NOTE 7. COMMITMENTS AND CONTINGENCIES
The cancelable purchase commitments and option payments are not reflected in the table above.
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.
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
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.
NOTE 9. OPERATING SEGMENT INFORMATION
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.
Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three3 reportable operating segments:
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
•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.
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:
|
| | | | |
| 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.
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, |
| 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Consolidated Operating Statistics:(a) | | | | | | | | | | | |
Revenue passengers (000) | 3,595 | | 12,574 | | (71.4)% | | 14,012 | | 35,018 | | (60.0)% |
RPMs (000,000) "traffic" | 3,817 | | 15,026 | | (74.6)% | | 16,127 | | 42,113 | | (61.7)% |
ASMs (000,000) "capacity" | 7,871 | | 17,519 | | (55.1)% | | 27,483 | | 50,006 | | (45.0)% |
Load factor | 48.5% | | 85.8% | | (37.3) pts | | 58.7% | | 84.2% | | (25.5) pts |
Yield | 14.99¢ | | 14.71¢ | | 1.9% | | 14.65¢ | | 14.34¢ | | 2.1% |
RASM | 8.90¢ | | 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) | 97 | | 227 | | (57.4)% | | 344 | | 646 | | (46.7)% |
ASMs per fuel gallon | 81.3 | | 77.2 | | 5.3% | | 79.9 | | 77.4 | | 3.2% |
Average full-time equivalent employees (FTEs) | 16,027 | | 22,247 | | (28.0)% | | 18,112 | | 22,000 | | (17.7)% |
Mainline Operating Statistics: | | | | | | | | | | | |
Revenue passengers (000) | 2,156 | | 9,655 | | (77.7)% | | 9,736 | | 26,725 | | (63.6)% |
RPMs (000,000) "traffic" | 2,958 | | 13,538 | | (78.2)% | | 13,816 | | 37,917 | | (63.6)% |
ASMs (000,000) "capacity" | 6,280 | | 15,702 | | (60.0)% | | 23,339 | | 44,816 | | (47.9)% |
Load factor | 47.1% | | 86.2% | | (39.1) pts | | 59.2% | | 84.6% | | (25.4) pts |
Yield | 13.56¢ | | 13.66¢ | | (0.7)% | | 13.46¢ | | 13.29¢ | | 1.3% |
RASM | 8.14¢ | | 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) | 69 | | 193 | | (64.2)% | | 270 | | 549 | | (50.8)% |
ASMs per fuel gallon | 91.0 | | 81.4 | | 11.8% | | 86.4 | | 81.6 | | 5.9% |
Average FTEs | 12,032 | | 16,789 | | (28.3)% | | 13,730 | | 16,599 | | (17.3)% |
Aircraft utilization | 7.3 | | 11.3 | | (35.4)% | | 8.3 | | 10.9 | | (23.9)% |
Average aircraft stage length | 1,244 | | 1,281 | | (2.9)% | | 1,263 | | 1,298 | | (2.7)% |
Operating fleet(d) | 217 | | 238 | | (21) a/c | | 217 | | 238 | | (21) a/c |
Regional Operating Statistics:(c) | | | | | | | | | | | |
Revenue passengers (000) | 1,439 | | 2,919 | | (50.7)% | | 4,276 | | 8,293 | | (48.4)% |
RPMs (000,000) "traffic" | 859 | | 1,488 | | (42.3)% | | 2,311 | | 4,196 | | (44.9)% |
ASMs (000,000) "capacity" | 1,592 | | 1,817 | | (12.4)% | | 4,143 | | 5,190 | | (20.2)% |
Load factor | 54.0% | | 81.9% | | (27.9 pts) | | 55.8% | | 80.8% | | (25.0 pts) |
Yield | 19.89¢ | | 24.23¢ | | (17.9)% | | 21.72¢ | | 23.81¢ | | (8.8)% |
RASM | 11.91¢ | | 20.51¢ | | (41.9)% | | 13.24¢ | | 19.93¢ | | (33.6)% |
Operating fleet | 94 | | 94 | | — a/c | | 94 | | 94 | | — 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.
|
| | | | | | | | | | | |
| 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 factor | 85.4% | | 85.6% | | (0.2) pts | | 84.6% | | 84.2% | | 0.4 pts |
Yield | 13.21¢ | | 13.77¢ | | (4.1)% | | 13.09¢ | | 13.49¢ | | (3.0)% |
PRASM | 11.29¢ | | 11.79¢ | | (4.2)% | | 11.08¢ | | 11.36¢ | | (2.5)% |
RASM | 13.12¢ | | 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 gallon | 78.1 | | 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 factor | 85.8% | | 86.1% | | (0.3) pts | | 85.0% | | 84.8% | | 0.2 pts |
Yield | 12.31¢ | | 12.49¢ | | (1.4)% | | 12.18¢ | | 12.26¢ | | (0.7)% |
PRASM | 10.56¢ | | 10.75¢ | | (1.8)% | | 10.36¢ | | 10.39¢ | | (0.3)% |
RASM | 12.40¢ | | 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 gallon | 80.9 | | 83.9 | | (3.6)% | | 80.6 | | 83.5 | | (3.5)% |
Average FTEs | 15,862 | | 11,397 | | 39.2% | | 15,439 | | 11,260 | | 37.1% |
Aircraft utilization | 11.4 | | 10.6 | | 7.5% | | 11.1 | | 10.7 | | 3.7% |
Average aircraft stage length | 1,300 | | 1,203 | | 8.1% | | 1,296 | | 1,218 | | 6.4% |
Operating fleet | 218 | | 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 factor | 81.7% | | 82.1% | | (0.4 pts) | | 80.2% | | 79.8% | | 0.4 pts |
Yield | 23.48¢ | | 24.75¢ | | (5.1)% | | 23.95¢ | | 24.35¢ | | (1.6)% |
PRASM | 19.17¢ | | 20.32¢ | | (5.7)% | | 19.22¢ | | 19.43¢ | | (1.1)% |
Operating fleet | 83 | | 69 | | 14 a/c | | 83 | | 69 | | 14 a/c |
| |
| 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 costs | 24 |
| | 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, |
| 2020 | | 2019 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted 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 other | 121 | | | 0.98 | | | — | | | — | |
Special items - merger-related costs | 1 | | | 0.01 | | | 5 | | | 0.04 | |
Special items - restructuring charges | 322 | | | 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) | 2020 | | 2019 | | % Change |
Consolidated: | | | | | |
CASM | 16.16 | ¢ | | 11.23 | ¢ | | 44 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (5.06) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 1.59 | | | 2.77 | | | (43) | % |
Special items - merger-related costs | 0.01 | | | 0.03 | | | (67) | % |
Special items - impairment charges and other | 1.53 | | | — | | | NM |
Special items - restructuring charges | 4.09 | | | — | | | NM |
CASM excluding fuel and special items | 14.00 | ¢ | | 8.43 | ¢ | | 66 | % |
| | | | | |
Mainline: | | | | | |
CASM | 16.80 | ¢ | | 10.46 | ¢ | | 61 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (5.56) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 1.43 | | | 2.62 | | | (45) | % |
Special items - merger-related costs | 0.02 | | | 0.03 | | | (33) | % |
| | | | | |
Special items - impairment charges and other | 1.93 | | | — | | | NM |
Special items - restructuring charges | 5.10 | | | — | | | NM |
CASM excluding fuel and special items | 13.88 | ¢ | | 7.81 | ¢ | | 78 | % |
|
| | | | | | | | | | |
| 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 losses | 2.27 |
| | 2.01 |
| | 12.9 | % |
Special items—merger-related costs | 0.15 |
| | 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 losses | 2.19 |
| | 1.91 |
| | 14.7 | % |
Special items—merger-related costs | 0.16 |
| | 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 Factor | 85.4% | | 85.6% | | (a) | | 85.7% | | (0.3) pts |
PRASM | 11.29¢ | | 11.79¢ | | (a) | | 11.43¢ | | (1.2)% |
RASM | 13.12¢ | | 13.97¢ | | (a) | | 13.34¢ | | (1.6)% |
CASMex | 7.98¢ | | 8.20¢ | | (a) | | 7.90¢ | | 1.0% |
FTEs | 20,743 | | 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 Factor | 85.8% | | 86.1% | | (a) | | 86.0% | | (0.2) pts |
PRASM | 10.56¢ | | 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) | 2020 | | 2019 | | % Change |
Passenger revenue | $ | 572 | | | $ | 2,211 | | | (74) | % |
Mileage Plan other revenue | 84 | | | 118 | | | (29) | % |
Cargo and other | 45 | | | 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 | % |
Regional | 262 |
| | 249 |
| | — |
| | 249 |
| | 13 |
| | 5.2 | % |
Total passenger revenue | 1,824 |
| | 1,322 |
| | 402 |
| | 1,724 |
| | 100 |
| | 5.8 | % |
Freight and mail | 32 |
| | 31 |
| | — |
| | 31 |
| | 1 |
| | 3.2 | % |
Other—net | 264 |
| | 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) | 2020 | | 2019 | | % Change |
Fuel expense | $ | 125 | | | $ | 486 | | | (74) | % |
Non-fuel operating expenses, excluding special items | 1,101 | | | 1,476 | | | (25) | % |
Payroll support program grant wage offset | (398) | | | — | | | NM |
Special items - merger-related costs | 1 | | | 5 | | | (80) | % |
| | | | | |
Special items - impairment charges and other | 121 | | | — | | | NM |
Special items - restructuring charges | 322 | | | — | | | NM |
Total operating expenses | $ | 1,272 | | | $ | 1,967 | | | (35) | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 expenses | 1,289 |
| | 919 |
| | 273 |
| | 1,192 |
| | 97 |
| | 8.1 | % |
Special items—merger-related costs | 24 |
| | 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, |
| 2020 | | 2019 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 123 | | | $ | 1.27 | | | $ | 481 | | | $ | 2.11 | |
Losses on settled hedges | 5 | | | 0.05 | | | 5 | | | 0.02 | |
Consolidated economic fuel expense | 128 | | | 1.32 | | | $ | 486 | | | $ | 2.13 | |
Mark-to-market fuel hedge adjustments | (3) | | | (0.03) | | | — | | | — | |
GAAP fuel expense | $ | 125 | | | $ | 1.29 | | | $ | 486 | | | $ | 2.13 | |
Fuel gallons | 97 | | | | | 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 hedges | 5 |
| | 0.02 |
| | 4 |
| | 0.03 |
| | 5 |
| | 0.03 |
|
Consolidated economic fuel expense | 373 |
| | 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 gallons | 207 |
| | | | 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.
| | | 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) | 2020 | | 2019 | | % Change |
Wages and benefits | $ | 475 |
| | $ | 340 |
| | $ | 72 |
| | $ | 412 |
| | $ | 63 |
| | 15.3 | % | Wages and benefits | $ | 495 | | | $ | 608 | | | (19) | % |
Variable incentive pay | 40 |
| | 31 |
| | 11 |
| | 42 |
| | (2 | ) | | (4.8 | )% | Variable incentive pay | 42 | | | 46 | | | (9) | % |
Aircraft maintenance | 88 |
| | 64 |
| | 17 |
| | 81 |
| | 7 |
| | 8.6 | % | Aircraft maintenance | 84 | | | 106 | | | (21) | % |
Aircraft rent | 70 |
| | 25 |
| | 48 |
| | 73 |
| | (3 | ) | | (4.1 | )% | Aircraft rent | 74 | | | 82 | | | (10) | % |
Landing fees and other rentals | 124 |
| | 89 |
| | 28 |
| | 117 |
| | 7 |
| | 6.0 | % | Landing fees and other rentals | 109 | | | 143 | | | (24) | % |
Contracted services | 76 |
| | 63 |
| | 16 |
| | 79 |
| | (3 | ) | | (3.8 | )% | Contracted services | 36 | | | 72 | | | (50) | % |
Selling expenses | 91 |
| | 58 |
| | 34 |
| | 92 |
| | (1 | ) | | (1.1 | )% | Selling expenses | 24 | | | 77 | | | (69) | % |
Depreciation and amortization | 95 |
| | 101 |
| | 11 |
| | 112 |
| | (17 | ) | | (15.2 | )% | Depreciation and amortization | 105 | | | 106 | | | (1) | % |
Food and beverage service | 50 |
| | 31 |
| | 13 |
| | 44 |
| | 6 |
| | 13.6 | % | Food and beverage service | 14 | | | 57 | | | (75) | % |
Third-party regional carrier expense | 30 |
| | 25 |
| | — |
| | 25 |
| | 5 |
| | 20.0 | % | Third-party regional carrier expense | 29 | | | 42 | | | (31) | % |
Other | 150 |
| | 92 |
| | 23 |
| | 115 |
| | 35 |
| | 30.4 | % | Other | 89 | | | 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 items | | Total 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) | 2020 | | 2019 | | % Change |
Wages | $ | 356 | | | $ | 460 | | | (23) | % |
Pension - Defined benefit plans service cost | 11 | | | 10 | | | 10 | % |
Defined contribution plans | 28 | | | 34 | | | (18) | % |
Medical and other benefits | 75 | | | 71 | | | 6 | % |
Payroll taxes | 25 | | | 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 plans | 8 |
| | 6 |
| | — |
| | 6 |
| | 2 |
| | 33.3 | % |
Defined contribution plans | 25 |
| | 16 |
| | 5 |
| | 21 |
| | 4 |
| | 19.0 | % |
Medical and other benefits | 59 |
| | 50 |
| | 6 |
| | 56 |
| | 3 |
| | 5.4 | % |
Payroll taxes | 25 |
| | 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.
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 expenses | 1,077 |
| | 727 |
| | 273 |
| | 1,000 |
| | 77 |
|
Economic fuel | 328 |
| | 188 |
| | 81 |
| | 269 |
| | 59 |
|
Operating income | 429 |
| | 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.
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 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, |
| 2020 | | 2019 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted 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 costs | 5 | | | 0.04 | | | 39 | | | 0.31 | |
Special items - impairment charges and other | 350 | | | 2.84 | | | — | | | — | |
Special items - restructuring charges | 322 | | | 2.61 | | | — | | | — | |
Income tax effect of reconciling items above | 20 | | | 0.16 | | | (9) | | | (0.07) | |
Non-GAAP adjusted net income (loss) and diluted EPS | $ | (940) | | | $ | (7.63) | | | $ | 617 | | | $ | 4.97 | |
|
| | | | | | | | | | | | | | | |
| 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 adjustments | 7 |
| | 0.06 |
| | (9 | ) | | (0.07 | ) |
Special items—merger-related costs | 88 |
| | 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) | 2020 | | 2019 | | % Change |
Consolidated: | | | | | |
CASM | 14.33 | ¢ | | 11.48 | ¢ | | 25 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (2.77) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 2.07 | | | 2.82 | | | (27) | % |
Special items - merger-related costs | 0.02 | | | 0.08 | | | (75) | % |
Special items - impairment charges and other | 1.27 | | | — | | | NM |
Special items - restructuring charges | 1.17 | | | — | | | NM |
CASM excluding fuel and special items | 12.57 | ¢ | | 8.59 | ¢ | | 46 | % |
| | | | | |
Mainline: | | | | | |
CASM | 13.56 | ¢ | | 10.65 | ¢ | | 27 | % |
Less the following components: | | | | | |
Payroll support program grant wage offset | (2.89) | | | — | | | NM |
Aircraft fuel, including hedging gains and losses | 1.92 | | | 2.65 | | | (28) | % |
Special items - merger-related costs | 0.02 | | | 0.09 | | | (78) | % |
Special items - impairment charges and other | 1.24 | | | — | | | NM |
Special items - restructuring charges | 1.37 | | | — | | | NM |
CASM excluding fuel and special items | 11.90 | ¢ | | 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 losses | 2.27 |
| | 1.81 |
| | 25.4 | % |
Special items—merger-related costs | 0.19 |
| | 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 losses | 2.19 |
| | 1.72 |
| | 27.3 | % |
Special items—merger-related costs | 0.21 |
| | 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 Factor | 84.6% | | 84.2% | | (a) | | 84.2% | | 0.4 pts |
PRASM | 11.08¢ | | 11.36¢ | | (a) | | 11.10¢ | | (0.2)% |
RASM | 12.93¢ | | 13.47¢ | | (a) | | 12.95¢ | | (0.2)% |
CASMex | 8.09¢ | | 8.16¢ | | (a) | | 7.98¢ | | 1.4% |
FTEs | 19,723 | | 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 Factor | 85.0% | | 84.8% | | (a) | | 84.6% | | 0.4 pts |
PRASM | 10.36¢ | | 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) | 2020 | | 2019 | | % Change |
Passenger revenue | $ | 2,362 | | | $ | 6,038 | | | (61) | % |
Mileage Plan other revenue | 266 | | | 346 | | | (23) | % |
Cargo and other | 130 | | | 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 | % |
Regional | 725 |
| | 682 |
| | — |
| | 682 |
| | 43 |
| | 6.3 | % |
Total passenger revenue | 5,115 |
| | 3,718 |
| | 1,115 |
| | 4,833 |
| | 282 |
| | 5.8 | % |
Freight and mail | 88 |
| | 82 |
| | — |
| | 82 |
| | 6 |
| | 7.3 | % |
Other—net | 768 |
| | 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.
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) | 2020 | | 2019 | | % Change |
Fuel expense | $ | 568 | | | $ | 1,408 | | | (60) | % |
Non-fuel operating expenses, excluding special items | 3,453 | | | 4,295 | | | (20) | % |
Payroll support program grant wage offset | (760) | | | — | | | NM |
Special items - merger-related costs | 5 | | | 39 | | | (87) | % |
Special items - impairment charges and other | 350 | | | — | | | NM |
Special items - restructuring charges | 322 | | | — | | | 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 expenses | 3,734 |
| | 2,670 |
| | 804 |
| | 3,474 |
| | 260 |
| | 7.5 | % |
Special items—merger-related costs | 88 |
| | 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, |
| 2020 | | 2019 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 553 | | | $ | 1.61 | | | $ | 1,397 | | | $ | 2.16 | |
Losses on settled hedges | 15 | | | 0.04 | | | 12 | | | 0.02 | |
Consolidated economic fuel expense | 568 | | | 1.65 | | | $ | 1,409 | | | $ | 2.18 | |
Mark-to-market fuel hedge adjustments | — | | | — | | | (1) | | | — | |
GAAP fuel expense | $ | 568 | | | $ | 1.65 | | | $ | 1,408 | | | $ | 2.18 | |
Fuel gallons | 344 | | | | | 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 hedges | 14 |
| | 0.02 |
| | 12 |
| | 0.03 |
| | 32 |
| | 0.06 |
|
Consolidated economic fuel expense | 1,044 |
| | 1.76 |
| | 602 |
| | 1.47 |
| | $ | 833 |
| | $ | 1.50 |
|
Mark-to-market fuel hedge adjustments | 7 |
| | 0.01 |
| | (9 | ) | | (0.02 | ) | | (11 | ) | | (0.02 | ) |
GAAP fuel expense | $ | 1,051 |
| | $ | 1.77 |
| | $ | 593 |
| | $ | 1.45 |
| | $ | 822 |
| | $ | 1.48 |
|
Fuel gallons | 592 |
| | | | 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.
Non-fuel Expense and Non- special items
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2020 | | 2019 | | % Change |
Wages and benefits | $ | 1,579 | | | $ | 1,732 | | | (9) | % |
Variable incentive pay | 65 | | | 125 | | | (48) | % |
Aircraft maintenance | 244 | | | 341 | | | (28) | % |
Aircraft rent | 229 | | | 247 | | | (7) | % |
Landing fees and other rentals | 323 | | | 388 | | | (17) | % |
Contracted services | 138 | | | 214 | | | (36) | % |
Selling expenses | 83 | | | 236 | | | (65) | % |
Depreciation and amortization | 320 | | | 317 | | | 1 | % |
Food and beverage service | 70 | | | 159 | | | (56) | % |
Third-party regional carrier expense | 92 | | | 125 | | | (26) | % |
Other | 310 | | | 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 pay | 98 |
| | 95 |
| | 25 |
| | 120 |
| | (22 | ) | | (18.3 | )% |
Aircraft maintenance | 271 |
| | 197 |
| | 51 |
| | 248 |
| | 23 |
| | 9.3 | % |
Aircraft rent | 204 |
| | 80 |
| | 143 |
| | 223 |
| | (19 | ) | | (8.5 | )% |
Landing fees and other rentals | 338 |
| | 232 |
| | 83 |
| | 315 |
| | 23 |
| | 7.3 | % |
Contracted services | 234 |
| | 183 |
| | 47 |
| | 230 |
| | 4 |
| | 1.7 | % |
Selling expenses | 269 |
| | 162 |
| | 96 |
| | 258 |
| | 11 |
| | 4.3 | % |
Depreciation and amortization | 275 |
| | 281 |
| | 29 |
| | 310 |
| | (35 | ) | | (11.3 | )% |
Food and beverage service | 145 |
| | 93 |
| | 39 |
| | 132 |
| | 13 |
| | 9.8 | % |
Third-party regional carrier expense | 84 |
| | 72 |
| | — |
| | 72 |
| | 12 |
| | 16.7 | % |
Other | 424 |
| | 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) | 2020 | | 2019 | | % Change |
Wages | $ | 1,159 | | | $ | 1,305 | | | (11) | % |
Pension—Defined benefit plans service cost | 37 | | | 31 | | | 19 | % |
Defined contribution plans | 96 | | | 100 | | | (4) | % |
Medical and other benefits | 205 | | | 203 | | | 1 | % |
Payroll taxes | 82 | | | 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 plans | 24 |
| | 19 |
| | — |
| | 19 |
| | 5 |
| | 26.3 | % |
Defined contribution plans | 73 |
| | 49 |
| | 18 |
| | 67 |
| | 6 |
| | 9.0 | % |
Medical and other benefits | 163 |
| | 135 |
| | 18 |
| | 153 |
| | 10 |
| | 6.5 | % |
Payroll taxes | 77 |
| | 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.
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.
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 expenses | 3,101 |
| | 2,107 |
| | 804 |
| | 2,911 |
| | 190 |
|
Economic fuel | 924 |
| | 512 |
| | 231 |
| | 743 |
| | 181 |
|
Operating income | 1,157 |
| | 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.
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, 2020 | | December 31, 2019 | | Change |
Cash and marketable securities | $ | 3,759 | | | $ | 1,521 | | | 147 % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 75 | % | | 22 | % | | 53 pts |
Total debt | 3,822 | | | 1,499 | | | 155 % |
Shareholders’ equity | $ | 3,454 | | | $ | 4,331 | | | (20)% |
| | | | | | | | | | | | | | | | | |
Debt-to-capitalization, adjusted for operating leases | | | | | |
(in millions) | September 30, 2020 | | December 31, 2019 | | Change |
Long-term debt, net of current portion | $ | 2,672 | | | $ | 1,264 | | | 111% |
Capitalized operating leases | 1,603 | | | 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' equity | 3,454 | | | 4,331 | | | (20)% |
Total invested capital | $ | 8,498 | | | $ | 7,303 | | | 16% |
| | | | | |
Debt-to-capitalization, including operating leases | 59 | % | | 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.
|
| | | | | | | | | |
(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' revenue | 29 | % | | 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, 2020 | | December 31, 2019 |
Current portion of long-term debt | $ | 1,150 | | | $ | 235 | |
Current portion of operating lease liabilities | 283 | | | 269 | |
Long-term debt, net of current portion | 2,672 | | | 1,264 | |
Long-term operating lease liabilities, net of current portion | 1,320 | | | 1,439 | |
Total adjusted debt | 5,425 | | | 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, 2020 | | Last 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 amortization | 426 | | | 423 | |
Aircraft rent | 313 | | | 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.
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 equipment | 100 |
| | 135 |
| | 170 |
|
Other property and equipment | 170 |
| | 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 Fleet | | Anticipated Fleet Activity |
Aircraft | September 30, 2020 | | 2020 Additions | | 2020 Removals | | December 31, 2020 | | 2021 Changes | | December 31, 2021 |
B737 Freighters | 3 | | | — | | | — | | | 3 | | | — | | | 3 | |
B737-700 | 11 | | | — | | | — | | | 11 | | | — | | | 11 | |
B737-800 | 61 | | | — | | | — | | | 61 | | | — | | | 61 | |
B737-900 | 12 | | | — | | | — | | | 12 | | | — | | | 12 | |
B737-900ER | 79 | | | — | | | — | | | 79 | | | — | | | 79 | |
B737 MAX9(a) | — | | | 3 | | | — | | | 3 | | | 15 | | | 18 | |
A320(b) | 41 | | | — | | | — | | | 41 | | | (7) | | | 34 | |
A321neo | 10 | | | — | | | — | | | 10 | | | — | | | 10 | |
Total Mainline Fleet | 217 | | | 3 | | | — | | | 220 | | | 8 | | | 228 | |
Q400 operated by Horizon | 32 | | | — | | | — | | | 32 | | | — | | | 32 | |
E175 operated by Horizon | 30 | | | — | | | — | | | 30 | | | — | | | 30 | |
E175 operated by third party | 32 | | | — | | | — | | | 32 | | | — | | | 32 | |
Total Regional Fleet | 94 | | | — | | | — | | | 94 | | | — | | | 94 | |
Total | 311 | | | 3 | | | — | | | 314 | | | 8 | | | 322 | |
|
| | | | | | | | | | | | | | | | | |
| Actual Fleet | | Expected Fleet Activity |
Aircraft | September 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 Aircraft | 148 |
| | 4 |
| | (1 | ) | | 151 |
| | 19 |
| | 170 |
|
Airbus Passenger Aircraft | 65 |
| | 3 |
| | — |
| | 68 |
| | 4 |
| | 72 |
|
Total Mainline Fleet | 218 |
| | 9 |
| | (4 | ) | | 223 |
| | 22 |
| | 245 |
|
Q400 operated by Horizon | 52 |
| | — |
| | — |
| | 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 Fleet | 83 |
| | 2 |
| | — |
| | 85 |
| | 20 |
| | 105 |
|
Total | 301 |
| | 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.
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 Barrel | | Average Premium Cost per Barrel |
| | | | | |
| | | | | |
| | | | | |
Fourth Quarter 2020 | 90 | | $64 | | $2 |
Full Year 2020 | 90 | | $64 | | $2 |
First Quarter 2021 | 60 | | $62 | | $2 |
Second Quarter 2021 | 65 | | $60 | | $2 |
Third Quarter 2021 | 55 | | $56 | | $2 |
Fourth Quarter 2021 | 35 | | $50 | | $3 |
Full Year 2021 | 215 | | $58 | | $2 |
First Quarter 2022 | 15 | | $51 | | $3 |
Full Year 2022 | 15 | | $51 | | $3 |
|
| | | | | | | | | | |
| Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
Fourth Quarter 2017 | 50 | % | | $ | 61 |
| | $ | 2 |
|
First Quarter 2018 | 50 | % | | 62 |
| | 2 |
|
Second Quarter 2018 | 40 | % | | $ | 61 |
| | $ | 2 |
|
Third Quarter 2018 | 30 | % | | 60 |
| | 2 |
|
Fourth Quarter 2018 | 20 | % | | 60 |
| | 2 |
|
Full Year 2018 | 35 | % | | 61 |
| | 2 |
|
First Quarter 2019 | 10 | % | | 62 |
| | 2 |
|
Total 2019 | 2 | % | | $ | 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 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Beyond 2024 | | Total |
Current and long-term debt obligations | $ | 73 | | | $ | 1,201 | | | $ | 393 | | | $ | 357 | | | $ | 265 | | | $ | 1,568 | | | $ | 3,857 | |
Aircraft lease commitments | 88 | | | 310 | | | 276 | | | 219 | | | 166 | | | 679 | | | 1,738 | |
Facility lease commitments | 3 | | | 9 | | | 8 | | | 7 | | | 7 | | | 84 | | | 118 | |
Aircraft maintenance deposits | 7 | | | 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 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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. |
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(b) | Aircraft maintenance deposits relate to leased Airbus aircraft. |
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(c) | Represents non-cancelable contractual commitments for aircraft and engines. |
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(d) | For variable-rate debt, future obligations are shown above using interest rates in effect as of September 30, 2017. |
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(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. |
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(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.
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”
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
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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.
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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).
PART II
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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.
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
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.
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.
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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. |
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| 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, 2017 | 5,770 |
| | $ | 84.37 |
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August 1, 2017 - August 31, 2017 | 349,645 |
| | 78.52 |
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September 1, 2017 - September 30, 2017 | — |
| | — |
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Total | 355,415 |
| | $ | 78.61 |
| | $ | 637 |
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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.
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ITEM 4. MINE SAFETY DISCLOSURES |
None.
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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).
The following documents are filed as part of this report:
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1. | Exhibits: See Exhibit Index.
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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.
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ALASKA AIR GROUP, INC. | |
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ALASKA AIR GROUP, INC. | |
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/s/ CHRISTOPHER M. BERRY | |
Christopher M. Berry | |
Vice President Finance and Controller | |
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November 2, 20175, 2020 | |
EXHIBIT INDEX
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Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
4.1 | | 8-K | July 6, 2020 | 4.1 |
4.2 | | 8-K | July 6, 2020 | 4.2 |
4.3 | | 8-K | July 6, 2020 | 4.3 |
4.4 | | 8-K | July 6, 2020 | 4.4 |
4.5 | | 8-K | July 6, 2020 | 4.5 |
4.6 | | 8-K | July 6, 2020 | 4.6 |
4.7 | | 8-K | July 6, 2020 | 4.7 |
4.8 | | 8-K | July 6, 2020 | 4.8 |
4.9 | | 8-K | July 6, 2020 | 4.9 |
4.10 | Revolving Credit Agreement (2020-1A), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1A and as Borrower, and Crédit Agricole Corporate and Revolving Credit Agreement (2020-1A), dated as of July 2, 2020, between U.S. Bank Trust National Association, as Subordination Agent, as agent and trustee for the trustee of Alaska Air Pass Through Trust 2020-1A and as Borrower, and Crédit Agricole Corporate and Investment Bank, acting through its New York Branch, as Class A Liquidity Provider. * | 8-K | July 6, 2020 | 4.10 |
4.11 | | 8-K | July 6, 2020 | 4.11 |
4.12 | Participation Agreement (N568AS), dated as of July 2, 2020, among Alaska Airlines, U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, ** | 8-K | July 6, 2020 | 4.12 |
4.13 | | 8-K | July 6, 2020 | 4.13 |
4.14 | Participation Agreement (N494AS), dated as of July 2, 2020, among Alaska Airlines, U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, *** | 8-K | July 6, 2020 | 4.14 |
4.15 | | 8-K | July 6, 2020 | 4.15 |
4.16 | Participation Agreement (N626QX), dated as of July 2, 2020, among Horizon U.S. Bank Trust National Association, as Pass Through Trustee under the Pass Through Trust Agreements, U.S. Bank Trust National Association, as Subordination Agent, U.S. Bank Trust National Association, as Loan Trustee, and U.S. Bank Trust National Association, in its individual capacity as set forth therein. *, **** | 8-K | July 6, 2020 | 4.16 |
4.17 | | 8-K | July 6, 2020 | 4.17 |
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Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
10.1* | | 10-Q | May 5, 2017 | 10.1 |
10.2* | | 10-Q | May 5, 2017 | 10.2 |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | | | | |
101.SCH† | | | | |
101.CAL† | | | | |
101.DEF† | | | | |
101.LAB† | | | | |
101.PRE† | | | | |
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† | Filed herewith | | | |
* | Indicates management contract or compensatory plan arrangement | | | |
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4.18 | Form of Series 2020-1 Equipment Notes issued by Alaska Airlines (included in Exhibits 4.13 and 4.15). | 8-K | July 6, 2020 | 4.18 |
4.19 | Form of Series 2020-1 Equipment Notes issued by Horizon (included in Exhibit 4.17). | 8-K | July 6, 2020 | 4.19 |
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† | Loan and Guarantee Agreement, dated as of September 28, 2020, and amended and restated as of October 30, 2020 among Alaska Airlines, Inc., as Borrower, the Guarantors party hereto from time to time, the United States Department of the Treasury, and The Bank of New York Mellon, as Administrative Agent and Collateral Agent | 10-Q | | |
10.3† | | 10-Q | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
99.1 | | 8-K | July 6, 2020 | 99.1 |
99.2 | | 8-K | July 6, 2020 | 99.2 |
99.3 | | 8-K | July 6, 2020 | 99.3 |
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 | | | |
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† | 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. |
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**** | 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. |