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.
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 $143$144 million, or 64%71%, compared to the thirdfirst quarter of 2016. On a Combined Comparative basis, aircraft fuel expense increased $62 million or 20%.2021. The elements of the change are illustrated in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | |
| 2022 | | 2021 | | | |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal | | | |
Raw or "into-plane" fuel cost | $ | 504 | | | $ | 2.91 | | | $ | 222 | | | $ | 1.77 | | | | |
(Gain)/loss on settled hedges | (50) | | | (0.29) | | | 3 | | | 0.02 | | | | |
Consolidated economic fuel expense | $ | 454 | | | $ | 2.62 | | | $ | 225 | | | $ | 1.79 | | | | |
Mark-to-market fuel hedge adjustments | (107) | | | (0.62) | | | (22) | | | (0.18) | | | | |
GAAP fuel expense | $ | 347 | | | $ | 2.00 | | | $ | 203 | | | $ | 1.61 | | | | |
Fuel gallons | | | 173 | | | | | 126 | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | |
OnRaw fuel expense increased 127% in the first quarter of 2022 compared to the first quarter of 2021 due to a Combined Comparative basis, rawcombination of increased fuel consumption and higher per gallon costs. Fuel consumption increased by 47 million gallons, consistent with an increase in departures. Raw fuel expense per gallon for the three months ended September 30, 2017 increased by 16%approximately 64% due to higher 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 increase in raw fuel price per gallon during the thirdfirst quarter of 20172022 was primarily driven by a 76% increase in refining margins and an 8%64% increase in crude oil prices when compared to the prior year. Fuel gallons consumed increased by 15 million gallons, or 8%, in line with the increase in capacity.
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 economicEconomic fuel expense, we include includes 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.
WeGains recognized total losses of $5 million and $4 million for hedges that settled during the thirdfirst quarter were $50 million in 2022, compared to losses of 2017 and 2016 as reported.$3 million in the same period in 2021. These amounts represent the netcash received from hedges at settlement, offset by cash paid includingfor premium expense.
We expect to see continued pressure in aircraft fuel expense as we progress through 2022, driven by both increased raw fuel and refining margins on increased capacity. We expect our economic fuel cost per gallon in the premium expense recognized for those hedges.second quarter to range between $3.20 and $3.25 per gallon. Based on expected raw fuel prices, we will continue to recognize benefits from our fuel hedge portfolio during 2022. We expect the magnitude of the hedge benefit to be lesser in the second half of the year as the strike price of the portfolio approaches projected market cost per barrel.
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 other special items. Significant operating expense variances from 20162021 are more fully described below. | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2022 | | 2021 | | % Change |
Wages and benefits | $ | 606 | | | $ | 493 | | | 23 | % |
Variable incentive pay | 36 | | | 33 | | | 9 | % |
Aircraft maintenance | 135 | | | 81 | | | 67 | % |
Aircraft rent | 73 | | | 62 | | | 18 | % |
Landing fees and other rentals | 138 | | | 129 | | | 7 | % |
Contracted services | 78 | | | 51 | | | 53 | % |
Selling expenses | 58 | | | 33 | | | 76 | % |
Depreciation and amortization | 102 | | | 97 | | | 5 | % |
Food and beverage service | 41 | | | 23 | | | 78 | % |
Third-party regional carrier expense | 42 | | | 30 | | | 40 | % |
Other | 152 | | | 105 | | | 45 | % |
Total non-fuel operating expenses, excluding special items | $ | 1,461 | | | $ | 1,137 | | | 28 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
(in millions) | 2017 | | 2016 as Reported | | 2016 Virgin America | | 2016 Combined | | $ Combined | | % Combined |
Wages and benefits | $ | 475 |
| | $ | 340 |
| | $ | 72 |
| | $ | 412 |
| | $ | 63 |
| | 15.3 | % |
Variable incentive pay | 40 |
| | 31 |
| | 11 |
| | 42 |
| | (2 | ) | | (4.8 | )% |
Aircraft maintenance | 88 |
| | 64 |
| | 17 |
| | 81 |
| | 7 |
| | 8.6 | % |
Aircraft rent | 70 |
| | 25 |
| | 48 |
| | 73 |
| | (3 | ) | | (4.1 | )% |
Landing fees and other rentals | 124 |
| | 89 |
| | 28 |
| | 117 |
| | 7 |
| | 6.0 | % |
Contracted services | 76 |
| | 63 |
| | 16 |
| | 79 |
| | (3 | ) | | (3.8 | )% |
Selling expenses | 91 |
| | 58 |
| | 34 |
| | 92 |
| | (1 | ) | | (1.1 | )% |
Depreciation and amortization | 95 |
| | 101 |
| | 11 |
| | 112 |
| | (17 | ) | | (15.2 | )% |
Food and beverage service | 50 |
| | 31 |
| | 13 |
| | 44 |
| | 6 |
| | 13.6 | % |
Third-party regional carrier expense | 30 |
| | 25 |
| | — |
| | 25 |
| | 5 |
| | 20.0 | % |
Other | 150 |
| | 92 |
| | 23 |
| | 115 |
| | 35 |
| | 30.4 | % |
Total non-fuel and non-special operating expenses | $ | 1,289 |
| | $ | 919 |
| | 273 |
| | 1,192 |
| | 97 |
| | 8.1 | % |
For the remainder of the year, we generally anticipate recognizing incremental costs as compared to 2021 as we continue to increase our capacity and scheduled departures, and hire additional employees at higher wage rates to staff our operation.
Wages and Benefits
Wages and benefits increased during the thirdfirst quarter of 20172022 by $135 million, or 40%. On a Combined Comparative basis, total wages and benefits increased by $63$113 million, or 15%.23%, compared to 2021. The primary components of wages and benefits, including a reconciliation of 2016 on a Combined Comparative basis, are shown in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
On a Combined Comparative basis, wages increased 16% with an 18% increase in FTEs. The increase in FTEs is attributable to the growth in our business, as well as the growth 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 operations and flight cancellations 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 2017 compared to the same period in 2016. On a Combined Comparative basis, depreciation and amortization expense decreased by $17 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%, during the third quarter of 2017 compared to the same period in 2016. On a Combined Comparative basis, other operating expenses increased by $35 million, or 30%. The increase is primarily due to additional costs incurred for crew hotel costs, passenger disruption costs, training costs for front-line employees, scrapped parts inventory, and certain information technology costs. These increases were largely driven by the growth in our business and increased costs from flight cancellations and delays during the quarter. .
Nonoperating Income (Expense)
During the third quarter of 2017 we recorded nonoperating expense of $12 million compared to income of $2 million in the same period in 2016. On a Combined Comparative basis, nonoperating expense increased by $9 million, primarily due to interest expense incurred in the current year on the debt issued in 2016 to finance the acquisition of Virgin America.
Additional Segment Information
Refer to Note 9 of the 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:
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| | | | | | | | | | | | | | | | | | | |
| 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 profit of $20 million in the third quarter of 2017 compared to $35 million in the third quarter of 2016. The decrease in pretax profit was attributable to higher non-fuel operating expense, due to increased capacity and the operational disruptions at Horizon during the third quarter. Increased costs were partially offset by a $13 million increase in operating revenues as described in Passenger Revenue—Regional.
Horizon
Horizon incurred a pretax profit of $5 million in the third quarter of 2017 compared to $9 million in the third quarter of 2016. The change in pretax profit was primarily driven by a $4 million increase in operating revenue, partially offset by higher non-fuel operating expenses attributable to higher wage and pilot training expense as a result of the increase in FTEs, along with other increased costs associated with flight cancellations during the current quarter.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2017 TO NINE MONTHS ENDED SEPTEMBER 30, 2016
Our consolidated net income for the nine months ended September 30, 2017 was $661 million, or $5.31 per diluted share, compared to net income of $700 million, or $5.63 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 America 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, 2017 was $721 million, or $5.79 per diluted share, compared to an adjusted net income of $717 million, or $5.77 per diluted share, in the nine months ended September 30, 2016. The following tables reconcile our adjusted net income and diluted EPS to amounts as reported in accordance with GAAP:
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| | | | | | | | | | | | | | | |
| 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) | 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$1.6 billion, or 35%, during the first nine months of 2017 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $330 million, or 6%. 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, | | 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—Mainline
Mainline passenger revenue for the first nine months of 2017increased45% on a 45%increase in capacity, driven primarily by the acquisition of Virgin America, and flat PRASM compared to the same period in 2016. On a Combined Comparative basis, mainline passenger revenue for the nine months ended September 30, 2017 increased 6%, primarily due to a 6% increase in capacity on flat PRASM. The increase in capacity was driven by our network expansion since September 30, 2016.
Passenger Revenue—Regional
Regional passenger revenue increased by $43 million, or 6%, 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%. 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, | | 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 $458 million, or 77%, compared to the nine months ended September 30, 2016. On a Combined Comparative basis, aircraft fuel expense increased $229 million, or 28%. The elements of the change are illustrated in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, the raw fuel price per gallon increased 21% due to higher 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 increase in raw fuel price per gallon during the first nine months of 2017 was driven by a 19% increase in crude oil prices and a 38% increase in refining margins.
We recognized losses of $14 million and $12 million for hedges that settled in the first nine months of 2017 and 2016 as reported. These amounts represent the cash paid for premium expense, offset by cash received from those hedges.
We currently expect our economic fuel price per gallon to be higher in the fourth quarter of 2017 compared to the fourth quarter of 2016 due to our current estimate of higher crude prices and higher refining margins.
Non-fuel Expense 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 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 increased during the first nine months of 2017 by $384 million, or 38%, compared to 2016. On a Combined Comparative basis, total wages and benefits increased by $165 million or 13%, compared to 2016. The primary components of wages and benefits are shown in the following table: | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2022 | | 2021 | | % Change |
Wages | $ | 467 | | | $ | 357 | | | 31 | % |
Pension - Defined benefit plans service cost | 11 | | | 13 | | | (15) | % |
Defined contribution plans | 38 | | | 32 | | | 19 | % |
Medical and other benefits | 56 | | | 65 | | | (14) | % |
Payroll taxes | 34 | | | 26 | | | 31 | % |
Total wages and benefits | $ | 606 | | | $ | 493 | | | 23 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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, wagesWages increased $135$110 million, or 15%31%, on a 14%26% increase in FTEs. The increase in FTEs is attributable to the growth of our business and increased staffing during irregular operations, as well as the growth in McGee Air Services which has brought certain airport ground service positions in-house that were previously reflected in our Contracted services expense. The remainder of the increase is driven by higher wage rates for certain labor groups. The first nine months of 2017 also include $9 million of ratification bonus expense in connection with the agreement reached with Horizon's pilots during the second quarter.
For the full year, we expectIncreased wages and benefits to increase at a rate greater than capacity growth on a combined comparative basis, due to higher wage rates for certain labor groups and the continued growth 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.
Variable Incentive Pay
Variable incentive pay expense increased during the first nine months of 2017 by $3 million, or 3% compared to 2016. On a Combined Comparative basis, variable incentive pay decreased $22 million, or 18% due to expectations of lower performance-based pay as compared to the prior year based on how weperiod are trackingprimarily the result of the increase in relationFTEs as Alaska and Horizon continue their recovery from the pandemic and ramp up operations. Increased expense for defined contribution plans and payroll taxes are in line with the related increase to wages.
Medical and other benefits decreased as compared to 2021 as a result of an adjustment to prior-period reserves and structural changes to benefit programs.
Aircraft Maintenance
Aircraft maintenance expense increased $54 million, or 67%, compared to the current year's goals.first quarter of 2021. Higher maintenance expense is the result of charges recorded for maintenance work to return leased aircraft and increased power-by-the-hour charges on covered aircraft, including a new contract for our regional fleet.
ForAircraft Rent
Aircraft rent expense increased by $11 million, or 18%, during the full year, wefirst quarter of 2022 compared to the same period in 2021 primarily as a result of leased Boeing 737-9 deliveries in the second half of 2021 and first quarter of 2022.
We expect variable incentive payaircraft rent to increase in 2022 on the annualization of expense and additional deliveries of leased 737-9 aircraft and incremental aircraft flown by SkyWest under our long-term capacity purchase agreement.
Landing Fees and Other Rentals
Landing fees and other rentals increased by $9 million, or 7%, during the first quarter of 2022. The increase compared to be lower thanthe same period in 2016 on a combined comparative basis,2021 is due to lower achievement against performance-based pay metrics than prior year.an increase in departures as demand returns, partially offset by decreases in rates at some of the airports we service.
Depreciation and AmortizationContracted Services
Depreciation and amortization expense decreased $6Contracted services increased by $27 million, or 2%53%, during the first quarter of 2022 compared to 2016. On a Combined Comparative basis, depreciationthe same period in 2021 driven primarily by increased departures and amortization decreased $35passengers in line with increased demand, coupled with increased rates charged by vendor partners.
Selling Expense
Selling expense increased by $25 million, or 11%. This decrease was76%, during the first quarter of 2022 compared to the same period in 2021, primarily driven by a changean increase in distribution costs and credit card commissions incurred with 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.overall revenue recovery.
For the full year, we expect depreciation and amortization to be 5-6% lower than in 2016 on a combined comparative basis for the same reasons mentioned above.
Food and Beverage Service
Food and beverage service expense increased $52by $18 million, or 56%. On a Combined Comparative basis, food and beverage service expense increased $13 million, or 10% due78%, during the first quarter of 2022 compared to increased number of passengers, premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products.
For the full year, we expect food and beverage expense to be approximately 11-12% higher thansame period in 2016 on a combined comparative basis,2021. This increase is in line with the 86% increase in revenue passengers inas compared to the current year, and enhancements to our onboard menu offerings.prior-year period.
Third-PartyThird-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made toexpenses associated with SkyWest and Pen Air under our CPAs,CPA, increased by $12 million, or 17%40%, during the first quarter of 2022 compared to 2016.the same period in 2021. The increase in expense is primarily due to the additional six E175 aircraft operatedincremental departures flown by SkyWest as compared to the prior-year period. In addition, a benefit was recorded in 2021 associated with the current year.pass through of CARES Act PSP funding that reduced expense, which did not recur in 2022.
For the full year, weWe expect Third-partythird-party regional carrier expense to increase duegrow in 2022 as compared to increased flying by our regional partners.
2021 as we bring incremental E175 aircraft into the CPA with SkyWest through the year.
Other Operating ExpensesExpense
Other operating expensesexpense increased by $157$47 million, or 59%45%, during the first quarter of 2022 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 million for merger-related costs associated with our acquisition of Virgin America 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. Costs incurred in the first nine months of 2017 consisted primarily of severance and retention and IT integration costs.
We expect to incur merger-related costs for the remainder of 2017, and continuing through 2019.
Nonoperating Income (Expense)
During the first nine months of 2017, we had nonoperating expense of $40 million, compared to income of $6 million in the same period in 2016. On a Combined Comparative basis, nonoperating2021. Increased expense increasedis primarily driven by $32incremental crew hotel stays and per diem, consistent with the overall increase in departures and capacity.
Special Items - fleet transition and related charges
We recorded non-recurring expense associated with fleet transition and related charges of $75 million primarily due to interest expense incurred in the current year onfirst quarter of 2022. Refer to Note 2 to the debt issued in 2016 to finance the acquisition of Virgin America.condensed consolidated financial statements for additional details.
Additional Segment Information
ADDITIONAL 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 operations recorded an adjusted pretax profit was $1.13 billionloss of $174 million in the first nine monthsquarter of 2017,2022, compared to $1.05 billionan adjusted pretax loss of $444 million in the same period in 2016. On a Combined Comparative basis, Mainline adjusted pretax profit decreased by $111 million.first quarter of 2021. 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$270 million decrease in Combined Comparative pretax profitimprovement was primarily driven by a $181$737 million increase in Passenger revenues as a result of increased demand for air travel, offset by a $301 million increase in non-fuel operating costs and a $207 million increase in economic fuel cost.
Non-fuel operating expenses increased significantly, driven by increased variable costs, largely consistent with the overall increase in capacity and departures. Higher economic fuel prices, combined with more gallons consumed, drove the increase in Mainline fuel expense,expense.
Regional
Regional operations recorded an adjusted pretax loss of $55 million in the first quarter of 2022, compared to an adjusted pretax loss of $150 million in the first quarter of 2021. Improved results were attributable to a $190$113 million increase in Mainline non-fuel operating expenses, andrevenues, partially offset by a $27$21 million increase in nonoperating expense. These increases were offsetfuel costs.
Regional passenger revenues increased significantly compared to the first quarter of 2021, primarily driven by increased load factors and a $287 million increase31% improvement in Mainline passenger revenue. yield.
Higher raweconomic fuel prices, and ancombined with a significant increase in gallons consumed, drove the increase in MainlineRegional 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.
RegionalHorizon
Our Regional operations contributed aHorizon recorded an adjusted pretax profitloss of $40$10 million in the first nine monthsquarter of 2017,2022, compared to $72 million in the first nine months of 2016. The decrease inan adjusted 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 lossincome of $11 million in the first nine monthsquarter of 2017, compared2021. The shift to pretax profit of $14 million in the same period in 2016. The change wasadjusted loss is driven by higher non-fuel expenses and lower CPA Revenues (100% of which are from Alaskarevenue on decreased departures, combined with incremental maintenance expense on E175 aircraft and eliminated in consolidation). Non-fuel expenses increased primarily due to higher wage and training expense as a result of the increase in FTE’s, increasedbenefit 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.on incremental FTEs.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
Our existing•Existing cash and marketable securities balance of $1.7$2.9 billion,, and our expected cash flows from operations;
Our 64•58 unencumbered aircraft in our operating fleet that could be financed, if necessary;
Our combined•Combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million. Information about these facilities can be found in Note 5 to the condensed consolidated financial statements.
During the ninethree months ended September 30, 2017,March 31, 2022, we took free and clear delivery of ten B737-900ER aircraft and ten E175seven Boeing 737-9 aircraft. We also made debt payments totaling $265$170 million, ending the quarter with a debt-to-capitalization ratio of 50%, within our stated target range of 40% to 50%. Subsequent to quarter end, we received $184 million in federal tax refund as a result of carrying back losses from the 2020 tax year.
As the business returns to sustained profitability, reducing outstanding debt, normalizing our on-hand liquidity, and paid dividends totaling $111 million.reinforcing our balance sheet remain high priorities. Our capital expenditures for 2022 are expected to be approximately $1.6 billion to $1.7 billion, which we plan to fund with cash generated by operating activities and cash on hand.
We believe that our current cash and marketable securities balance, combined with available sources of liquidity, will be sufficient to fund our operations, meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.
In our cash and marketable securities portfolio, we invest only in securities that meet our primary investment strategy of maintaining and securing investment principal. The portfolio is managed by reputable firms that adhere to our investment policy that sets forth investment objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy, and the portfolio managers, are continually reviewed to ensure that the investments are aligned with our strategy.
The table below presents the major indicators of financial condition and liquidity: | | | | | | | | | | | | | | | | | |
(in millions) | March 31, 2022 | | December 31, 2021 | | Change |
Cash and marketable securities | $ | 2,890 | | | $ | 3,116 | | | (7) % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 47 | % | | 57 | % | | (10) pts |
Long-term debt, net of current portion | 2,078 | | | 2,173 | | | (4)% |
Shareholders’ equity | $ | 3,637 | | | $ | 3,801 | | | (4)% |
| | | | | | | | | | | | | | | | | |
Debt-to-capitalization, adjusted for operating leases | | | | | |
(in millions) | March 31, 2022 | | December 31, 2021 | | Change |
Long-term debt, net of current portion | $ | 2,078 | | | $ | 2,173 | | | (4)% |
Capitalized operating leases | 1,629 | | | 1,547 | | | 5% |
| | | | | |
Adjusted debt, net of current portion of long-term debt | $ | 3,707 | | | $ | 3,720 | | | —% |
Shareholders' equity | 3,637 | | | 3,801 | | | (4)% |
Total invested capital | $ | 7,344 | | | $ | 7,521 | | | (2)% |
| | | | | |
Debt-to-capitalization, including operating leases | 50 | % | | 49 | % | | 1 pt |
|
| | | | | | | | | |
(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 |
| | | | | | | | | | | |
Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items and rent | | |
(in millions) | March 31, 2022 | | December 31, 2021 |
Current portion of long-term debt | $ | 292 | | | $ | 366 | |
Current portion of operating lease liabilities | 272 | | | 268 | |
Long-term debt | 2,078 | | | 2,173 | |
Long-term operating lease liabilities, net of current portion | 1,357 | | | 1,279 | |
Total adjusted debt | 3,999 | | | 4,086 | |
Less: Cash and marketable securities | (2,890) | | | (3,116) | |
Adjusted net debt | $ | 1,109 | | | $ | 970 | |
| | | |
(in millions) | Twelve Months Ended March 31, 2022 | | Twelve Months Ended December 31, 2021 |
GAAP Operating Income(a) | $ | 644 | | | $ | 685 | |
Adjusted for: | | | |
Payroll Support Program grant wage offset and special items | (468) | | | (925) | |
Mark-to-market fuel hedge adjustments | (132) | | | (47) | |
Depreciation and amortization | 399 | | | 394 | |
Aircraft rent | 265 | | | 254 | |
EBITDAR | $ | 708 | | | $ | 361 | |
Adjusted net debt to EBITDAR | 1.6x | | 2.7x |
| |
(a) | Calculated using the present value of remaining aircraft lease payments for aircraft in our operating fleet as of the balance sheet date. |
(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 by Operating Activities
For the first ninethree months of 2017,2022, net cash provided by operating activities was $1.4 billion,$287 million, compared to $1.2 billion$167 million during the same period in 2016.2021. The $151$120 million increase in our operating cash flows is primarily attributable to increased ticket sales for future travel compared to the prior year resulting from the overall growthbuild in our business andair traffic liability, as cash advance bookings in March 2022 reached the addition of Virgin America.highest monthly total in company history. This increase was partially offset by a decrease inuses of cash on increasing operating expenses and greater payout on our net income, which was impacted by higher fuel costs and $88 million of merger-related costs.performance based pay program as compared to 2021.
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 provided by investing activities was $39 million during the first three months of 2022, compared to $543 million used in investing activities was $1.1 billion during the first nine months of 2017, compared to $641 million during the same period of 2016. Our capital expenditures2021. The shift to cash provided by investing activities is primarily due to net sales of marketable securities, which were $841$328 million in the first ninethree months of 2017,2022, compared to net purchases of $511 million in the three months ended March 31, 2021. This activity was partially offset by an increase in cash used for capital expenditures of $332$261 million for aircraft purchase deposits and other property and equipment.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities was $168 million during the first three months of 2022, compared to the nine months ended September 30, 2016. This is primarily drivencash provided by more aircraft purchases and higher spend on other equipment compared tofinancing activities of $82 million during the same period of 2016. Our net purchases of marketable securities increased by $202 million from the prior year, primarily driven by stronger operating cash flows in 2021. During the first ninethree months of 2017.2022, we had no new proceeds from issuance of debt and utilized cash on hand to repay $170 million of outstanding long-term debt, compared to debt proceeds of $189 million and payments of $115 million during the same period in 2021.
The table below reflects our full-year expectation for capital expenditures
MATERIAL CASH COMMITMENTS
Aircraft Commitments
As of March 31, 2022, Alaska has firm orders to purchase 67 Boeing 737 aircraft with deliveries in 2022 through 2024 and firm commitments to lease seven Boeing 737-9 aircraft with deliveries in 2022. Alaska also has an agreement with SkyWest Airlines to expand their long-term capacity purchase agreement by six Embraer E175 aircraft in 2022 and one in 2023. Horizon has commitments to purchase 12 Embraer E175 aircraft with deliveries between 2022 and 2025. Alaska has options to acquire up to 11 additional expenditures if options are exercised.Boeing 737-9 aircraft and 41 additional Boeing 737-10 aircraft with deliveries between 2024 and 2026. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.met over the long term.
|
| | | | | | | | | | | |
(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 options 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 by financing activities of $1.2 billion 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. During the first nine months of 2017 we made debt payments of $265 million, dividend payments totaling $111 million, and had $50 million in common stock repurchases.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Commitments
As of September 30, 2017, we have firm orders to purchase or lease 93 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neo with deliveries from 2020 through 2022. We could incur a loss of pre-delivery payments and credits as a cancellation fee. We also have options to acquire 37 B737 aircraft with deliveries from 2020 through 2024 and 30 E175 aircraft with deliveries from 2019 through 2021. In addition to the 21 E175 aircraft currently operated by SkyWest in our regional fleet, we have options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft.
The following table summarizes expectedour anticipated fleet activitycount by year, as of September 30, 2017:March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual Fleet | | Anticipated Fleet Activity(a) |
Aircraft | March 31, 2022 | | 2022 Additions | | 2022 Removals | | Dec 31, 2022 | | 2023 Changes | | Dec 31, 2023 | | 2024 Changes | | Dec 31, 2024 |
737 Freighters(b) | 3 | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | |
B737-700 | 11 | | | — | | | — | | | 11 | | | — | | | 11 | | | — | | | 11 | |
B737-800(b) | 61 | | | — | | | — | | | 61 | | | — | | | 61 | | | — | | | 61 | |
B737-900 | 12 | | | — | | | — | | | 12 | | | — | | | 12 | | | — | | | 12 | |
B737-900ER | 79 | | | — | | | — | | | 79 | | | — | | | 79 | | | — | | | 79 | |
B737-8 | — | | | — | | | — | | | — | | | 5 | | | 5 | | | 5 | | | 10 | |
B737-9 | 19 | | | 23 | | | — | | | 42 | | | 28 | | | 70 | | | 7 | | | 77 | |
B737-10 | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | 6 | |
A320(d) | 30 | | | — | | | (14) | | | 16 | | | (16) | | | — | | | — | | | — | |
A321neo | 10 | | | — | | | — | | | 10 | | | (10) | | | — | | | — | | | — | |
Total Mainline Fleet | 225 | | | 23 | | | (14) | | | 234 | | | 7 | | | 241 | | | 18 | | | 259 | |
Q400 operated by Horizon(d) | 32 | | | — | | | (8) | | | 24 | | | (24) | | | — | | | — | | | — | |
E175 operated by Horizon | 30 | | | 3 | | | — | | | 33 | | | 6 | | | 39 | | | — | | | 39 | |
E175 operated by third party | 36 | | | 6 | | | — | | | 42 | | | 1 | | | 43 | | | — | | | 43 | |
Total Regional Fleet(c) | 98 | | | 9 | | | (8) | | | 99 | | | (17) | | | 82 | | | — | | | 82 | |
Total | 323 | | | 32 | | | (22) | | | 333 | | | (10) | | | 323 | | | 18 | | | 341 | |
(a)Anticipated fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted or agreed to by counterparties yet. |
| | | | | | | | | | | | | | | | | |
| 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 |
|
(b)Excludes the planned addition of two 737-800 freighters following conversion from passenger aircraft, as well as the subsequent replacement of passenger aircraft. | |
(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. |
(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party, which are not yet contracted.
(d)In March 2022, management announced its intention to accelerate the removal of the A320 and Q400 aircraft from the operating fleet. Management continues to refine anticipated removal dates for individual aircraft, and as such, timing of removals may shift between 2022 and 2023.
For future firm orders and ifoption exercises, we exercise our options for additional deliveries, we mayintend to finance the aircraft through internally generated cash flow from operations or long-term debt or lease arrangements.debt.
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 than the premiums we paypreviously paid for hedge premiums. We typically hedge up to enter into the contracts.50% of our expected consumption. Our crude oil positions are as follows: | | | | | | | | | | | | | | | | | |
| Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
| | | | | |
| | | | | |
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Second Quarter 2022 | 50 | % | | $71 | | $3 |
Third Quarter 2022 | 50 | % | | $80 | | $3 |
Fourth Quarter 2022 | 40 | % | | $83 | | $5 |
Full Year 2022 | 47 | % | | $78 | | $4 |
First Quarter of 2023 | 30 | % | | $84 | | $6 |
Second Quarter of 2023 | 20 | % | | $92 | | $7 |
Third Quarter of 2023 | 10 | % | | $100 | | $8 |
Full Year 2023 | 15 | % | | $90 | | $7 |
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| Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
Fourth Quarter 2017 | 50 | % | | $ | 61 |
| | $ | 2 |
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First Quarter 2018 | 50 | % | | 62 |
| | 2 |
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Second Quarter 2018 | 40 | % | | $ | 61 |
| | $ | 2 |
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Third Quarter 2018 | 30 | % | | 60 |
| | 2 |
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Fourth Quarter 2018 | 20 | % | | 60 |
| | 2 |
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Full Year 2018 | 35 | % | | 61 |
| | 2 |
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First Quarter 2019 | 10 | % | | 62 |
| | 2 |
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Total 2019 | 2 | % | | $ | 62 |
| | $ | 2 |
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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.March 31, 2022. For agreements with variable terms, amounts included reflect our minimum obligations. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Remainder of 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Beyond 2026 | | Total |
Debt obligations | $ | 201 | | | $ | 334 | | | $ | 240 | | | $ | 261 | | | $ | 176 | | | $ | 1,176 | | | $ | 2,388 | |
Aircraft lease commitments(a) | 235 | | | 255 | | | 198 | | | 193 | | | 188 | | | 710 | | | 1,779 | |
Facility lease commitments | 13 | | | 16 | | | 9 | | | 8 | | | 8 | | | 86 | | | 140 | |
Aircraft-related commitments(b) | 1,159 | | | 1,781 | | | 414 | | | 111 | | | 47 | | | 275 | | | 3,787 | |
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Interest obligations (c) | 50 | | | 95 | | | 71 | | | 53 | | | 53 | | | 132 | | | 454 | |
Other obligations (d) | 144 | | | 193 | | | 199 | | | 203 | | | 199 | | | 757 | | | 1,695 | |
Total | $ | 1,802 | | | $ | 2,674 | | | $ | 1,131 | | | $ | 829 | | | $ | 671 | | | $ | 3,136 | | | $ | 10,243 | |
(a)Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms. |
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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 |
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Operating lease commitments (a) | 111 |
| | 415 |
| | 409 |
| | 380 |
| | 335 |
| | 1,467 |
| | 3,117 |
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Aircraft maintenance deposits (b) | 15 |
| | 61 |
| | 65 |
| | 68 |
| | 63 |
| | 90 |
| | 362 |
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Aircraft purchase commitments (c) | 168 |
| | 956 |
| | 806 |
| | 352 |
| | 273 |
| | 355 |
| | 2,910 |
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Interest obligations (d) | 18 |
| | 89 |
| | 77 |
| | 63 |
| | 48 |
| | 108 |
| | 403 |
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Aircraft maintenance and parts management (e) | 8 |
| | 32 |
| | 35 |
| | 37 |
| | 40 |
| | — |
| | 152 |
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Other obligations (f) | 22 |
| | 125 |
| | 158 |
| | 165 |
| | 172 |
| | 1,277 |
| | 1,919 |
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Total | $ | 397 |
| | $ | 2,028 |
| | $ | 1,972 |
| | $ | 1,514 |
| | $ | 1,353 |
| | $ | 4,313 |
| | $ | 11,577 |
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(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations. Contractual commitments do not reflect the impact of the impending fleet transition. | |
(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. |
(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of March 31, 2022.
(d)Comprised of non-aircraft lease costs associated with capacity purchase agreements and other miscellaneous obligations.
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.
Leased Aircraft Return Costs
For many of our leased aircraft, we are required under the contractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. We anticipate recording material expenses and cash outflows to return aircraft in 2022 in conjunction with expected lease terminations and the accelerated exit of Airbus aircraft from Alaska's fleet.
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 that we have the liquidity to make our future tax payments.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimatesExcept as described below, for the three months ended September 30, 2017. For information onregarding 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, 2016.2021.
The rate at which we defer sales proceeds related to services sold:
Following the amendment of our agreement with our co-brand bank card partner in the first quarter, the Company updated the standalone selling price for performance obligations in the contract. Updated standalone selling prices became effective as of January 1, 2022.
The number of miles that will not be redeemed for travel (breakage):
Following its review of significant Mileage Plan assumptions, the Company updated its breakage estimate for the portion of loyalty mileage credits not expected to be redeemed, effective January 1, 2022. This update was made following a study that used a statistical analysis of historical data. At March 31, 2022, the deferred revenue balance associated with the Mileage Plan program was $2.4 billion. A hypothetical 1% change in the amount of outstanding miles estimated to be redeemed would result in an approximately $7 million impact on annual revenue recognized.
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 Plan and other ancillary revenue; represents the average total revenue for flying one seat one mile
Regional - represents capacity purchased by Alaska from Horizon SkyWest and PenAir.SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon SkyWest and PenAirSkyWest 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, 2016.2021.
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ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of September 30, 2017,March 31, 2022, 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.March 31, 2022.
Changes in Internal Control over Financial Reporting
Except as noted below, thereThere have been no changes in ourthe Company’s internal controlcontrols over financial reporting during the quarter ended September 30, 2017,March 31, 2022, 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 areThe Company is a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these mattersits business and with respect to which no material liability is not likelyexpected. Liabilities for litigation related contingencies are recorded when a loss is determined to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant lawbe probable 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.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. Virgin AmericaThe Company believes the claims in this case are without factual and legal meritmerit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and intendsAlaska Airlines, as a successor-in-interest to defendVirgin America, responsible for various damages and penalties sought by the class members. In February 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. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this lawsuit.filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets.
Alaska is seeking a conclusive U.S. Supreme Court ruling that the California laws on which the judgment is based are invalid as applied to airlines pursuant to the U.S. Constitution and provisions of federal law 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. If appeal efforts are unsuccessful, compliance with California and other states' laws may have an adverse impact on the Company's operations and financial position.
Like other U.S. airlines, Alaska and Horizon are involved in other litigation around the application of state and local employment laws. 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.
There have been no material changes to theSee Part I, Item 1A. "Risk Factors," in our 2021 Form 10-K for a detailed discussion of 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.Alaska Air Group.
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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, subject to restrictions under the CARES Act, the Company suspended the share repurchase program indefinitely. These restrictions are effective until October 1, 2022. When the repurchase program is restarted, the plan has remaining authorization to purchase an additional $456 million in shares.
As of March 31, 2022, a total of 1,455,438 shares of the Company’s common stock have been issued to Treasury in connection with the Payroll Support Program. Each warrant is exercisable at a strike price of $31.61 (928,127 shares related to PSP1), $52.25 (305,499 shares related to PSP2), and $66.39 (221,812 shares related to PSP3) 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”).
None.
None.