunction with each new borrowing under the Agreement. Warrants to purchase shares shall be equal to 10% of each borrowing, divided by $31.61, the closing price of Air Group common stock on April 9, 2020. Pursuant to the Warrant Agreement, on the closing date, Air Group granted the Treasury 427,080 warrants to purchase ALK common stock at a strike price of $31.61. Upon upsize of the loan agreement in October 2020, an additional 369,182 shares for $25 million.
Share repurchase activity (in millions, except share amounts):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 Shares Amount Shares Amount Shares Amount Shares Amount
2015 Repurchase Program—$1 billion355,415
 $28
 —
 $—
 612,095
 $50
 2,594,809
 $193

Accumulated Other Comprehensive Loss
1,983,550 warrants were added to the aggregate.
Components of accumulated other comprehensive loss, net of tax (in millions):
September 30, 2020December 31, 2019
Related to marketable securities$25 $9 
Related to employee benefit plans(453)(469)
Related to interest rate derivatives(22)(5)
Total$(450)$(465)
 September 30, 2017 December 31, 2016
Marketable securities$—
 $(3)
Employee benefit plans(287) (299)
Interest rate derivatives(2) (3)
Total$(289) $(305)


Earnings Per Share ("EPS")(EPS)


Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, 20172020 and 2016,2019, anti-dilutive shares excluded from the calculation of EPS were not material.


NOTE 9. OPERATING SEGMENT INFORMATION


Alaska Air Group has threetwo operating airlines—Alaska Virgin America and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carriers SkyWest, and PenAir, under which Alaska receives all passenger revenues.


Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker ("CODM")(CODM) in making resource allocation decisions.
21

Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three3 reportable operating segments:
•Mainline - includes Alaska's and Virgin America’s scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica and Cuba.
Rica.


•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs.a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.


The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the CompanyCompany's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.



22

Operating segment information is as follows (in millions):
Three Months Ended September 30, 2020
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues   
Passenger revenues$401 $171 $0 $0 $572 $0 $572 
CPA revenues0 0 95 (95)0 0 0 
Mileage Plan other revenue65 19 0 0 84 0 84 
Cargo and other45 0 0 0 45 0 45 
Total Operating Revenues511 190 95 (95)701 0 701 
Operating Expenses
Operating expenses, excluding fuel872 248 78 (97)1,101 46 1,147 
Economic fuel90 38 0 0 128 (3)125 
Total Operating Expenses962 286 78 (97)1,229 43 1,272 
Nonoperating Income (Expense)
Interest income8 0 0 (1)7 0 7 
Interest expense(28)0 (6)0 (34)0 (34)
Interest capitalized4 0 0 0 4 0 4 
Other - net4 0 0 1 5 0 5 
Total Nonoperating Income (Expense)(12)0 (6)0 (18)0 (18)
Income (Loss) Before Income Tax$(463)$(96)$11 $2 $(546)$(43)$(589)
Three Months Ended September 30, 2019
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues$1,850 $361 $0 $0 $2,211 $0 $2,211 
CPA revenues0 0 112 (112)0 0 0 
Mileage Plan other revenue107 11 0 0 118 0 118 
Cargo and other58 1 0 1 60 — 60 
Total Operating Revenues2,015 373 112 (111)2,389 0 2,389 
Operating Expenses
Operating expenses, excluding fuel1,226 275 94 (119)1,476 5 1,481 
Economic fuel411 75 0 0 486 0 486 
Total Operating Expenses1,637 350 94 (119)1,962 5 1,967 
Nonoperating Income (Expense)
Interest income17 0 0 (6)11 0 11 
Interest expense(18)0 (7)7 (18)0 (18)
Interest capitalized4 0 0 0 4 0 4 
Other - net(3)0 0 0 (3)0 (3)
Total Nonoperating Income (Expense)0 0 (7)1 (6)0 (6)
Income (Loss) Before Income Tax$378 $23 $11 $9 $421 $(5)$416 
 Three Months Ended September 30, 2017
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$1,562
 $—
 $—
 $—
 $1,562
 $—
 $1,562
Regional—
 262
 —
 —
 262
 —
 262
Total passenger revenues1,562
 262
 —
 —
 1,824
 —
 1,824
CPA revenues—
 —
 112
 (112) —
 —
 —
Freight and mail30
 1
 1
 —
 32
 —
 32
Other—net242
 21
 1
 —
 264
 —
 264
Total operating revenues1,834
 284
 114
 (112) 2,120
 —
 2,120
Operating expenses             
Operating expenses, excluding fuel1,077
 219
 105
 (112) 1,289
 24
 1,313
Economic fuel328
 45
 —
 —
 373
 (5) 368
Total operating expenses1,405
 264
 105
 (112) 1,662
 19
 1,681
Nonoperating income (expense)             
Interest income11
 —
 —
 (2) 9
 —
 9
Interest expense(23) —
 (4) 1
 (26) —
 (26)
Other5
 —
 —
 —
 5
 —
 5
Total Nonoperating income (expense)(7) —
 (4) (1) (12) —
 (12)
Income (loss) before income tax$422
 $20
 $5
 $(1) $446
 $(19) $427


 Three Months Ended September 30, 2016
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$1,073
 $—
 $—
 $—
 $1,073
 $—
 $1,073
Regional—
 249
 —
 —
 249
 —
 249
Total passenger revenues1,073
 249
 —
 —
 1,322
 —
��1,322
CPA revenues—
 —
 109
 (109) —
 —
 —
Freight and mail30
 1
 —
 —
 31
 —
 31
Other—net190
 21
 1
 1
 213
 —
 213
Total operating revenues1,293
 271
 110
 (108) 1,566
 —
 1,566
Operating expenses             
Operating expenses, excluding fuel727
 202
 99
 (109) 919
 22
 941
Economic fuel188
 34
 —
 —
 222
 3
 225
Total operating expenses915
 236
 99
 (109) 1,141
 25
 1,166
Nonoperating income (expense)             
Interest income7
 —
 —
 —
 7
 —
 7
Interest expense(7) —
 (2) (2) (11) —
 (11)
Other5
 —
 —
 1
 6
 —
 6
Total Nonoperating income (expense)5
 —
 (2) (1) 2
 —
 2
Income (loss) before income tax$383
 $35
 $9
 $—
 $427
 $(25) $402



 Nine Months Ended September 30, 2017
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$4,390
 $—
 $—
 $—
 $4,390
 $—
 $4,390
Regional—
 725
 —
 —
 725
 —
 725
Total passenger revenues4,390
 725
 —
 —
 5,115
 —
 5,115
CPA revenues—
 —
 317
 (317) —
 —
 —
Freight and mail84
 3
 1
 —
 88
 —
 88
Other—net708
 57
 3
 —
 768
 —
 768
Total operating revenues5,182
 785
 321
 (317) 5,971
 —
 5,971
Operating expenses             
Operating expenses, excluding fuel3,101
 625
 324
 (316) 3,734
 88
 3,822
Economic fuel924
 120
 —
 —
 1,044
 7
 1,051
Total operating expenses4,025
 745
 324
 (316) 4,778
 95
 4,873
Nonoperating income (expense)             
Interest income27
 —
 —
 (2) 25
 —
 25
Interest expense(68) —
 (9) —
 (77) —
 (77)
Other11
 —
 1
 —
 12
 —
 12
Total Nonoperating income (expense)(30) —
 (8) (2) (40) —
 (40)
Income (loss) before income tax1,127
 40
 (11) (3) 1,153
 (95) 1,058
 Nine Months Ended September 30, 2016
 Mainline Regional Horizon 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 Consolidated
Operating revenues             
Passenger             
Mainline$3,036
 $—
 $—
 $—
 $3,036
 $—
 $3,036
Regional—
 682
 —
 —
 682
 —
 682
Total passenger revenues3,036
 682
 —
 —
 3,718
 —
 3,718
CPA revenues—
 —
 322
 (322) —
 —
 —
Freight and mail79
 3
 —
 —
 82
 —
 82
Other—net546
 57
 3
 1
 607
 —
 607
Total operating revenues3,661
 742
 325
 (321) 4,407
 —
 4,407
Operating expenses             
Operating expenses, excluding fuel2,107
 580
 305
 (322) 2,670
 36
 2,706
Economic fuel512
 90
 —
 —
 602
 (9) 593
Total operating expenses2,619
 670
 305
 (322) 3,272
 27
 3,299
Nonoperating income (expense)             
Interest income19
 —
 1
 —
 20
 —
 20
Interest expense(23) —
 (7) (3) (33) —
 (33)
Other15
 —
 —
 4
 19
 —
 19
Total Nonoperating income (expense)11
 —
 (6) 1
 6
 —
 6
Income (loss) before income tax1,053
 72
 14
 2
 1,141
 (27) 1,114
(a)Includes consolidating entries, Parent Company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain income and charges.
(c)Includes merger-related costs and mark-to-market fuel-hedge accounting charges.


23


Nine Months Ended September 30, 2020
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues$1,860 $502 $0 $0 $2,362 $0 $2,362 
CPA revenues0 0 281 (281)0 0 0 
Mileage Plan other revenue219 47 0 0 266 0 266 
Cargo and other128 0 0 2 130 0 130 
Total Operating Revenues2,207 549 281 (279)2,758 0 2,758 
Operating Expenses
Operating expenses, excluding fuel2,777 727 238 (289)3,453 (83)3,370 
Economic fuel448 120 0 0 568 0 568 
Total Operating Expenses3,225 847 238 (289)4,021 (83)3,938 
Nonoperating Income (Expense)
Interest income33 0 0 (10)23 0 23 
Interest expense(58)0 (16)10 (64)0 (64)
Interest capitalized8 0 0 0 8 0 8 
Other - net16 0 0 0 16 0 16 
Total Nonoperating Income (Expense)(1)0 (16)0 (17)0 (17)
Income (Loss) Before Income Tax$(1,019)$(298)$27 $10 $(1,280)$83 $(1,197)
Nine Months Ended September 30, 2019
MainlineRegionalHorizon
Consolidating & Other(a)
Air Group Adjusted(b)
Special Items(c)
Consolidated
Operating Revenues
Passenger revenues$5,039 $999 $0 $0 $6,038 $0 $6,038 
CPA revenues0 0 340 (340)0 0 0 
Mileage Plan other revenue312 34 0 0 346 0 346 
Cargo and other163 2 1 3 169 0 169 
Total Operating Revenues5,514 1035 341 (337)6,553 0 6,553 
Operating Expenses
Operating expenses, excluding fuel3,545 817 286 (353)4,295 39 4,334 
Economic fuel1,191 218 0 0 1,409 (1)1,408 
Total Operating Expenses4,736 1,035 286 (353)5,704 38 5,742 
Nonoperating Income (Expense)
Interest income50 0 0 (19)31 0 31 
Interest expense(58)0 (22)20 (60)0 (60)
Interest capitalized11 0 0 0 11 0 11 
Other - net(20)0 0 0 (20)0 (20)
Total Nonoperating Income (Expense)(17)0 (22)1 (38)0 (38)
Income (Loss) Before Income Tax$761 $0 $33 $17 $811 $(38)$773 

(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain income and charges.
(c)Includes payroll support program grant wage offsets, special items and mark-to-market fuel hedge accounting adjustments.


24

Total assets were as follows (in millions):
September 30, 2020December 31, 2019
Mainline$20,586 $19,207 
Horizon1,231 1,266 
Consolidating & Other(7,068)(7,480)
Consolidated$14,749 $12,993 

25
 September 30, 2017 December 31, 2016
Mainline$16,382
 $15,260
Horizon914
 690
Consolidating & Other(6,557) (5,988)
Consolidated$10,739
 $9,962

NOTE 10. SUBSEQUENT EVENTS

On October 30, 2017, the Company received a final decision from a third-party arbitration panel on increased wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")(MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2019, and in Item 1A. "Risk Factors" of Part II of this Form 10-Q. This overview summarizes the MD&A, which includes the following sections:
 
•Third Quarter Review—highlights from the third quarter of 20172020 outlining some of the major events that happened during the period and how they affected our financial performance.
 
•Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2017.2020. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. As Virgin America was acquired on December 14, 2016, its financial and operational results are reflected in the three and nine months ended September 30, 2017 but not in the comparative prior period. However, for comparability purposes, we have added "Combined Comparative" information for the prior year, which is more fully described below. This section includes forward-looking statements regarding our view of the remainder of 2017. 
2020. 

•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.

THIRD QUARTER REVIEW

COVID-19 Impacts and Response

The impacts of COVID-19 on our business have been unprecedented, and have presented us with some of the greatest challenges in our 88-year history. The cancellation of large public events, suspension of business travel, closure of popular tourist destinations and implementation of stay-at-home orders throughout the country beginning in March 2020 has driven demand for air travel to historic lows.

Although we have seen slow improvements in demand through the second and third quarters of 2020 as daily passenger counts have grown from a low of 5,000 per day to approximately 40,000 in September, we remain well below prior-year traffic levels. Some targeted promotions, including a "Buy the Row" sale, have provided meaningful cash bookings and positive reactions from guests, indicating that there is underlying demand for air travel when the time is right. Based on several recent studies performed on the safety of air travel during the pandemic, we strongly believe air travel is, and has been, safe and we stand ready as our guests return to travel over the coming months.

However, as we expect recovery to be slow and we face the reality that our airlines are, and will be, significantly smaller than we were a year ago, we had to make the difficult decision to reduce our workforce at the end of the third quarter. We initiated various early-out and furlough mitigation programs for frontline work groups, as well as incentive leaves for Alaska pilots and aircraft mechanics. These leaves were accepted by approximately 4,000 employees, including over 600 employees volunteering for early-out separation from the Company. In addition, we reduced our non-union management positions by approximately 300 positions. As a result of these actions, we were able to reduce the number of involuntary furloughs to approximately 400. Costs of $322 million associated with these programs were recorded in the third quarter. We expect these workforce reductions will result in permanent annual savings of approximately $130 million.

These and other structural cost reduction measures are critical to reaching our monthly cash preservation goals. We believe getting to a zero cash burn position will be a leading indicator of industry health and recovery, and we believe we will be the first airline to reach this goal. Our capacity and cash bookings planning assumptions do not represent guidance, and we will adjust our plans if demand trends do not support these assumptions.

26


Looking forward, we are planning for capacity in the fourth quarter to be approximately 40% below the same period in 2019. We expect to see continued increases in passenger counts from the holiday travel season and as Hawai'i reopens to tourism travel. However, we do expect load factors to be in the range of 45% to 55% given our decision to block middle seats on the majority of our mainline flights through January 6, 2021.

THIRD QUARTER REVIEWCurrently, by the summer of 2021, our planning assumption is that capacity will be approximately 80% of the summer of 2019. Although, that is subject to change given the ever-changing dynamic of the COVID-19 pandemic and the demand for air travel. We will remain flexible as the situation changes and are committed to take advantage of opportunities that may arise as the industry begins to recover.


Maintaining a significant liquidity balance is also paramount to preserving our financial strength. In addition to the $1 billion in CARES Act funding obtained in the second quarter of 2020, we have also sourced $589 million in secured financing, drawn $400 million from our existing credit facilities, and issued $1.2 billion in EETCs. We also have available to us $1.9 billion in CARES Act loans, from which we have drawn $135 million to support general business operations. As of November 3, 2020, our cash and marketable securities balance was approximately $3.5 billion.

Guest and employee safety

Our commitment to the health and safety of our guests and employees remains our top priority. In response to the crisis, we have partnered with experts to build our Next-Level Care initiative. In doing so, we have added layers of safety with over 100 safety measures through all stages of travel. Some examples of measures that are helping our guests build confidence include:

•Making the pre-flight experience as contactless as possible, including the addition of a health agreement during check-in;

•Requiring masks for both guests aged 2 and older and employees, and empowering our crews to enforce the policy with the ability to issue a formal warning to any guest who refuses to do so;

•Using the latest air filtration technology and hospital grade filters to remove particulates and fully recycle air in the cabin every 2 to 3 minutes;

•Exceeding CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmission on board, and;

•Providing for adequate social distancing in our airports and on-board, including blocking middle seats on mainline aircraft through January 6, 2021.

oneworld Invitation

In July 2020, we received our formal invitation to join the oneworld alliance. Upon entrance to the alliance, Alaska guests will be able to access the full range of customer services and benefits, and Mileage Plan members will be able to earn and redeem rewards on all oneworld member airlines. The Company is working to accelerate its timeline for entrance into the alliance, with a focus on completion by the end of the first quarter of 2021.

Financial Overview

Our consolidated pretax incomeloss was $427$589 million during the third quarter of 2017,2020, compared to $402pretax profit of $416 million in the third quarter of 2016.2019. The increaseshift to pretax loss was driven primarily by a decrease in pretax income of $25 million was primarily driven by an increase inoperating revenues of $554$1.7 billion stemming from the sharp decline in demand, $322 million partiallyin restructuring costs, and $121 million in special charges from asset impairment, offset by a $372 million increasedecrease in non-fuel expense andoperating expenses of $334 million, including wage offsets from the payroll support program of the CARES Act of $398 million. Pretax loss was also offset by a $143 million increasedecrease in fuel expense.expense of $361 million.


As we completed the acquisition of Virgin America on December 14, 2016, our results of operations for the three months ended September 30, 2017 include those of Virgin America and the impact of purchase accounting. Our results of operations for the three months ended September 30, 2016 do not include those of Virgin America.

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



Operations Performance

During A glossary of financial terms can be found at the third quarter of 2017, our on-time performance was 85.0% for Alaska, 73.3% for Virgin America and 78.6% for Horizon. Air traffic control issues and airport runway construction have negatively impacted our on-time performance, particularly in Seattle, Los Angeles, and San Francisco where we have a large concentration of flights. While these challenges negatively impact all airlines that operate in the affected markets, we plan to continue working to mitigate the impact in 2018. Additionally, pilot shortages at Horizon resulted in approximately 1,300 canceled flights and a reduction in scheduled service into the fourth quarter and early 2018. As a result of these adjustments to the flight schedule and our recent pilot hiring efforts, we anticipate that operational headwinds will be behind us by year end.

New Markets

We launched 20 new routes during the quarter, which is the most we have ever launched in one quarter. In total, we have announced approximately 40 new markets since the acquisition of Virgin America as we begin to realize the network and revenue synergies from bringing our two airlines together.

Shareholder Return

During the third quarter of 2017, we paid cash dividends of $37 million and repurchased 355,415 shares for $28 million. Subsequent to September 30, 2017, we repurchased an additional 369,182 shares for $25 million.

Labor Update

Each of our represented groups, other than aircraft technicians, has been certified by the National Mediation Board as having single carrier status which allows for Virgin America teammates to be represented by unions that currently represent Alaska's work groups and enables work toward single collective bargaining agreements.

We were not able to come to an agreement during negotiations or mediation with our pilots, so Alaska and the Air Line Pilots Association presented their respective positions to a third-party arbitration panel during the third quarter. On October 30, 2017, we received a decision from the arbitration panel on new wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America. This award is binding and is effective November 1, 2017. The wage rates equate to an approximately 33% increase for top-of-scale captains at Virgin America and approximately 16% for top-of-scale captains at Alaska Airlines with a 3% increase in rates effective April 1, 2018 and April 1, 2019.

The decision increases contribution rates for pilots in defined contribution only retirement plans from 13.5% at Alaska and 12% at Virgin America to 15% effective immediately and to 15.5% effective January 1, 2019.

We estimate the impactend of this new contract over the status quo to be an incremental cost of approximately $24 million for the remainder of 2017, $150 million in 2018, and $180 million in 2019. Over the life of the contract, the average annualized impact is approximately $160 million to $165 million compared to the $140 million estimate of our proposal at arbitration.Item 2.


Outlook

We completed the acquisition of Virgin America on December 14, 2016, positioning us as the fifth largest airline in the U.S. with a unique ability to serve West Coast travelers. The acquisition of Virgin America provides a platform for growth of our low-fare, premium product, a powerful West Coast network for our guests and enhanced international partnerships. Additionally, Virgin America provides access to constrained gates, particularly on the East Coast, creating increased utility for our guests.



We are focused on the successful integration of Virgin America, which includes obtaining a Single Operating Certificate ("SOC") in early 2018 and a single Passenger Service System ("PSS"), or more commonly known as the reservations system, in the second quarter of 2018. The single PSS has been accelerated from later in 2018 and is expected to bring forward approximately $20 million of revenue synergies into 2018. Our priority throughout the integration process is to run our airlines well and maintain a safe, compliant and low-cost operation, while providing a remarkable experience for our guests. The combined airline will adopt Alaska’s name and logo, retiring the Virgin America name sometime in late 2019. Over the next several months we will focus on enhancing our guest experience and will adopt certain aspects of Virgin America’s brand elements, including enhanced inflight connectivity, inflight entertainment content, mood lighting, music and the relentless desire to make flying a different experience for guests. We will continue to enhance our fresh, healthy, West Coast-inspired onboard food and beverage menus and expect our First Class guests on Alaska will be able to pre-select meals before they fly starting this year. Alaska’s main cabin guests will also be able to pre-pay for their meals in advance in 2018, with Airbus flights soon to follow. Our onboard Free Chat service and free entertainment was added to Airbus flights in August 2017. We also plan to expand the premium class offering on our Airbus fleet beginning in 2018 and have our entire fleet equipped with high-speed satellite Wi-Fi by early 2020. 

In January 2018, Alaska Mileage Plan™ will become our sole loyalty program, offering guests more rewards, an expansive global partner network and the only major airline loyalty program that still rewards a mile flown with a mile earned on Alaska and Virgin America flights. 

We intend to minimize any disruption to our guests during the integration efforts by being transparent about the progress we are making and how the changes may affect them. Employee engagement throughout the integration will remain a top priority as well, ensuring that employees remain engaged, informed and excited about the changes. We remain focused on capturing the value and synergies created by combining these two great airlines.

Currently, we expect to grow our combined network capacity in 2017 by 7.2%. The growth rate compares 2017 system-wide capacity to historical Air Group and Virgin America combined capacity in 2016. Current schedules indicate competitive capacity will increase by approximately 5% in the fourth quarter of 2017, and approximately 9% in the first quarter of 2018. We believe that our product, our operation, our low-cost structure, our engaged employees, our award-winning service, and our award-winning Mileage Plan™ program, combined with our strong balance sheet, give us the ability to compete effectively in our markets.

Our current expectations for capacity and CASM excluding fuel and special items for the remainder of 2017 are summarized below. These expectations are from a "Combined Comparative" perspective, calculated as the sum of historical results for Alaska Air Group and Virgin America for the 2016 comparative periods:
27
 Forecast
Q4 2017		 
Q4 2016 Combined Comparative(a)
% Change
Capacity (ASMs in millions)15,950 - 16,000 14,404~ 11%
Cost per ASM excluding fuel and special items (cents) 
8.50¢ - 8.55¢ 8.25¢~ 3%
Fuel gallons (millions)204 184~ 11%
Economic fuel cost per gallon$1.95 $1.66~ 17.5%

 Forecast
Full Year 2017		 
2016 Combined Comparative(a)
% Change
Capacity (ASMs in millions)62,130 - 62,160 57,953~ 7.2%
Cost per ASM excluding fuel and special items (cents)8.19¢ - 8.21¢ 8.04¢~ 2%
Fuel gallons (millions)795 739~ 7.5%
Economic fuel cost per gallon$1.81 $1.54~ 17.5%
(a)
Refer to our Investor Update issued on October 25, 2017 on Form 8-K for further details of the calculation of the three and twelve months ended December 31, 2016 combined data.

We currently expect capacity growth of approximately 8% for the full year 2018. We expect unit costs to increase in 2018. This increase is driven by increases in pilot wages as a result of the pilot arbitration decision, a new engine services deal, our growing mix of regional flying, and continued costs associated with the integration.

RESULTSOF OPERATIONS


ADJUSTED (NON-GAAP) RESULTS ANDPER-SHARE AMOUNTS


We believe disclosure of earnings excluding the impact of the payroll support program grant wage offset, impairment and other charges, merger-related costs, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:


•By excluding fuel expense and certain special items (including the payroll support program grant wage offset, impairment and restructuring charges and merger-related costs) from our unit metrics, we believe it provides managementthat we have better visibility into the results of operations and our non-fuel cost initiatives.as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers, such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.


•Cost per ASM ("CASM")(CASM) excluding fuel and certain special items, such as the payroll support program grant wage offset, impairment and restructuring charges and merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.


•Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee annual cash incentive plan, which covers the majority of employees within the Air Group employees.organization.


•CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they comparehave historically compared our airlinesairline to others in the industry. The measure is also the subject of frequent questions from investors.




•Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certainthese items such as merger-related costs and mark-to-market hedging adjustments,noted above is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.


•Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.


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

28


OPERATING STATISTICS SUMMARY (unaudited)
AsBelow are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
Three Months Ended September 30,Nine Months Ended September 30,
20202019Change20202019Change
Consolidated Operating Statistics:(a)
Revenue passengers (000)3,59512,574(71.4)%14,01235,018(60.0)%
RPMs (000,000) "traffic"3,81715,026(74.6)%16,12742,113(61.7)%
ASMs (000,000) "capacity"7,87117,519(55.1)%27,48350,006(45.0)%
Load factor48.5%85.8%(37.3) pts58.7%84.2%(25.5) pts
Yield14.99¢14.71¢1.9%14.65¢14.34¢2.1%
RASM8.90¢13.64¢(34.8)%10.04¢13.10¢(23.4)%
CASM excluding fuel and special items(b)
14.00¢8.43¢66.1%12.57¢8.59¢46.3%
Economic fuel cost per gallon(b)
$1.32$2.13(38.0)%$1.65$2.18(24.3)%
Fuel gallons (000,000)97227(57.4)%344646(46.7)%
ASMs per fuel gallon81.377.25.3%79.977.43.2%
Average full-time equivalent employees (FTEs)16,02722,247(28.0)%18,11222,000(17.7)%
Mainline Operating Statistics:
Revenue passengers (000)2,1569,655(77.7)%9,73626,725(63.6)%
RPMs (000,000) "traffic"2,95813,538(78.2)%13,81637,917(63.6)%
ASMs (000,000) "capacity"6,28015,702(60.0)%23,33944,816(47.9)%
Load factor47.1%86.2%(39.1) pts59.2%84.6%(25.4) pts
Yield13.56¢13.66¢(0.7)%13.46¢13.29¢1.3%
RASM8.14¢12.83¢(36.6)%9.46¢12.30¢(23.1)%
CASM excluding fuel and special items(b)
13.88¢7.81¢77.7%11.90¢7.91¢50.4%
Economic fuel cost per gallon(b)
$1.31$2.13(38.5)%$1.66$2.17(23.5)%
Fuel gallons (000,000)69193(64.2)%270549(50.8)%
ASMs per fuel gallon91.081.411.8%86.481.65.9%
Average FTEs12,03216,789(28.3)%13,73016,599(17.3)%
Aircraft utilization7.311.3(35.4)%8.310.9(23.9)%
Average aircraft stage length1,2441,281(2.9)%1,2631,298(2.7)%
Operating fleet(d)
217238(21) a/c217238(21) a/c
Regional Operating Statistics:(c)
Revenue passengers (000)1,4392,919(50.7)%4,2768,293(48.4)%
RPMs (000,000) "traffic"8591,488(42.3)%2,3114,196(44.9)%
ASMs (000,000) "capacity"1,5921,817(12.4)%4,1435,190(20.2)%
Load factor54.0%81.9%(27.9 pts)55.8%80.8%(25.0 pts)
Yield19.89¢24.23¢(17.9)%21.72¢23.81¢(8.8)%
RASM11.91¢20.51¢(41.9)%13.24¢19.93¢(33.6)%
Operating fleet9494— a/c9494— a/c
(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)See reconciliation of this non-GAAP measure to the acquisition closed on December 14, 2016, Consolidatedmost directly related GAAP measure in the accompanying pages.
(c)Data presented includes information related to flights operated by Horizon and Mainline amounts presented below include Virgin America results forthird-party carriers.
(d)Excludes 20 Airbus aircraft permanently parked in the three andfirst nine months ended September 30, 2017 and not for the prior period.of 2020.

29
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 
Change(d)
 2017 2016 
Change(d)
Consolidated Operating Statistics:(a)
           
Revenue passengers (000)11,645 9,054 28.6% 33,063 25,536 29.5%
RPMs (000,000) "traffic"13,811 9,601 43.8% 39,073 27,569 41.7%
ASMs (000,000) "capacity"16,164 11,212 44.2% 46,170 32,728 41.1%
Load factor85.4% 85.6% (0.2) pts 84.6% 84.2% 0.4 pts
Yield13.21¢ 13.77¢ (4.1)% 13.09¢ 13.49¢ (3.0)%
PRASM11.29¢ 11.79¢ (4.2)% 11.08¢ 11.36¢ (2.5)%
RASM13.12¢ 13.97¢ (6.1)% 12.93¢ 13.47¢ (4.0)%
CASM excluding fuel and special items(b)
7.98¢ 8.20¢ (2.7)% 8.09¢ 8.16¢ (0.9)%
Economic fuel cost per gallon(b)
$1.80 $1.58 13.9% $1.76 $1.47 19.7%
Fuel gallons (000,000)207 140 47.9% 592 410 44.4%
ASMs per fuel gallon78.1 80.1 (2.5)% 78.0 79.8 (2.3)%
Average full-time equivalent employees (FTEs)20,743 14,674 41.4% 19,723 14,500 36.0%
Mainline Operating Statistics:           
Revenue passengers (000)9,142 6,507 40.5% 25,875 18,432 40.4%
RPMs (000,000) "traffic"12,694 8,595 47.7% 36,046 24,767 45.5%
ASMs (000,000) "capacity"14,796 9,987 48.2% 42,398 29,216 45.1%
Load factor85.8% 86.1% (0.3) pts 85.0% 84.8% 0.2 pts
Yield12.31¢ 12.49¢ (1.4)% 12.18¢ 12.26¢ (0.7)%
PRASM10.56¢ 10.75¢ (1.8)% 10.36¢ 10.39¢ (0.3)%
RASM12.40¢ 12.96¢ (4.3)% 12.22¢ 12.53¢ (2.5)%
CASM excluding fuel and special items(b)
7.28¢ 7.28¢ —% 7.32¢ 7.21¢ 1.5%
Economic fuel cost per gallon(b)
$1.79 $1.57 14.0% $1.76 $1.46 20.5%
Fuel gallons (000,000)183 119 53.8% 526 350 50.3%
ASMs per fuel gallon80.9 83.9 (3.6)% 80.6 83.5 (3.5)%
Average FTEs15,862 11,397 39.2% 15,439 11,260 37.1%
Aircraft utilization11.4 10.6 7.5% 11.1 10.7 3.7%
Average aircraft stage length1,300 1,203 8.1% 1,296 1,218 6.4%
Operating fleet218 154 64 a/c 218 154 64 a/c
Regional Operating Statistics:(c)
           
Revenue passengers (000)2,503 2,547 (1.7)% 7,188 7,105 1.2%
RPMs (000,000) "traffic"1,117 1,006 11.0% 3,027 2,801 8.1%
ASMs (000,000) "capacity"1,368 1,225 11.7% 3,772 3,512 7.4%
Load factor81.7% 82.1% (0.4 pts) 80.2% 79.8% 0.4 pts
Yield23.48¢ 24.75¢ (5.1)% 23.95¢ 24.35¢ (1.6)%
PRASM19.17¢ 20.32¢ (5.7)% 19.22¢ 19.43¢ (1.1)%
Operating fleet83 69 14 a/c 83 69 14 a/c
(a)

Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)
See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.
(c)
Data presented includes information related to flights operated by Horizon and third-party carriers.
(d)
See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.


COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 20172020 TO THREE MONTHS ENDED SEPTEMBER 30, 20162019


Our consolidated net incomeloss for the three months ended September 30, 20172020 was $266$431 million, or $2.14$3.49 per diluted share, compared to net income of $256$322 million, or $2.07$2.60 per diluted share, for the three months ended September 30, 2016. As the acquisition of Virgin America closed on December 14, 2016, our financial results include results of Virgin America for the three months ended September 30, 2017, but not for the comparable prior period.2019.


Excluding the impact of merger-related coststhe payroll support program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net incomeloss for the third quarter of 20172020 was $278$399 million, or $2.24$3.23 per diluted share, compared to an adjusted net income of $272$326 million, or $2.20$2.63 per diluted share, in the third quarter of 2016.2019. The following tables reconcile our adjusted net income and adjusted earnings per diluted share ("EPS")(EPS) to amounts as reported in accordance with GAAP:

 Three Months Ended September 30,
 2017 2016
(in millions, except per share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$266
 $2.14
 $256
 $2.07
Mark-to-market fuel hedge adjustments(5) (0.04) 3
 0.02
Special items—merger-related costs24
 0.20
 22
 0.18
Income tax effect on special items and fuel hedge adjustments(7) (0.06) (9) (0.07)
Non-GAAP adjusted net income and diluted EPS$278
 $2.24
 $272
 $2.20
 Three Months Ended September 30,
 20202019
(in millions, except per share amounts)DollarsDiluted EPSDollarsDiluted EPS
GAAP net income (loss) and diluted EPS$(431)$(3.49)$322 $2.60 
Payroll support program grant wage offset(398)(3.22)— — 
Mark-to-market fuel hedge adjustments(3)(0.02)— — 
Special items - impairment charges and other121 0.98 — — 
Special items - merger-related costs1 0.01 5 0.04 
Special items - restructuring charges322 2.60 — — 
Income tax effect of reconciling items above(11)(0.09)(1)(0.01)
Non-GAAP adjusted net income (loss) and diluted EPS$(399)$(3.23)$326 $2.63 


CASM reconciliation is summarized below:
 Three Months Ended September 30,
(in cents)20202019% Change
Consolidated:
CASM16.16 ¢11.23 ¢44 %
Less the following components:
Payroll support program grant wage offset(5.06)— NM
Aircraft fuel, including hedging gains and losses1.59 2.77 (43)%
Special items - merger-related costs0.01 0.03 (67)%
Special items - impairment charges and other1.53 — NM
Special items - restructuring charges4.09 — NM
CASM excluding fuel and special items14.00 ¢8.43 ¢66 %
Mainline:
CASM16.80 ¢10.46 ¢61 %
Less the following components:
Payroll support program grant wage offset(5.56)— NM
Aircraft fuel, including hedging gains and losses1.43 2.62 (45)%
Special items - merger-related costs0.02 0.03 (33)%
Special items - impairment charges and other1.93 — NM
Special items - restructuring charges5.10 — NM
CASM excluding fuel and special items13.88 ¢7.81 ¢78 %

30

 Three Months Ended September 30,
(in cents)2017 2016 % Change
Consolidated:     
CASM
10.40¢ 
10.40¢ — %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.27
 2.01
 12.9 %
Special items—merger-related costs0.15
 0.19
 (21.1)%
CASM excluding fuel and special items
7.98¢ 
8.20¢ (2.7)%
      
Mainline:     
CASM
9.63¢ 
9.41¢ 2.3 %
Less the following components:   
  
Aircraft fuel, including hedging gains and losses2.19
 1.91
 14.7 %
Special items—merger-related costs0.16
 0.22
 (27.3)%
CASM excluding fuel and special items
7.28¢ 
7.28¢ — %

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The discussion below includes "Combined Comparative" results for the three months ended September 30, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America's financial information has been conformed to reflect Air Group's historical financial statement presentation. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.



COMBINED COMPARATIVE OPERATING STATISTICS
 Three Months Ended September 30,
 2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:         
Revenue passengers (in 000)11,645 9,054 2,175 11,229 3.7%
RPMs (in 000,000)13,811 9,601 3,321 12,922 6.9%
ASMs (in 000,000)16,164 11,212 3,867 15,079 7.2%
Load Factor85.4% 85.6% (a) 85.7% (0.3) pts
PRASM11.29¢ 11.79¢ (a) 11.43¢ (1.2)%
RASM13.12¢ 13.97¢ (a) 13.34¢ (1.6)%
CASMex7.98¢ 8.20¢ (a) 7.90¢ 1.0%
FTEs20,743 14,674 2,888 17,562 18.1%
          
Mainline:         
RPMs (in 000,000)12,694 8,595 3,321 11,916 6.5%
ASMs (in 000,000)14,796 9,987 3,867 13,854 6.8%
Load Factor85.8% 86.1% (a) 86.0% (0.2) pts
PRASM10.56¢ 10.75¢ (a) 10.65¢ (0.8)%
(a)
2016 Combined operating statistics have been recalculated using the combined results.

COMBINED COMPARATIVE OPERATING REVENUES


Total operating revenues increased $554 million,decreased $1.7 billion, or 35%71%, during the third quarter of 20172020 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $108 million or 5%.2019. The changes including the reconciliation of the impact of Virgin America on the comparative results, are summarized in the following table:
Three Months Ended September 30,
(in millions)20202019% Change
Passenger revenue$572 $2,211 (74)%
Mileage Plan other revenue84 118 (29)%
Cargo and other45 60 (25)%
Total operating revenues$701 $2,389 (71)%
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Passenger           
Mainline$1,562
 $1,073
 $402
 $1,475
 $87
 5.9%
Regional262
 249
 —
 249
 13
 5.2%
Total passenger revenue1,824
 1,322
 402
 1,724
 100
 5.8%
Freight and mail32
 31
 —
 31
 1
 3.2%
Other—net264
 213
 44
 257
 7
 2.7%
Total operating revenues$2,120
 $1,566
 $446
 $2,012
 $108
 5.4%


Passenger Revenue—MainlineRevenue


On a consolidated basis, Mainline passengerPassenger revenue for the third quarter of 2017 increased2020 decreased by $489 million,$1.6 billion, or 46%74%, on a 48% increase75% decline in capacitytraffic. Decreased revenue year-over-year is driven by the acquisitionsignificant ongoing reductions in demand caused by the COVID-19 pandemic. Impacts to demand began in March 2020, and continued through the third quarter. Although third quarter results show sequential improvement from the prior quarter as more guests return to flying, capacity was reduced 55% of Virgin America, partially offset bythat flown in the third quarter of 2019, with a 2% decrease37 point reduction in unit revenues. system-wide load factors.

Mileage Plan other revenue

On a Combined Comparativeconsolidated basis, Mainline passengerMileage Plan other revenue decreased $34 million, or 29%, as compared to the same prior-year period primarily on a reduction in miles purchased by our affinity card partner, consistent with an overall reduction in consumer spending.

Cargo and Other Revenue

On a consolidated basis, Cargo and other revenue for the third quarter of 2017 increased2020 decreased by 6%$15 million, or 25%, due to a 7% increase in capacity, slightly offset by a 1% decrease in unit revenuesas compared to the combined third quarter of 2016.same prior-year period. The increase in capacity wasdecrease is primarily due to reduced belly cargo activity driven by ourthe schedule reductions for passenger aircraft, as well as continued network expansion and aircraft added to our fleet since the third quarter of 2016. The decrease in PRASM was driven by decreased load factors coupled with lower ticket yields. The lower yields were impacted by our new market growth and by competitor pricing actions felt more acutelycapacity limitations in our California markets.freighters due to design issues that we are working to address with our third-party vendor.


Passenger Revenue—RegionalOPERATING EXPENSES


Regional passenger revenue increased 5%Total operating expenses decreased $695 million, or 35%, compared to the third quarter of 2016 primarily, driven by a 12% increase in capacity. The increase in capacity was offset by a 6% decrease in PRASM. The decrease in Regional PRASM was largely driven by growth and competitive pricing actions. The operational challenges at Horizon, due in large part to a shortage of pilot


s, resulted in a significant number of flight cancellations that led us to either refund or re-accommodate passengers. We estimate these cancellations resulted in lost revenues for Air Group of approximately $25 million to $30 million.

Other—Net

Other—net revenue increased $51 million, or 24%, from the third quarter of 2016. Frequent flyer revenue contributed $15 million of the increase, primarily driven by a significant increase in miles sold to our affinity credit card partner in the Mileage Plan program. The remainder of the increase was due to higher ancillary revenues. On a Combined Comparative basis, Other—net revenue increased $7 million, or 3%.

COMBINED COMPARATIVE OPERATING EXPENSES

Total operating expenses increased $515 million, or 44%, compared to the third quarter of 2016. On a Combined Comparative basis, total operating expenses increased $159 million, or 10%.2019. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
 Three Months Ended September 30,
(in millions)20202019% Change
Fuel expense$125 $486 (74)%
Non-fuel operating expenses, excluding special items1,101 1,476 (25)%
Payroll support program grant wage offset(398)— NM
Special items - merger-related costs1 5 (80)%
Special items - impairment charges and other121 — NM
Special items - restructuring charges322 — NM
Total operating expenses$1,272 $1,967 (35)%

31
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Fuel expense$368
 $225
 $81
 $306
 $62
 20.3%
Non-fuel expenses1,289
 919
 273
 1,192
 97
 8.1%
Special items—merger-related costs24
 22
 2
 24
 —
 —%
Total operating expenses$1,681
 $1,166
 $356
 $1,522
 $159
 10.4%


Fuel Expense


Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our consolidated statement of operations as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S.  Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.


Aircraft fuel expense increased $143decreased $361 million, or 64%74%, compared to the third quarter of 2016. On a Combined Comparative basis, aircraft fuel expense increased $62 million or 20%.2019. The elements of the change are illustrated in the following table: 
Three Months Ended September 30,
20202019
(in millions, except for per gallon amounts)Dollars Cost/GalDollars Cost/Gal
Raw or "into-plane" fuel cost$123 $1.27 $481 $2.11 
Losses on settled hedges5 0.05 5 0.02 
Consolidated economic fuel expense128 1.32 $486 $2.13 
Mark-to-market fuel hedge adjustments(3)(0.03)— — 
GAAP fuel expense$125 $1.29 $486 $2.13 
Fuel gallons97 227 
 Three Months Ended September 30,
 2017 2016 as Reported 2016 Combined
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$368
 $1.78
 $218
 $1.55
 $298
 $1.54
Losses on settled hedges5
 0.02
 4
 0.03
 5
 0.03
Consolidated economic fuel expense373
 1.80
 222
 1.58
 $303
 $1.57
Mark-to-market fuel hedge adjustments(5) (0.02) 3
 0.02
 3
 0.02
GAAP fuel expense$368
 $1.78
 $225
 $1.60
 $306
 $1.59
Fuel gallons207
   140
   192
  


On a Combined Comparative basis, rawRaw fuel expense per gallon for the three months ended September 30, 2017 increased2020 decreased by 16%approximately 40% due to higherlower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil as well asand refining margins associated with the conversion of crude oil to jet fuel. The increasedecrease in raw fuel price per gallon during the third quarter of 20172020 was primarily driven by a 76% increase in refining margins and an 8% increase27% decrease in crude oil prices and a 79% decrease in refining margins, when compared to the prior year. Fuel gallons consumed increasedCrude oil prices have been dramatically impacted by 15the COVID-19 pandemic and the related reduction in demand. The decrease is also due to a year-over-year decline in consumption of 130 million gallons, or 8%57%, primarily on a significant reduction in line with the increase in capacity.scheduled departures.

We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A


key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business becauseas it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.


WeLosses recognized total losses of $5 million and $4 million for hedges that settled during the third quarter were $5 million in 2020, compared to losses of 2017 and 2016 as reported.$5 million in the same period in 2019. These amounts represent the netcash received from hedges at settlement, offset by cash paid including thefor premium expense recognized for those hedges.expense.


Non-fuel Expenses and Non-special Items


The table below provides the reconciliation of the impact of Virgin America on the comparative results for each of our operating expense line items, excluding fuel, the payroll support program grant wage offset and special items. Significant operating expense variances from 20162019 are more fully described below.
32

Three Months Ended September 30, Change Three Months Ended September 30,
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined(in millions)20202019% Change
Wages and benefits$475
 $340
 $72
 $412
 $63
 15.3 %Wages and benefits$495 $608 (19)%
Variable incentive pay40
 31
 11
 42
 (2) (4.8)%Variable incentive pay42 46 (9)%
Aircraft maintenance88
 64
 17
 81
 7
 8.6 %Aircraft maintenance84 106 (21)%
Aircraft rent70
 25
 48
 73
 (3) (4.1)%Aircraft rent74 82 (10)%
Landing fees and other rentals124
 89
 28
 117
 7
 6.0 %Landing fees and other rentals109 143 (24)%
Contracted services76
 63
 16
 79
 (3) (3.8)%Contracted services36 72 (50)%
Selling expenses91
 58
 34
 92
 (1) (1.1)%Selling expenses24 77 (69)%
Depreciation and amortization95
 101
 11
 112
 (17) (15.2)%Depreciation and amortization105 106 (1)%
Food and beverage service50
 31
 13
 44
 6
 13.6 %Food and beverage service14 57 (75)%
Third-party regional carrier expense30
 25
 —
 25
 5
 20.0 %Third-party regional carrier expense29 42 (31)%
Other150
 92
 23
 115
 35
 30.4 %Other89 137 (35)%
Total non-fuel and non-special operating expenses$1,289
 $919
 273
 1,192
 97
 8.1 %
Total non-fuel operating expenses, excluding special itemsTotal non-fuel operating expenses, excluding special items$1,101 $1,476 (25)%


Wages and Benefits


Wages and benefits increaseddecreased during the third quarter of 20172020 by $135 million, or 40%. On a Combined Comparative basis, total wages and benefits increased by $63$113 million, or 15%.19%, compared to 2019. The primary components of wagesWages and benefits including a reconciliation of 2016 on a Combined Comparative basis, are shown in the following table:
 Three Months Ended September 30,
(in millions)20202019% Change
Wages$356 $460 (23)%
Pension - Defined benefit plans service cost11 10 10 %
Defined contribution plans28 34 (18)%
Medical and other benefits75 71 6 %
Payroll taxes25 33 (24)%
Total wages and benefits$495 $608 (19)%
 Three Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages$358
 $250
 $58
 $308
 $50
 16.2%
Pension—Defined benefit plans8
 6
 —
 6
 2
 33.3%
Defined contribution plans25
 16
 5
 21
 4
 19.0%
Medical and other benefits59
 50
 6
 56
 3
 5.4%
Payroll taxes25
 18
 3
 21
 4
 19.0%
Total wages and benefits$475
 $340
 $72
 $412
 $63
 15.3%


OnWages decreased $104 million, or 23%, on a Combined Comparative basis, wages increased 16% with an 18% increase28% reduction in FTEs. The increase in FTEsdecrease is attributableprimarily due to voluntary leaves of absence, with an average of 4,600 employees on leave throughout the growth in our business,quarter, as well as reductions in executive pay and hours for management employees, and reducing represented employees work hours to minimums. Reduced employee wages directly correlate with the growthreduction in McGee Air Services which has brought certain airport ground service positions in-house that were previously reflected in our Contracted services expense. Additionally, irregular operationsretirement contributions and flight cancellationspayroll taxes.

Variable Incentive Pay

Variable incentive pay expense decreased $4 million, or 9%, during the third quarter resulted in significant overtime for our customer service agents and reservations agents.



Depreciation and Amortization

Depreciation and amortization expense decreased by $6 million, or 6%, during the third quarter of 20172020 compared to the same period in 2016. On2019, due to the expectation that key financial metrics will not be achieved under the performance based pay program. The decrease was offset by the recognition of nine months of expense for a Combined Comparative basis, depreciationsupplemental incentive pay plan, which was approved in July 2020, and amortizationincreased operational bonuses as compared to the prior year.

Aircraft Maintenance

Aircraft maintenance expense decreased by $17$22 million, or 15%. This decrease was primarily driven by a change in the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016, partially offset by aircraft additions since September 30, 2016.

Other Operating Expenses
Other operating expenses increased by $58 million, or 63%21%, during the third quarter of 20172020 compared to the same period in 2016. On a Combined Comparative basis, other operating expenses increased by $35 million, or 30%.2019. The increasedecrease is primarily due to additionalfewer engine events and heavy checks as compared to the prior year, as well as lower power-by-the-hour expense on reduced third quarter utilization of covered aircraft. These decreases were offset by penalties accrued for failure to meet minimum obligations under certain contracts and costs incurred for crew hotel costs, passenger disruption costs, training costs for front-line employees, scrapped parts inventory,in the temporary grounding of certain aircraft, although we are currently in negotiations with these service providers with respect to these penalties.

33

Landing fees and certain information technology costs. These increases were largely drivenother rentals

Landing fees and other rentals decreased by the growth in our business and increased costs from flight cancellations and delays$34 million, or 24%, during the quarter. .

Nonoperating Income (Expense)

During the third quarter of 2017 we recorded nonoperating expense of $12 million2020 compared to income of $2 million in the same period in 2016. On2019 on a Combined Comparative basis, nonoperating45% decrease in departures. Decreased departure-related costs were offset by rate increases at many of our airports.

Contracted Services

Contracted services decreased by $36 million, or 50%, during the third quarter of 2020 compared to the same period in 2019 driven primarily by decreased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.

Selling Expense

Selling expense increaseddecreased by $9$53 million, or 69%, during the third quarter of 2020 compared to the same period in 2019, primarily driven by a significant reduction in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs also contributed to the year-over-year decline given the renegotiation of certain contracts.

Food and Beverage Service

Food and beverage service decreased by $43 million, or 75%, during the third quarter of 2020 compared to the same period in 2019. This decrease is consistent with the overall reduction in revenue passengers as compared to the prior-year period, as well as the temporary closure of the majority of our airport lounges and temporary elimination of buy-on-board service.

Third-party Regional Carrier Expense

Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, decreased by $13 million, or 31%, during the third quarter of 2020 compared to the same period in 2019. The reduction in expense is primarily due to interest expense incurreda 11% reduction in departures flown by SkyWest as compared to the prior-year period, a reduction in departure-related contractual rates, and the elimination of PenAir flying.

Special Items - Impairment and other charges

We recorded impairment and other charges of $121 million in the current yearthird quarter of 2020, consisting of the impairment for ten owned Airbus aircraft which are expected to be retired prior to the end of their originally anticipated useful life, eight of which have been permanently parked.

Special Items - Restructuring charges

We recorded restructuring charges of $322 million in the third quarter of 2020 relating to the right-sizing of our workforce as a result of decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for those pilots and mechanics on the debt issued in 2016 to finance the acquisition of Virgin America.incentive leaves, ongoing medical benefit coverage, and lump-sum termination payouts.


Additional Segment InformationADDITIONAL SEGMENT INFORMATION


Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.


Mainline


Mainline recorded adjusted pretax profit of $422 million in the third quarter of 2017 compared to $383 million in the third quarter of 2016. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $48 million. The table below provides the reconciliation of the impact of Virgin America on the comparative results for our Mainline segment, excluding merger-related costs and mark-to-market fuel-hedge accounting charges:
 Three Months Ended September 30,  
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Change
Mainline         
Operating revenues$1,834
 $1,293
 $446
 $1,739
 $95
Non-fuel, non-special operating expenses1,077
 727
 273
 1,000
 77
Economic fuel328
 188
 81
 269
 59
Operating income429
 378
 92
 470
 (41)
Nonoperating income (expense)(7) 5
 (5) —
 (7)
Pretax profit$422
 $383
 $87
 $470
 $(48)

The $48 million decrease in Combined Comparative pretax profit was primarily driven by a $77 million increase in non-fuel operating expenses and a $59 million increase in economic fuel cost, partially offset by a $95 million increase in operating revenues. The increase in non-fuel expense was primarily driven by higher wages to support our growth and higher other operating expenses as described above. The increase in economic fuel expense was driven by higher raw fuel costs and refining margins. The increase in operating revenues was primarily driven by higher capacity and an increase in frequent flyer revenue as described above.

Regional

Our Regional operations contributed a pretax profitloss of $20$463 million in the third quarter of 20172020, compared to $35a pretax profit of $378 million in the third quarter of 2016. 2019. The $841 million shift to pretax loss was primarily driven by a $1.4 billion decrease in Passenger revenues as a result of the COVID-19 pandemic, offset by a $354 million decrease in non-fuel operating costs and a $321 million decrease in economic fuel cost.

The decrease in pretax profit was attributable to higher non-fuel operating expense, due to increased capacity and the operational disruptions at Horizon duringMainline passenger revenue for the third quarter. Increased costs were partially offsetquarter of 2020 was primarily driven by a $13 million increase78% decline in traffic on a 60% decrease in capacity. The overall decreases in both traffic and capacity were driven by the significant reduction in demand as a result of the COVID-19 pandemic.

34

Non-fuel operating revenuesexpenses decreased significantly on cost savings driven by reduced variable costs on reduced capacity, as describedwell as decreased wages and benefits expense from voluntary leaves of absence and a reduction in Passenger Revenue—Regional.hours for management employees. Lower raw fuel prices, combined with a 64% decrease in gallons consumed, drove the decline in Mainline fuel expense.



Regional


Horizon

Horizon incurredRegional operations generated a pretax profitloss of $5$96 million in the third quarter of 20172020, compared to $9a pretax profit of $23 million in the third quarter of 2016.2019. The changeincrease in the pretax profitloss was attributable to a $183 million decline in operating revenues, partially offset by a $37 million decrease in fuel costs and an $27 million decrease in non-fuel operating expenses.

Regional passenger revenue decreased 53% compared to the third quarter of 2019, primarily driven by a $4 million increase42% decline in operating revenue, partially offsettraffic on a 12% decrease in capacity. The overall decrease in both traffic and capacity are driven by higher non-fuel operating expenses attributable to higher wage and pilot training expensethe significant reduction in demand as a result of the increaseCOVID-19 pandemic.

The decrease in FTEs, alongnon-fuel operating expenses is primarily due to the 12% decline in capacity, as well as a discontinuation of our partnership with other increased costs associated with flight cancellations duringPenAir for contract flying in the current quarter.    state of Alaska.


Horizon

Horizon achieved a pretax profit of $11 million in both the third quarter of 2020 and the third quarter of 2019. Profit recorded by Horizon in the third quarter is primarily the result of incremental flying as a proportion of overall Air Group capacity as compared to the prior year. Horizon revenues are recorded based upon purchased capacity, and are not impacted by changes to ticket prices and customer demand. Horizon profit is also the result of significant cost reduction efforts implemented in response to the COVID-19 pandemic.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 20172020 TO NINE MONTHS ENDED SEPTEMBER 30, 20162019


Our consolidated net incomeloss for the nine months ended September 30, 20172020 was $661$877 million, or $5.31$7.12 per diluted share, compared to net income of $700$588 million, or $5.63$4.74 per diluted share, for the nine months ended September 30, 2016. As the acquisition of Virgin America closed on December 14, 2016, our financial results include results of Virgin America2019.

Our adjusted net loss for the nine months ended September 30, 2017, but not for the prior periods.

Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, our adjusted net income for the nine months ended September 30, 20172020 was $721$940 million, or $5.79$7.63 per diluted share, compared to an adjusted net income of $717$617 million, or $5.77$4.97 per diluted share, in the nine months ended September 30, 2016.2019. The following tables reconcile our adjusted net income and adjusted diluted EPS to amounts as reported in accordance with GAAP:
Nine Months Ended September 30,
20202019
(in millions, except per share amounts)DollarsDiluted EPSDollarsDiluted EPS
Reported GAAP net income (loss) and diluted EPS$(877)$(7.12)$588 $4.74 
Payroll support program grant wage offset(760)(6.16)— — 
Mark-to-market fuel hedge adjustments— — (1)(0.01)
Special items - merger-related costs5 0.04 39 0.31 
Special items - impairment charges and other350 2.84 — — 
Special items - restructuring charges322 2.61 — — 
Income tax effect of reconciling items above20 0.16 (9)(0.07)
Non-GAAP adjusted net income (loss) and diluted EPS$(940)$(7.63)$617 $4.97 

35
 Nine Months Ended September 30,
 2017 2016
(in millions, except per share amounts)Dollars Diluted EPS Dollars Diluted EPS
Reported GAAP net income and diluted EPS$661
 $5.31
 $700
 $5.63
Mark-to-market fuel hedge adjustments7
 0.06
 (9) (0.07)
Special items—merger-related costs88
 0.70
 36
 0.29
Income tax effect on special items and fuel hedge adjustments(35) (0.28) (10) (0.08)
Non-GAAP adjusted net income and diluted EPS$721
 $5.79
 $717
 $5.77




Our operating costs per ASM are summarized below:
 Nine Months Ended September 30,
(in cents)20202019% Change
Consolidated:
CASM14.33 ¢11.48 ¢25 %
Less the following components:
Payroll support program grant wage offset(2.77)— NM
Aircraft fuel, including hedging gains and losses2.07 2.82 (27)%
Special items - merger-related costs0.02 0.08 (75)%
Special items - impairment charges and other1.27 — NM
Special items - restructuring charges1.17 — NM
CASM excluding fuel and special items12.57 ¢8.59 ¢46 %
Mainline:
CASM13.56 ¢10.65 ¢27 %
Less the following components:
Payroll support program grant wage offset(2.89)— NM
Aircraft fuel, including hedging gains and losses1.92 2.65 (28)%
Special items - merger-related costs0.02 0.09 (78)%
Special items - impairment charges and other1.24 — NM
Special items - restructuring charges1.37 — NM
CASM excluding fuel and special items11.90 ¢7.91 ¢50 %
 Nine Months Ended September 30,
(in cents)2017 2016 % Change
Consolidated:     
CASM
10.55¢ 
10.08¢ 4.7 %
Less the following components:     
Aircraft fuel, including hedging gains and losses2.27
 1.81
 25.4 %
Special items—merger-related costs0.19
 0.11
 72.7 %
CASM excluding fuel and special items
8.09¢ 
8.16¢ (0.9)%
      
Mainline:     
CASM
9.72¢ 
9.06¢ 7.3 %
Less the following components:     
Aircraft fuel, including hedging gains and losses2.19
 1.72
 27.3 %
Special items—merger-related costs0.21
 0.13
 61.5 %
CASM excluding fuel and special items
7.32¢ 
7.21¢ 1.5 %





COMBINED COMPARATIVE OPERATING STATISTICS
 Nine Months Ended September 30,
 2017 2016 as Reported 2016 Virgin America 2016 Combined Change
Consolidated:         
Revenue passengers (in 000)33,063 25,536 6,029 31,565 4.7%
RPMs (in 000,000)39,073 27,569 9,101 36,670 6.6%
ASMs (in 000,000)46,170 32,728 10,821 43,549 6.0%
Load Factor84.6% 84.2% (a) 84.2% 0.4 pts
PRASM11.08¢ 11.36¢ (a) 11.10¢ (0.2)%
RASM12.93¢ 13.47¢ (a) 12.95¢ (0.2)%
CASMex8.09¢ 8.16¢ (a) 7.98¢ 1.4%
FTEs19,723 14,500 2,771 17,271 14.2%
          
Mainline:         
RPMs (in 000,000)36,046 24,767 9,101 33,868 6.4%
ASMs (in 000,000)42,398 29,216 10,821 40,037 5.9%
Load Factor85.0% 84.8% (a) 84.6% 0.4 pts
PRASM10.36¢ 10.39¢ (a) 10.37¢ (0.1)%
(a)2016 Combined operating statistics have been recalculated using the combined results.




COMBINED COMPARATIVE OPERATING REVENUES


Total operating revenues increased$1.6decreased $3.8 billion,, or 35%58%, during the first nine months of 20172020 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $330 million, or 6%.2019. The changes including the reconciliation of the impact of Virgin America on the comparative results, are summarized in the following table:
Nine Months Ended September 30,
(in millions)20202019% Change
Passenger revenue$2,362 $6,038 (61)%
Mileage Plan other revenue266 346 (23)%
Cargo and other130 169 (23)%
Total operating revenues$2,758 $6,553 (58)%
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Passenger           
Mainline$4,390
 $3,036
 $1,115
 $4,151
 $239
 5.8%
Regional725
 682
 —
 682
 43
 6.3%
Total passenger revenue5,115
 3,718
 1,115
 4,833
 282
 5.8%
Freight and mail88
 82
 —
 82
 6
 7.3%
Other—net768
 607
 119
 726
 42
 5.8%
Total operating revenues$5,971
 $4,407
 $1,234
 $5,641
 $330
 5.9%


Passenger Revenue—MainlineRevenue


Mainline passengerOn a consolidated basis, Passenger revenue for the first nine months of 2017increased45%2020 decreased by $3.7 billion, or 61%, on a 45%increase decrease in capacity, drivenand a 26 point decrease in load factor. Decreased revenue year-over-year is primarily bydue to the acquisitionnear complete loss of Virgin America,demand due to the COVID-19 pandemic. Load factors and flat PRASMunit revenues in the first two months of 2020 were in-line with our original expectations. In March 2020, demand deteriorated at an unprecedented level, and in response we reduced April 2020 and May 2020 capacity to approximately 80% below prior year levels. Moderate recovery began in June 2020, however, resurgence of cases throughout the United States slowed that recovery in July 2020. Targeted promotions, coupled with continued growth of guest confidence in air travel, led to sequential revenue improvement in the third quarter. We expect that fourth quarter revenue will continue to show improvement, given the holiday travel season and reopening of Hawaii, however, revenues will remain well below 2019 levels.

Mileage Plan other revenue

On a consolidated basis, Mileage Plan other revenue decreased $80 million, or 23%, in the first nine months of 2020 compared to the same periodfirst nine months of 2019, due largely to a reduction in 2016. purchased miles and decreased commissions received from our affinity card partner, consistent with fewer new affinity card holders in 2020 and an overall reduction in consumer spending.

36

Cargo and other

On a Combined Comparativeconsolidated basis, mainline passengerCargo and other revenue fordecreased $39 million, or 23%, in the first nine months ended September 30, 2017 increased 6%,of 2020 compared to the first nine months of 2019. The decrease is primarily due to a 6% increase in capacity on flat PRASM. The increase in capacity wasreduced belly cargo activity driven by the schedule reductions for passenger aircraft, as well as continued capacity limitations in our network expansion since September 30, 2016.freighters. We expect that our cargo revenues will continue to be negatively impacted in the fourth quarter due to ongoing capacity reductions.


Passenger Revenue—RegionalOPERATING EXPENSES


Regional passenger revenue increased by $43 million,Total operating expenses decreased $1.8 billion, or 6%31%, compared to the first nine months of 2016, due to a 7%increase in capacity on more regional flying, partially offset by a 1%decrease in PRASM.

Other—Net

Other—net revenue increased$161 million, or 27%, from the first nine months of 2016. On a Combined Comparative basis, other—net revenue increased $42 million, or 6%. Mileage Plan revenue contributed $40 million of the increase primarily driven by an increase in miles sold to our affinity credit card partner.



COMBINED COMPARATIVE OPERATING EXPENSES

Total operating expenses increased$1.6 billion, or 48%, compared to the first nine months of 2016. On a Combined Comparative basis, total operating expenses increased $533 million, or 12%.2019. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
 Nine Months Ended September 30,
(in millions)20202019% Change
Fuel expense$568 $1,408 (60)%
Non-fuel operating expenses, excluding special items3,453 4,295 (20)%
Payroll support program grant wage offset(760)— NM
Special items - merger-related costs5 39 (87)%
Special items - impairment charges and other350 — NM
Special items - restructuring charges322 — NM
Total operating expenses$3,938 $5,742 (31)%
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Fuel expense$1,051
 $593
 $229
 $822
 $229
 27.9%
Non-fuel expenses3,734
 2,670
 804
 3,474
 260
 7.5%
Special items—merger-related costs88
 36
 8
 44
 44
 100.0%
Total operating expenses$4,873
 $3,299
 $1,041
 $4,340
 $533
 12.3%


Fuel Expense


Aircraft fuel expense increased $458decreased $840 million, or 77%60%, compared to the nine months ended September 30, 2016. On a Combined Comparative basis, aircraft fuel expense increased $229 million, or 28%.2019. The elements of the change are illustrated in the following table: 
Nine Months Ended September 30,
20202019
(in millions, except for per gallon amounts)Dollars Cost/GalDollars Cost/Gal
Raw or "into-plane" fuel cost$553 $1.61 $1,397 $2.16 
Losses on settled hedges15 0.04 12 0.02 
Consolidated economic fuel expense568 1.65 $1,409 $2.18 
Mark-to-market fuel hedge adjustments— — (1)— 
GAAP fuel expense$568 $1.65 $1,408 $2.18 
Fuel gallons344 646 
 Nine Months Ended September 30,
 2017 2016 as Reported 2016 Combined
(in millions, except for per gallon amounts)Dollars Cost/Gal Dollars Cost/Gal Dollars Cost/Gal
Raw or "into-plane" fuel cost$1,030
 $1.74
 $590
 $1.44
 $801
 $1.44
Losses on settled hedges14
 0.02
 12
 0.03
 32
 0.06
Consolidated economic fuel expense1,044
 1.76
 602
 1.47
 $833
 $1.50
Mark-to-market fuel hedge adjustments7
 0.01
 (9) (0.02) (11) (0.02)
GAAP fuel expense$1,051
 $1.77
 $593
 $1.45
 $822
 $1.48
Fuel gallons592
   410
   554
  


On a Combined Comparative basis, theThe raw fuel price per gallon increased 21%decreased 25% due to higherlower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The increasedecrease in raw fuel price per gallon during the first nine months of 20172020 was driven by a 19% increase26% decrease in crude oil prices and a 38% increase56% decrease in refining margins.

WeLosses recognized losses of $14 million and $12 million for hedges that settled in the first nine months of 2017 and 2016 as reported.2020 were $15 million, compared to losses of $12 million in the same period in 2019. These amounts represent thecash received from settled hedges, offset by cash paid for premium expense, offset by cash received from those hedges.expense.


We currently expect our economic fuel pricecost per gallon to be higher in the fourth quarter of 2017 compared to the fourth quarter of 2016 due to ourrange between $1.20 and $1.25 per gallon on current estimate of higher crudemarket West Coast jet fuel prices and higher refining margins.trends.

37



Non-fuel Expense and Non- special items

 Nine Months Ended September 30,
(in millions)20202019% Change
Wages and benefits$1,579 $1,732 (9)%
Variable incentive pay65 125 (48)%
Aircraft maintenance244 341 (28)%
Aircraft rent229 247 (7)%
Landing fees and other rentals323 388 (17)%
Contracted services138 214 (36)%
Selling expenses83 236 (65)%
Depreciation and amortization320 317 1 %
Food and beverage service70 159 (56)%
Third-party regional carrier expense92 125 (26)%
Other310 411 (25)%
Total non-fuel operating expenses, excluding special items$3,453 $4,295 (20)%
The table below provides the reconciliation of the impact of Virgin America on the comparative results for each of our operating expense line items, excluding fuel and special items. Significant operating expense variances from 2016 are more fully described below.
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages and benefits$1,392
 $1,008
 $219
 $1,227
 $165
 13.4 %
Variable incentive pay98
 95
 25
 120
 (22) (18.3)%
Aircraft maintenance271
 197
 51
 248
 23
 9.3 %
Aircraft rent204
 80
 143
 223
 (19) (8.5)%
Landing fees and other rentals338
 232
 83
 315
 23
 7.3 %
Contracted services234
 183
 47
 230
 4
 1.7 %
Selling expenses269
 162
 96
 258
 11
 4.3 %
Depreciation and amortization275
 281
 29
 310
 (35) (11.3)%
Food and beverage service145
 93
 39
 132
 13
 9.8 %
Third-party regional carrier expense84
 72
 —
 72
 12
 16.7 %
Other424
 267
 72
 339
 85
 25.1 %
Total non-fuel and non-special operating expenses$3,734
 $2,670
 804
 3,474
 260
 7.5 %




Wages and Benefits


Wages and benefits increaseddecreased during the first nine months of 20172020 by $384 million, or 38%, compared to 2016. On a Combined Comparative basis, total wages and benefits increased by $165$153 million, or 13%, compared to 2016.9%. The primary components of wages and benefits are shown in the following table:
 Nine Months Ended September 30,
(in millions)20202019% Change
Wages$1,159 $1,305 (11)%
Pension—Defined benefit plans service cost37 31 19 %
Defined contribution plans96 100 (4)%
Medical and other benefits205 203 1 %
Payroll taxes82 93 (12)%
Total wages and benefits$1,579 $1,732 (9)%
 Nine Months Ended September 30, Change
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Combined % Combined
Wages$1,055
 $749
 $171
 $920
 $135
 14.7%
Pension—Defined benefit plans24
 19
 —
 19
 5
 26.3%
Defined contribution plans73
 49
 18
 67
 6
 9.0%
Medical and other benefits163
 135
 18
 153
 10
 6.5%
Payroll taxes77
 56
 12
 68
 9
 13.2%
Total wages and benefits$1,392
 $1,008
 $219
 $1,227
 $165
 13.4%


On a Combined Comparative basis, wages increased $135Wages decreased $146 million, or 15%11%, on a 14% increasean 18% decrease in FTEs. The increasedecrease is primarily due to voluntary leaves of absence accepted by nearly 7,000 employees in FTEs is attributable to the growth of our businesssecond and increased staffing during irregular operations,third quarters, as well as the growthreduction in McGee Air Services which has brought certain airport ground service positions in-house thatexecutive pay and hours for management employees. These decreases were previously reflected in our Contracted services expense. The remainder of the increase is drivenoffset by higherincreased wage rates following the mid-2019 ratification of new contracts for certain labor groups. The first nine monthsemployees represented by the Aircraft Mechanics Fraternal Association and the International Association of 2017 also include $9 million of ratification bonus expense in connection with the agreement reached with Horizon's pilots during the second quarter.Machinists.


For the full year, we expect wages and benefits will decline compared to increase at a rate greater than capacity growth on a combined comparative basis, duethe prior year as we reduce scheduled flying and executive salaries, and realize savings generated from our reduction in workforce necessary to higher wage rates for certain labor groups and the continued growthalign with our expectation of McGee Air Services. Our forecast includes the impact of the pilot arbitration decision which was received subsequent to quarter end, and results in an estimated $24 million of incremental costs in the fourth quarter of 2017.demand.


Variable Incentive Pay


Variable incentive pay expense increaseddecreased $60 million, or 48%, during the first nine months of 2017 by $3 million, or 3%2020 as compared to 2016. Onthe same period in 2019. The decrease is primarily due to the expectation that key financial metrics will not be achieved under the performance based pay program, offset by the recognition of nine months of expense for a Combined Comparative basis, variablesupplemental incentive pay decreased $22 million, or 18% due to expectations of lower performance-based payplan, which was approved in July 2020, and increased operational bonuses as compared to the prior year based on how we are tracking in relationyear.

Aircraft Maintenance

Aircraft maintenance expense decreased by $97 million, or 28%, during the first nine months of 2020 compared to the current year's goals.same period in 2019. The decrease is primarily due to a significant reduction in engine events and heavy checks, as well as reduced power-by-the-hour expense on reduced utilization in covered aircraft, offset by penalties recorded for failure to meet contractual minimum obligations.


38

We expect full year aircraft maintenance expense to be lower than 2019 on reduced aircraft utilization and parking of certain aircraft.

Landing fees and other rentals

Landing fees and other rentals decreased by $65 million, or 17%, during the first nine months of 2020 compared to the same period in 2019, primarily due to a 39% decrease in departures, offset by increased rates at certain of our airports.

For the full year, we expect variable incentive pay expenselanding fees and other rentals to be lower than in 2016 on a combined comparative basis, duedecrease as compared to lower achievement against performance-based pay metrics than prior year.2019, however, not at the same rate as decreased departures. We expect to see continued rate increases at many of our airports, as well as negative net settlements to cover airport operating costs.


Depreciation and AmortizationContracted Services


Depreciation and amortization expenseContracted services decreased $6by $76 million, or 2%36%, during the first nine months of 2020 compared to 2016. On a Combined Comparative basis, depreciation and amortization decreased $35 million, or 11%.the same period in 2019. This decrease wasis primarily driven by a change inresult of reduced vendor spend directly correlating to reduced year-over-year departures and passengers as a result of the estimated useful lives of certain B737 operating aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016, partially offset by aircraft additions since September 30, 2016.COVID-19 pandemic.


For the full year, we expect depreciation and amortizationcontracted services expense to be 5-6%significantly lower than in 2016 on a combined comparative basis for2019, given our ongoing cost reduction efforts and significant reduction in departures.

Selling Expense

Selling expense decreased by $153 million, or 65%, during the first nine months of 2020 compared to the same reasons mentioned above.period in 2019, primarily driven by a significant reduction in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs given the continued delay in professional sports also contributed to the year-over-year decline.


We expect full year selling expense will decrease in-line with the reduction to revenue as a result of reduced distribution costs on lower bookings, as well as reduced sponsorship and marketing costs.

Food and Beverage Servicebeverage service


Food and beverage service expense increased $52decreased by $89 million, or 56%. On a Combined Comparative basis,, during the first nine months of 2020 compared to the same period in 2019. This decrease is primarily due to the 62% decrease in revenue passengers as compared to the prior-year period, as well as the temporary closure of the majority of our airport lounges in the second quarter of 2020 and the temporary elimination of buy-on-board service.

We expect food and beverage service expense increased $13 million, or 10% due to increased numberdecrease as compared to 2019, consistent with our expectation of reduced passengers premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products.throughout 2020.


For the full year, we expect food and beverage expense to be approximately 11-12% higher than in 2016 on a combined comparative basis, in line with the increase in passengers in the current year, and enhancements to our onboard menu offerings.

Third-PartyThird-party Regional Carrier Expense


Third-party regional carrier expense, which represents payments made to SkyWest and Pen Air under our CPAs, increased $12CPA, decreased $33 million, or 17%26%, during the first nine months of 2020 compared to 2016.the same period in 2019. The increasedecrease is primarily due to a 14% decrease in SkyWest departures as compared to the additional six E175 aircraft operated by SkyWest in the currentprior year.


For the full year, we expect Third-partythird-party regional carrier expense to increasebe lower than 2019 due to increaseddecreased flying by our regional partners.and reduced contractual rates.

Other Operating Expenses

Other operating expenses increased by $157 million, or 59%, compared to the first nine months of 2016. On a Combined Comparative basis, other operating expenses increased by $85 million, or 25%. The increase was due to higher costs associated with irregular operations, crew and training costs, higher IT costs, an increase in scrapped parts inventory, and higher property taxes. The first nine months of 2016 also included a benefit of an insurance claim reimbursement we received in the prior year.

For the full year, we expect other expenses to be higher than in 2016 in line with the trends described above.

Special Items—Merger-Related Costs


We recorded special items of $88$5 million in the first nine months of 2020 for merger-related costs associated with our acquisition of Virgin America, compared to $39 million in the first nine months of 2017, compared to $36 million as reported and $44 million on a Combined Comparative basis in the first nine months of 2016.2019. Costs incurred in the first nine months of 2017 consisted2020 are primarily comprised of severance and retention and ITcertain technology integration costs. We expect 2020 will be the final year in which we incur integration related charges.





39

Special Items - Impairment and other charges

We expect to incur merger-related costs for the remainderrecorded impairment and other charges of 2017, and continuing through 2019.

Nonoperating Income (Expense)



During$350 million in the first nine months of 2017,2020, driven by our current expectation of decreased future cash flows stemming from the COVID-19 pandemic. Impairment and other charges primarily consist of the write down to fair value for ten owned Airbus A320 aircraft identified for sale, the full write-down of the operating lease assets and related spare inventory and parts, as well as estimated lease return costs for certain leased Airbus aircraft which were permanently parked, the write-down of our owned Q400 fleet to fair value, and the full write-off of gate assets at Dallas Love Field.

Additional impairment charges may be recorded as we had nonoperating expensefinalize our long-term fleet strategy.

Special Items - Restructuring charges

We recorded restructuring charges of $40 million, compared to income of $6$322 million in the same period in 2016. Onfirst nine months of 2020 relating to the right-sizing of our workforce as a Combined Comparative basis, nonoperating expense increased by $32 million,result of decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily due to interest expense incurred in the current yearcomprised of wages for those pilots and mechanics on the debt issued in 2016 to finance the acquisition of Virgin America.incentive leaves, ongoing medical benefit coverage, and lump-sum termination payouts.


Additional Segment InformationADDITIONAL SEGMENT INFORMATION


Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.


Mainline


Mainline adjusted pretax profitloss was $1.13$1 billion in the first nine months of 2017,2020, compared to $1.05 billionpretax profit of $761 million in the same period in 2016. On a Combined Comparative basis, Mainline adjusted2019. The $1.8 billion shift to pretax profit decreased by $111 million. The table below provides the reconciliation of the impact of Virgin America on the comparative results for our Mainline segment, excluding merger-related costs and mark-to-market fuel-hedge accounting charges:
 Nine Months Ended September 30,  
(in millions)2017 2016 as Reported 2016 Virgin America 2016 Combined $ Change
Mainline         
Operating revenues$5,182
 $3,661
 $1,234
 $4,895
 $287
Non-fuel, non-special operating expenses3,101
 2,107
 804
 2,911
 190
Economic fuel924
 512
 231
 743
 181
Operating income1,157
 1,042
 199
 1,241
 (84)
Nonoperating income (expense)(30) 11
 (14) (3) (27)
Pretax profit$1,127
 $1,053
 $185
 $1,238
 $(111)

The $111 million decrease in Combined Comparative pretax profitloss was driven by a $181 million increase$3.3 billion decrease in Mainline fuel expense,operating revenues, offset by a $190$768 million increasedecrease in Mainline non-fuel operating expenses,expense and a $27$743 million increase in nonoperating expense. These increases were offset by a $287 million increasedecrease in Mainline passenger revenue. Higherfuel expense.

As compared to the prior year, lower Mainline revenues are primarily attributable to a 64% decrease in traffic and a 48 point decrease in capacity, driven by the significant reduction in demand as a result of the COVID-19 pandemic. Non-fuel operating expenses decreased significantly on cost savings driven by reduced variable costs on reduced capacity, as well as decreased wages and benefits expense from voluntary leaves of absence and a reduction in hours for management employees. Lower raw fuel prices, and an increasecombined with decreased consumption from the reduction in gallons consumedflying, drove the increasedecrease in Mainline fuel expense. Non-fuel operating expenses increased due to higher wages to support our growth and higher other operating expenses as described above. Nonoperating expense increased primarily due to increased interest expense. Mainline revenue increased due to higher capacity from the new routes we have added over the past twelve months.


Regional


Our Regional operations contributedgenerated a pretax profitloss of $40$298 million in the first nine months of 2017,2020, compared to $72break-even in the first nine months of 2019. The shift to a pretax loss was attributable to a $486 million decrease in operating revenues, partially offset by a $98 million decrease in fuel costs and a $90 million decrease in non-fuel operating expenses. The decrease in regional revenues is primarily due to the 20% decrease in capacity, spurred by the COVID-19 pandemic.

Horizon

Horizon achieved a pretax profit of $27 million in the first nine months of 2016. The decrease in pretax profit was attributable to higher non-fuel operating expense, due in large part to increased capacity and higher raw fuel costs, partially offset by a $43 million increase in operating revenues as described in Passenger Revenue—Regional.

Horizon

Horizon incurred a pretax loss of $11 million in the first nine months of 2017,2020, compared to pretax profit of $14$33 million in the same period in 2016. The change was driven by higher non-fuel expenses and lower CPA Revenues (100% of which are from Alaska and eliminated in consolidation). Non-fuel expenses increased2019, primarily due to higher wage and training expense as a result ofsignificant cost reduction efforts implemented in response to the increase in FTE’s, increased costs associated with flight cancellations primarily due to a shortage of pilots necessary to fly the schedule, and a $9 million ratification bonus expense in connection with the agreement with Horizon's pilots.COVID-19 pandemic.





40

LIQUIDITY AND CAPITAL RESOURCES
 
Our primary sourcesAs a result of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, increase liquidity are:and help to preserve the relative strength of our balance sheet. From the onset of the pandemic, we have taken the following key actions to enhance and preserve our liquidity:

•Obtained approximately $1.1 billion in CARES Act funding to use towards payment of wages and benefits;
Our
•Executed an agreement with the U.S. Department of the Treasury to obtain up to $1.9 billion through the CARES Act Loan program, secured by certain Mileage Plan assets and cash flow streams, 34 aircraft and 15 spare engines;

•Obtained $1.2 billion in financing through the issuance of EETC, collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft;

•Raised $589 million in secured financing collateralized by 32 aircraft;

•Drew $400 million from existing cashcredit facilities;

•Suspended our share repurchase program and marketable securities balancequarterly dividend indefinitely, and;

•Reduced planned capital expenditures by nearly $550 million for 2020, including suspension of $1.7 billion,pre-delivery payments and deferral of non-essential capital projects.

Although we have no plans to access equity markets at this time, we believe our equity would be of high interest to investors. The liquidity raised from these financings, coupled with the availability of additional liquidity and our expected cash from operations;

Our 64 unencumbered aircraftmeaningful cost reductions have provided the Company with confidence in our operating fleet that could be financed, if necessary;

Our combined bank line-of-credit facilities, with no outstanding borrowings,ability to withstand the depressed demand and prepare for the recovery ahead. Despite the significant amount of $400 million. Information about these facilities can be found in Note 5debt raised, our adjusted net debt is flat as compared to the condensed consolidated financial statements.end of 2019. We will also continue to execute additional cost restructuring initiatives in an effort to transition from a cash-burn focus towards reducing outstanding debt and repairing our balance sheet.
During the nine months ended September 30, 2017, we took free and clear delivery of ten B737-900ER aircraft and ten E175 aircraft. We made debt payments totaling $265 million and paid dividends totaling $111 million.


The table below presents the major indicators of financial condition and liquidity:
(in millions)September 30, 2020December 31, 2019Change
Cash and marketable securities$3,759 $1,521 147 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue75 %22 %53 pts
Total debt3,822 1,499 155 %
Shareholders’ equity$3,454 $4,331 (20)%

Debt-to-capitalization, adjusted for operating leases
(in millions)September 30, 2020December 31, 2019Change
Long-term debt, net of current portion$2,672 $1,264 111%
Capitalized operating leases1,603 1,708 (6)%
COVID-19 related borrowings(a)
769 — NM
Adjusted debt, net of current portion of long-term debt$5,044 $2,972 70%
Shareholders' equity3,454 4,331 (20)%
Total invested capital$8,498 $7,303 16%
Debt-to-capitalization, including operating leases59 %41 %18 pts
(a)To best reflect our leverage at September 30, 2020, we included the short-term borrowings stemming from the COVID-19 pandemic in the above calculation, although these borrowings are classified as current in the condensed consolidated balance sheets.
41

(in millions)September 30, 2017 December 31, 2016 Change
Cash and marketable securities$1,740
 $1,580
 10.1 %
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue29% 31% (2) pts
Long-term debt, net of current portion$2,367
 $2,645
 (10.5)%
Shareholders’ equity$3,491
 $2,931
 19.1%
Long-term debt-to-capital including net present value of aircraft operating lease payments(a)
53% 59% (6) pts

(a)Calculated using the present value of remaining aircraft lease payments for aircraft in our operating fleet as of the balance sheet date.

Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)September 30, 2020December 31, 2019
Current portion of long-term debt$1,150 $235 
Current portion of operating lease liabilities283 269 
Long-term debt, net of current portion2,672 1,264 
Long-term operating lease liabilities, net of current portion1,320 1,439 
Total adjusted debt5,425 3,207 
Less: Cash and marketable securities(3,759)(1,521)
Adjusted net debt$1,666 $1,686 
(in millions)Last Twelve Months Ended September 30, 2020Last Twelve Months Ended December 31, 2019
GAAP Operating Income(a)
$(928)$1,063 
Adjusted for:
Special items(78)44 
Mark-to-market fuel hedge adjustments(5)(6)
Depreciation and amortization426 423 
Aircraft rent313 331 
EBITDAR$(272)$1,855 
Adjusted net debt to EBITDAR(6.1x)0.9x
(a)Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.


ANALYSIS OF OUR CASH FLOWS
 
Cash Provided byUsed in Operating Activities
 
For the first nine months of 2017,2020, net cash provided by operating activities was $1.4 billion,$116 million, compared to $1.2$1.4 billion during the same period in 2016.2019. The $151 million increase$1.3 billion decrease in our operating cash flows is primarily attributable to increased ticket salesa $793 million decline in net income, net of non-cash special items for future travelimpairment and workforce reduction. The decrease is also due to significant cash refund activity, and a decline in advance bookings as compared to the same period in the prior year, resulting fromall as a result of the overall growth in our business and the addition of Virgin America. This was partially offset by a decrease in our net income, which was impacted by higher fuel costs and $88 million of merger-related costs.COVID-19 pandemic.

We typically generate positive cash flows from operations and expect to use that cash flow to purchase aircraft and capital equipment, make scheduled debt payments, and return capital to shareholders.

Cash Used in Investing Activities
 
Cash used in investing activities was $1.1 billion$767 million during the first nine months of 2017,2020, compared to $641$708 million during the same period of 2016. Our capital expenditures2019. The increase to cash used in investing activities is primarily due to an increase in net purchases of marketable securities, which were $841$572 million in the first nine months of 2017, an increase of $3322020, compared to $218 million compared toin the nine months ended September 30, 2016. This2019. Increased net purchases is primarily driven by more aircraft purchasesadditional cash on hand from borrowings and higher spend on other equipment comparedthe PSP program, which allowed the Company to invest additional funds. These increases were offset by the same periodpostponement of 2016. Our net purchasescapital expenditures in 2020 as a result of marketable securities increased by $202 millionthe COVID-19 pandemic.
42


Cash Used in Financing Activities
Cash from the prior year, primarily driven by stronger operating cash flows infinancing activities was $2.3 billion during the first nine months of 2017.

The table below reflects our full-year expectation for capital expenditures and additional expenditures if options are exercised. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.


(in millions)2017 2018 2019
Aircraft and aircraft purchase deposits—firm$780
 $820
 $635
Other flight equipment100
 135
 170
Other property and equipment170
 240
 205
Total property and equipment additions$1,050
 $1,195
 $1,010
Option aircraft and aircraft deposits, if exercised(a)
$—
 $170
 $665
(a)We have options2020 compared to acquire 37 B737 aircraft with deliveries from 2020 through 2024, and options to acquire 30 E175 aircraft with deliveries in 2019 to 2021. Amounts above also include payments toward cancelable purchase commitments for 30 A320neo aircraft with deliveries from 2020 through 2022.

Cash Used by Financing Activities
Net cash used by financing activities was $399 million during the first nine months of 2017 compared to net cash provided byfor financing activities of $1.2 billion$538 million during the same period in 2016. The change is due to $1.5 billion of debt financing cash inflow in the prior period for the Virgin America acquisition.2019. During the first nine months of 20172020, we madehad proceeds from debt issuances of $2.6 billion, including funding from the EETC, the loan portion of the proceeds from the PSP and $135 million drawn on the CARES Act secured term loan. These proceeds were partially offset by debt payments of $265$238 million,, dividend payments totaling $111$45 million,, and had $50$31 million in common stock repurchases.


CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
Aircraft Commitments
 
As of September 30, 2017,2020, we have firm orders to purchase or lease 9335 aircraft. WeAlaska also havehas cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 20202024 through 2022.2026. We could incur a loss of pre-delivery payments and credits as a cancellation fee. WeAlaska also havehas options to acquire 37 B737 MAX aircraft with deliveries from 20202021 through 2024, and Horizon has options to acquire 30 E175 aircraft with deliveries from 20192022 through 2021.2024. In addition to the 2132 E175 aircraft currently operated by SkyWest in our regional fleet, we haveAlaska has options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft. Options will be exercised only if we believe return on invested capital targets can be met over the long term.


The followingGiven the drastically reduced demand for air travel as a result of the COVID-19 pandemic, we are currently evaluating our overall fleet strategy and long-term plan. We are also in the process of negotiating with aircraft manufacturers and lessors to optimize timing of fleet activity. It is probable that the current outlook as stated below will change significantly. This table summarizes expectedrepresents anticipated fleet activity by year as of September 30, 2017:2020:
Actual FleetAnticipated Fleet Activity
AircraftSeptember 30, 20202020 Additions2020 RemovalsDecember 31, 20202021 ChangesDecember 31, 2021
B737 Freighters3 — — 3 — 3 
B737-70011 — — 11 — 11 
B737-80061 — — 61 — 61 
B737-90012 — — 12 — 12 
B737-900ER79 — — 79 — 79 
B737 MAX9(a)
— 3 — 3 15 18 
A320(b)
41 — — 41 (7)34 
A321neo10 — — 10 — 10 
Total Mainline Fleet217 3 — 220 8 228 
Q400 operated by Horizon32 — — 32 — 32 
E175 operated by Horizon30 — — 30 — 30 
E175 operated by third party32 — — 32 — 32 
Total Regional Fleet94 — — 94 — 94 
Total311 3 — 314 8 322 
 Actual Fleet Expected Fleet Activity
AircraftSeptember 30, 2017 Q4 2017 Additions Q4 2017 Removals December 31, 2017 2018-2019 Changes December 31, 2019
B737 Freighters & Combis(a)
5
 2
 (3) 4
 (1) 3
B737 Passenger Aircraft148
 4
 (1) 151
 19
 170
Airbus Passenger Aircraft65
 3
 —
 68
 4
 72
Total Mainline Fleet218
 9
 (4) 223
 22
 245
Q400 operated by Horizon52
 —
 —
 52
 (15) 37
E175 operated by Horizon(b)
10
 —
 —
 10
 23
 33
E175 operated by third party(c)
21
 2
 —
 23
 12
 35
Total Regional Fleet83
 2
 —
 85
 20
 105
Total301
 11
 (4) 308
 42
 350
(a)The three B737 MAX9 aircraft previously reflected in 2020 were originally contracted for delivery in 2019 and delayed due to the MAX grounding, and have been shifted to 2020, but are not expected to enter revenue service until 2021. Seven B737 MAX9 deliveries originally contracted for 2020 have been shifted to 2021 based on our current estimate of expected delivery dates. The Company continues to discuss delivery timelines with Boeing.
(a)
Remaining 2017 changes reflect retirement of three combis and the reintroduction of two B737-700 aircraft as freighters.
(b)
Reflects recent deferral of three aircraft from 2017 to 2018.
(c)
Reflects third-quarter addition of ten aircraft flown by SkyWest under our CPA to be delivered in 2017 and 2018.

(b)Actual fleet at September 30, 2020, excluding 20 Airbus aircraft permanently parked in response to COVID-19 capacity reductions.

For future firm orders and if we exercise our options for additional deliveries,option exercises, we may finance the aircraft through internally generated cash flow from operations, long-term debt, or lease arrangements.



43


Fuel Hedge Positions


All of our currentfuture oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we benefit fromare hedged against volatile crude oil price increases. During a period of decline in crude oil prices, as there is nowe only forfeit cash outlay other thanpreviously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. However, given the premiumssharp decline in demand and our capacity resulting from the COVID-19 pandemic, we payare currently overhedged relative to enter intoour target of 50% of consumption through the contracts.remainder of 2020. Our crude oil positions are as follows:
 Approximate Gallons Hedged (in millions)Weighted-Average Crude Oil Price per BarrelAverage Premium Cost per Barrel
Fourth Quarter 202090$64$2
Full Year 202090$64$2
First Quarter 202160$62$2
Second Quarter 202165$60$2
Third Quarter 202155$56$2
Fourth Quarter 202135$50$3
Full Year 2021215$58$2
First Quarter 202215$51$3
Full Year 202215$51$3
 Approximate % of Expected Fuel Requirements Weighted-Average Crude Oil Price per Barrel Average Premium Cost per Barrel
Fourth Quarter 201750% $61
 $2
First Quarter 201850% 62
 2
Second Quarter 201840% $61
 $2
Third Quarter 201830% 60
 2
Fourth Quarter 201820% 60
 2
Full Year 201835% 61
 2
First Quarter 201910% 62
 2
Total 20192% $62
 $2


Contractual Obligations
 
The following table provides a summary of our principal payments under current and long-term debt obligations, operating lease commitments, aircraft purchase commitments and othercontractual obligations as of September 30, 2017.2020. For agreements with variable terms, amounts included reflect our minimum obligations.
(in millions)Remainder of 20202021202220232024Beyond 2024Total
Current and long-term debt obligations$73 $1,201 $393 $357 $265 $1,568 $3,857 
Aircraft lease commitments88 310 276 219 166 679 1,738 
Facility lease commitments3 9 8 7 7 84 118 
Aircraft maintenance deposits7 35 45 24 6 2 119 
Aircraft purchase commitments (a)
343 549 333 192 21 25 1,463 
Interest obligations (b)
16 118 88 75 63 153 513 
Other obligations (c)
39 181 185 190 197 910 1,702 
Total$569 $2,403 $1,328 $1,064 $725 $3,421 $9,510 
(in millions)Remainder of 2017 2018 2019 2020 2021 Beyond 2021 Total
Current and long-term debt obligations$55
 $350
 $422
 $449
 $422
 $1,016
 $2,714
Operating lease commitments (a)
111
 415
 409
 380
 335
 1,467
 3,117
Aircraft maintenance deposits (b)
15
 61
 65
 68
 63
 90
 362
Aircraft purchase commitments (c)
168
 956
 806
 352
 273
 355
 2,910
Interest obligations (d)
18
 89
 77
 63
 48
 108
 403
Aircraft maintenance and parts management (e)
8
 32
 35
 37
 40
 —
 152
Other obligations (f)
22
 125
 158
 165
 172
 1,277
 1,919
Total$397
 $2,028
 $1,972
 $1,514
 $1,353
 $4,313
 $11,577
(a)Although the Company has contractual obligations for purchase commitments in 2020, informal agreements have been reached with aircraft manufacturers to defer payments beyond 2020.
(a)Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. Included here are E175 aircraft that are operated by SkyWest under capacity purchase agreements.
(b)Aircraft maintenance deposits relate to leased Airbus aircraft.
(c)Represents non-cancelable contractual commitments for aircraft and engines.
(d)For variable-rate debt, future obligations are shown above using interest rates in effect as of September 30, 2017.
(e)Includes minimum obligations under engine and parts management and maintenance agreements with third-party vendors. Subsequent to September 30, 2017, the Company signed a parts management and maintenance agreement which includes minimum obligations of approximately $459 million over a nine-year period, not included in the table above.
(f)Includes minimum obligations associated with the SkyWest third-party CPA.

(b)For variable-rate debt, future obligations are shown above using forecasted interest rates as of September 30, 2020.
(c)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.

During the nine months ended September 30, 2020, the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations. The Company has also deferred 2020 aircraft payments, including those related to the B737 MAX9, to periods beyond 2020. Discussions remain ongoing with aircraft manufacturers and lessors to optimize the timing of aircraft deliveries and lease returns.

Credit Card Agreements
 
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the contractually-specified level,agreement or if our cash and marketable securities balance fallsfell below $500 million.$500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fallsfell below $500 million.$500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.

44




Deferred Income Taxes


For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.


While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short termshort-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, pendingany future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. We believe thatGiven our current expectation of operating losses for the remainder of the year, we haveexpect to file for a cash refund for the liquidity to make our future2020 tax payments.year.


CRITICAL ACCOUNTING ESTIMATES


There have been no material changes to our critical accounting estimates forduring the three months ended September 30, 2017.2020. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2016.2019 and Note 2, "COVID-19," for discussion about the estimates used in the Company's impairment analyses.


GLOSSARY OF AIRLINE TERMS


Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Adjusted net debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)

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


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


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


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


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


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


Diluted Earnings per Share - represents earnings per share ("EPS")(EPS) using fully diluted shares outstanding


Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised


Economic Fuel - best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period


Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures

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


Mainline - represents flying Boeing 737, and Airbus 320 family and Airbus 321neo jets and all associated revenues and costs


PRASM - passenger revenue per ASM; commonly called “passenger unit revenue”
45


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


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




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


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


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


46


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
 
47


ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures


As of September 30, 2017,2020, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of September 30, 2017.2020.
 
Changes in Internal Control over Financial Reporting
 
Except as noted below,In the quarter ended September 30, 2020, the Company implemented a new revenue accounting system, and updated the relevant control structure. Other than this implementation, there have been no changes in ourthe Company’s internal controlcontrols over financial reporting during the quarter ended September 30, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.


In the fourth quarter of 2016, we acquired Virgin America (see Note 2). As permitted by Securities and Exchange Commission Staff interpretive guidance for newly acquired businesses, management excluded Virgin America from its annual evaluation ofOur internal control over financial reporting asis based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of December 31, 2016. We are implementing internal controls over significant processes specific to the acquisition that we believe are appropriate in consideration of related integration of operations, systems, control activities, and accounting for the merger and merger-related transactions. AsSponsoring Organizations of the date of this Quarterly Report on Form 10-Q, we are in the process of further integrating the acquired Virgin America operations into our overall internal controls over financial reporting.Treadway Commission (the COSO Framework).

48




PART II



ITEM 1. LEGAL PROCEEDINGS
 
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.


In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Plaintiffs receivedThe court certified a class certificationof approximately 1,800 flight attendants in November 2016. Virgin America filed a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds. In January 2017, the Court denied in part and granted in part Virgin America’s motion. Virgin AmericaThe Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines.

The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.

In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend thisthe lawsuit.


The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.


ITEM 1A. RISK FACTORS


ThereExcept for the additional risk factors below, there have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.


The global pandemic caused by COVID-19, and related measures implemented to combat its spread has had, and is expected to continue to have, a material adverse effect on the Company’s operations, financial position and liquidity.

In late 2019, an outbreak of novel coronavirus and its resulting disease (COVID-19) was detected in Wuhan, China. Since that time, COVID-19 has spread rapidly throughout the globe, including within the United States, where over one million cases have been positively diagnosed to date. In March 2020, the President of the United States declared a national emergency in response to the rapid spread, and all markets we serve have implemented some measure of travel restriction or stay-at-home order. These orders, combined with a wariness among the public of travel by aircraft due to perceived risk of infection, have resulted in an unprecedented decline in business and leisure travel. Cancellations of conventions and conferences, sporting events, concerts and other similar events, as well as the closure of popular tourist destinations, have contributed to this decline. This reduction in demand has materially negatively impacted our revenues and results of operations. As there is no indication of when these restrictions may be lifted or when demand may return, we expect to continue to see negative impacts from the COVID-19 pandemic on our business. Our operations could be negatively affected further if our employees are quarantined or sickened as a result of exposure to COVID-19, or if they are subject to additional governmental COVID-19 curfews or “shelter
49

in place” health orders or similar restrictions. Measures restricting the ability of our airport or inflight employees to come to work may cause a further deterioration in our service or operations, all of which could negatively affect our business.

In response to the pandemic, we have implemented and continue to implement a comprehensive strategy to mitigate the impacts on our business. This strategy may itself have negative impacts on our business and operations. One such action is the waiver of change fees and the ability to rebook travel for an extended period beyond standard rebooking terms. The loss of change fee revenue, combined with ongoing significant ticket cancellation activity, has adversely impacted our revenues and liquidity, and we expect such impacts to continue if governmental authorities extend existing travel restriction or stay-at-home orders or impose new orders or other restrictions intended to mitigate the spread of COVID-19, if businesses continue to restrict nonessential travel for their employees, or if the perceived risk of infection persists.

We have also implemented significant cash preservation and cost reduction strategies in response to the impacts of COVID-19. These strategies include, but are not limited to, capital expenditure reductions, hiring freezes, solicitation of voluntary leaves of absence and renegotiation of contractual terms and conditions. These measures, while helpful in slowing the rate at which we utilize our cash, are not expected to fully recover the loss of cash as a result of decreased ticket sales.

The Company may also experience significant supply chain disruptions as the COVID-19 pandemic may also adversely impact our suppliers. See “Item 1A., Risk Factors – We are dependent on a limited number of suppliers for aircraft and parts” of our Annual Report on Form 10-K for further discussion of risks related to the Company’s dependence on a limited number of suppliers. Should COVID-19 cause our limited vendors to have performance problems, reduced or ceased operations, or bankruptcies, or other events causing them to be unable to fulfill their commitments to us, our operations and business could be materially adversely affected.

At this time, we are unable to predict what impact the pandemic will have on future customer behavior. Future business travel may be impacted by widespread use of videoconferencing or the reduction of business travel budgets. Travelers may also become more reluctant in general to travel. In addition, the Company has incurred, and will continue to incur COVID-19 related costs for enhanced aircraft cleaning and additional procedures to limit transmission among employees and guests. Although these procedures are elective, the industry may in the future be subject to further cleaning and safety measures, which may be costly and take a significant amount of time to implement. These contingencies, individually and combined, could have a material adverse impact on our business. See “Item 1A., Risk Factors – Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.” of our Annual Report on Form 10-K for further discussion of the Company’s vulnerability to a general economic downturn or recession.

We have a significant amount of debt and fixed obligations and have incurred substantial incremental debt in response to the COVID-19 pandemic. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position.

We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease and financing commitments, as well as non-cancelable commitments for airport and facility leases, maintenance and other obligations. In response to the COVID-19 pandemic, we have incurred and continue to seek new financing sources to fund our operations while demand remains at an unprecedented low level and for the unknown duration of any economic recovery period. Further, as we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.

Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, the impacts of COVID-19, or from other risks as described in “Item 1A., Risk Factors” of our Annual Report on Form 10-K, may prohibit us from doing so in the future and may adversely affect our overall liquidity.

We have accepted certain conditions by accepting funding under the payroll support program of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

The CARES Act was signed into law on March 27, 2020, providing U.S. airlines and related businesses the ability to access liquidity in the form of grants, loans, loan guarantees and other investments by the U.S. government.

In the second quarter of 2020, the Company, Alaska Airlines, Horizon Air, and McGee entered agreements with the United States Department of the Treasury (Treasury) to secure approximately $1 billion of funding under the CARES Act payroll support program (PSP), of which $290 million is in the form of an unsecured senior term loan payable over ten years. PSP proceeds must be used exclusively for employee payroll and benefits expenses in accordance with the terms and conditions of the PSP agreements and the applicable provisions of the CARES Act.
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In the third quarter of 2020, the Company and its airline subsidiaries entered agreements with the Treasury to obtain access to term loans of approximately $1.3 billion under the CARES Act loan program. Funds drawn under the loan program must be secured with assets owned by Alaska Airlines or Horizon Air. In October of 2020, Treasury informed the Company it would amend these agreements to increase the total amount of available secured loan funds to $1.9 billion.

To date, the Company has drawn $135 million from the loan facility, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021. All proceeds must be used for general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreements and the applicable provisions of the CARES Act. All borrowings are pre-payable in whole or in part and are ultimately due and payable on September 26, 2025 (or March 28, 2025 with respect to the portion of the loan, if any, secured with certain loyalty program assets).

In addition to repayment commitments, we are subject to the following conditions under our CARES Act PSP and loan agreements:

•Alaska Airlines, Horizon Air and McGee had to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits for non-officer employees through September 30, 2020;

•Alaska Airlines and Horizon Air had to maintain DOT-prescribed levels of air service to markets they served as of March 1, 2020, through September 30, 2020 (subject to extension through March 1, 2022);

•The Company may not repurchase its common stock or pay dividends on its common stock until the later of September 30, 2021, or one year after secured loan funds are repaid;

•The Company must meet minimum liquidity and collateral coverage ratio requirements until the secured loan funds are repaid;

•Compensation and severance payments for officers and employees who earned more than $425,000 in total compensation in 2019 will be subject to maximum limitations through the later of March 24, 2022, or one year after secured loan funds are repaid; and

•The Company must maintain certain internal controls and records, and provide any additional reporting required by the U.S. government, relating to PSP and loan funding.

These conditions may adversely affect the Company’s profitability, our ability to negotiate favorable terms with loyalty partners, our attractiveness to investors, and our ability to compensate at market-competitive levels and retain key personnel.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


This table provides certain information with respect to our purchases ofHistorically, the Company purchased shares of our common stock during the third quarter of 2017.
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Maximum remaining
dollar value of shares
that can be purchased
under the plan
(in millions)
July 1, 2017 - July 31, 20175,770
 $84.37
  
August 1, 2017 - August 31, 2017349,645
 78.52
  
September 1, 2017 - September 30, 2017—
 —
  
Total355,415
 $78.61
 $637

The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, the Company suspended the share repurchase program indefinitely. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.


On September 30, 2020, the Company issued the New PSP Warrant (as defined in Item 5. “Other Information” below) to the United States Department of the Treasury (“Treasury”) in connection with the payroll support program under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of 915,929 shares of the Company’s common stock that have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $31.61 per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

In addition, in connection with increases on September 28, 2020 and October 30, 2020 in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, the Company may issue the Additional Loan Program Warrants (as defined in Item 5. “Other Information” below) to Treasury pursuant to the loan program, resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program. A warrant to purchase 427,080 shares of the Company’s common stock was issued on September 28, 2020. Additional warrants will be issued to Treasury in conjunction with each new borrowing under the A&R Loan Agreement (as defined in Item 5. “Other Information” below). Each warrant is exercisable at a strike price of $31.61 per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were or, when issued will be, issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.


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ITEM 3. DEFAULTS UPON SENIOR SECURITIES


None.



ITEM 4. MINE SAFETY DISCLOSURES


None.



ITEM 5. OTHER INFORMATION
 
None.On September 30, 2020, the Company and Treasury agreed to an increase of $28.7 million in the payroll support available to Alaska Airlines and Horizon under the payroll support program (PSP) under the CARES Act, which resulted in an increase in the unsecured term loan borrowed from Treasury by approximately $8.6 million, bringing the total amount in unsecured funds borrowed from Treasury under the payroll support program for Alaska Airlines and Horizon to approximately $280.8 million (the “New Maximum Alaska Airlines Loan Amount”). As a result of this increase, on September 30, 2020, the Company issued additional warrants to Treasury to purchase 27,258 shares of the Company’s common stock (the “New PSP Warrant”).




In addition, on September 28, 2020, the Company, Alaska Airlines and Treasury agreed to an increase of $173 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in an initial aggregate lender commitment of $1,301 million. On October 30, 2020, the Company, Alaska Airlines and Treasury agreed to a further increase of $627 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in a new aggregate initial lender commitment of $1,928 million under such program. In connection with the new aggregate initial lender commitment, Alaska Airlines, as Borrower, the Company, as Parent, the guarantors party thereto from time to time, the Treasury, as the initial lender, and Bank of New York Mellon, as administrative agent and collateral agent, entered into a Restatement Agreement (the “Restatement Agreement”) to amend and restate the Loan and Guarantee Agreement (the “A&R Loan Agreement”), and Alaska Airlines, Horizon and, in each case, the guarantors party thereto each entered into an amended and restated Pledge and Security Agreement (together, the “A&R Pledge and Security Agreements”) relating to the collateral that secure the new aggregate initial lender commitment pursuant to the A&R Loan Agreement. As a result of the increases in the aggregate initial lender commitment, additional warrants to purchase 2,530,845 shares of the Common Stock are issuable by the Company to Treasury from time to time in connection with borrowings made pursuant to the A&R Loan Agreement (the “Additional Loan Program Warrants”), resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program.

On November 4, 2020, the Board of Directors (the “Board”) adopted resolutions (the “Resolutions”) pursuant to Section 204 of the General Corporation Law of the State of Delaware, which Resolutions ratify, confirm and approve the additional corporate actions taken on September 28, 2020, September 30, 2020 and October 30, 2020 as described above. Specifically, the Resolutions ratify, confirm and approve: (i) the New Maximum Alaska Airlines Loan Amount, the issuance to Treasury of the New PSP Warrant and the issuance of shares of the Company’s common stock upon exercise of the New PSP Warrant; and (ii) the New Initial Lender Commitment, including the execution, delivery and performance of the Restatement Agreement, the A&R Loan Agreement, the A&R Pledge and Security Agreements and all additional loan documents required to be executed or otherwise related to such agreements, as well as the transactions contemplated by such loan documents, the issuance to Treasury of the Additional Loan Program Warrants and the issuance of shares of the Company’s common stock upon exercise of the Additional Loan Program Warrants. Pursuant to the Resolutions, the Board ratified the foregoing corporate actions because it determined that such actions may not have been approved by the Board. Any claim that the defective corporate acts or putative stock ratified by the Board are void or voidable due to the failure of authorization specified in the Resolutions, or that the Delaware Court of Chancery should declare in its discretion that the ratification thereof not be effective or be effective only on certain conditions, must be brought within 120 days from the later of the validation effective time (which is November 4, 2020), and the giving of this notice (which is deemed given on the date that this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission).
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ITEM 6. EXHIBITS
 
The following documents are filed as part of this report:

1.
Exhibits: See Exhibit Index.


1.Exhibits: See Exhibit Index.

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.
ALASKA AIR GROUP, INC.
/s/ CHRISTOPHER M. BERRY
Christopher M. Berry
Vice President Finance and Controller
November 2, 20175, 2020
 

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EXHIBIT INDEX
Exhibit
Number		Exhibit
Description		FormDate of First FilingExhibit Number
3.110-QAugust 3, 20173.1
4.18-KJuly 6, 20204.1
4.28-KJuly 6, 20204.2
4.38-KJuly 6, 20204.3
4.48-KJuly 6, 20204.4
4.58-KJuly 6, 20204.5
4.68-KJuly 6, 20204.6
4.78-KJuly 6, 20204.7
4.88-KJuly 6, 20204.8
4.98-KJuly 6, 20204.9
4.108-KJuly 6, 20204.10
4.118-KJuly 6, 20204.11
4.128-KJuly 6, 20204.12
4.138-KJuly 6, 20204.13
4.148-KJuly 6, 20204.14
4.158-KJuly 6, 20204.15
4.168-KJuly 6, 20204.16
4.178-KJuly 6, 20204.17
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Exhibit
Number
Exhibit
Description
FormDate of First FilingExhibit Number
3.1
Amended and Restated Certificate of Incorporation of Registrant
10-QAugust 3, 20173.1
10.1*
Alaska Air Group Operational Performance Rewards Plan Description, adopted January 3, 2005; Amended February 14, 2017
10-QMay 5, 201710.1
10.2*
Alaska Air Group Performance Based Pay Plan, Amended and Restated January 18, 2017
10-QMay 5, 201710.2
31.1†
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q  
31.2†
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10-Q  
32.1†
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q  
32.2†
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10-Q  
101.INS†
XBRL Instance Document
   
101.SCH†
XBRL Taxonomy Extension Schema Document
   
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
   
     
†Filed herewith   
*Indicates management contract or compensatory plan arrangement   


4.18
Form of Series 2020-1 Equipment Notes issued by Alaska Airlines (included in Exhibits 4.13 and 4.15).
8-KJuly 6, 20204.18
4.19
Form of Series 2020-1 Equipment Notes issued by Horizon (included in Exhibit 4.17).
8-KJuly 6, 20204.19
4.20†10-Q
4.21†10-Q
4.22†10-Q
4.23†10-Q
4.24†10-Q
10.1†10-Q
10.2†10-Q
10.3†10-Q
31.1†10-Q
31.2†10-Q
32.1†10-Q
32.2†10-Q
99.18-KJuly 6, 202099.1
99.28-KJuly 6, 202099.2
99.38-KJuly 6, 202099.3
101.INS†XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.
101.SCH†XBRL Taxonomy Extension Schema Document
101.CAL†XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†XBRL Taxonomy Extension Label Linkbase Document
101.PRE†XBRL Taxonomy Extension Presentation Linkbase Document
†Filed herewith
*Certain confidential information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and it (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed.
**Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.1 filed herewith contains a list of documents applicable to the Boeing 737-890 Aircraft (other than the Aircraft bearing U.S. Registration No. N568AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.12 and 4.13, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-890 Aircraft. Exhibit 99.1 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.12 and 4.13 with respect to the Aircraft bearing U.S. Registration No. N568AS.
***Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.2 filed herewith contains a list of documents applicable to the Boeing 737-990ER Aircraft (other than the Aircraft bearing U.S. Registration No. N494AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.14 and 4.15, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-990ER Aircraft. Exhibit 99.2 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.14 and 4.15 with respect to the Aircraft bearing U.S. Registration No. N494AS.
46
55

****Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.3 filed herewith contains a list of documents applicable to the Embraer E175 LR Aircraft (other than the Aircraft bearing U.S. Registration No. N626QX) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.16 and 4.17, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Embraer E175 LR Aircraft. Exhibit 99.3 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.16 and 4.17 with respect to the Aircraft bearing U.S. Registration No. N626QX.

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