UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172023
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
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Delaware | | 91-1292054 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
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19300 International Boulevard, | Seattle, Washington | WA | 98188 |
Telephone: (206) 392-5040 |
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Ticker Symbol | Name of each exchange on which registered |
Common stock, $0.01 par value | ALK | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
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Large accelerated filerx | ☒ | Accelerated filer ¨ | ☐ | Non-accelerated filer ¨ (Do not check if a smaller reporting company)
| ☐ | Smaller reporting company ¨ | ☐ | Emerging growth company ¨ | ☐ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨☐ No x☒
The registrant has 123,044,897128,053,077 common shares, par value $0.01, outstanding at October 31, 2017.
2023.
This document is also available on our website at http://investor.alaskaair.com.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 20172023
TABLE OF CONTENTS
As used in this Form 10-Q, the terms “Air Group,” the "Company,"“Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc., Virgin America Inc., and Horizon Air Industries, Inc. are referred to as “Alaska,” "Virgin America"“Alaska” and “Horizon” and together as our “airlines.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are:
the competitive environment in our industry;
changes in our operating costs, including fuel, which can be volatile;
our ability to meet our cost reduction goals;
labor disputes and our ability to attract and retain qualified personnel;
operational disruptions;
an aircraft accident or incident;
general economic conditions, including the impact of those conditions on customer travel behavior;
the concentration of our revenue from a few key markets;
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
our reliance on automated systems and the risks associated with changes made to those systems;
changes in laws and regulations;
our ability to successfully integrate the operations of Virgin America into those of Alaska;
our ability to achieve anticipated synergies and timing thereof in connection with the acquisition of Virgin America.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and otherour risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2016,2022. Some of these risks include competition, labor costs, relations and Item 1A. "Risk Factors" included herein.availability, general economic conditions including those associated with pandemic recovery, increases in operating costs including fuel, inability to meet cost reduction, ESG and other strategic goals, seasonal fluctuations in demand and financial results, supply chain risks, events that negatively impact aviation safety and security, and changes in laws and regulations that impact our business. Please consider our forward-looking statements in light of those risks as you read this report.
PART I
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 647 | | | $ | 338 | |
Marketable securities | 1,804 | | | 2,079 | |
Total cash and marketable securities | 2,451 | | | 2,417 | |
Receivables - net | 341 | | | 296 | |
Inventories and supplies - net | 122 | | | 104 | |
Prepaid expenses | 187 | | | 163 | |
Assets held for sale | 385 | | | 3 | |
Other current assets | 158 | | | 57 | |
Total Current Assets | 3,644 | | | 3,040 | |
| | | |
Property and Equipment | | | |
Aircraft and other flight equipment | 10,015 | | | 9,053 | |
Other property and equipment | 1,756 | | | 1,661 | |
Deposits for future flight equipment | 538 | | | 670 | |
| 12,309 | | | 11,384 | |
Less accumulated depreciation and amortization | 4,283 | | | 4,127 | |
Total Property and Equipment - Net | 8,026 | | | 7,257 | |
| | | |
Other Assets | | | |
Operating lease assets | 1,171 | | | 1,471 | |
Goodwill and intangible assets | 2,034 | | | 2,038 | |
Other noncurrent assets | 290 | | | 380 | |
Total Other Assets | 3,495 | | | 3,889 | |
| | | |
Total Assets | $ | 15,165 | | | $ | 14,186 | |
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| | | | | | | |
(in millions) | September 30, 2017 | | December 31, 2016 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 144 |
| | $ | 328 |
|
Marketable securities | 1,596 |
| | 1,252 |
|
Total cash and marketable securities | 1,740 |
| | 1,580 |
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Receivables—net | 301 |
| | 302 |
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Inventories and supplies—net | 57 |
| | 47 |
|
Prepaid expenses and other current assets | 116 |
| | 121 |
|
Total Current Assets | 2,214 |
| | 2,050 |
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| | | |
Property and Equipment | |
| | |
|
Aircraft and other flight equipment | 7,590 |
| | 6,947 |
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Other property and equipment | 1,187 |
| | 1,103 |
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Deposits for future flight equipment | 531 |
| | 545 |
|
| 9,308 |
| | 8,595 |
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Less accumulated depreciation and amortization | 3,078 |
| | 2,929 |
|
Total Property and Equipment—Net | 6,230 |
| | 5,666 |
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| | | |
Goodwill | 1,934 |
| | 1,934 |
|
Intangible assets | 135 |
| | 143 |
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Other noncurrent assets | 226 |
| | 169 |
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Other Assets | 2,295 |
| | 2,246 |
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| | | |
Total Assets | $ | 10,739 |
| | $ | 9,962 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | | | | | | | | | | | |
(in millions, except share amounts) | September 30, 2023 | | December 31, 2022 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities | | | |
Accounts payable | $ | 229 | | | $ | 221 | |
Accrued wages, vacation and payroll taxes | 561 | | | 619 | |
Air traffic liability | 1,359 | | | 1,180 | |
Other accrued liabilities | 806 | | | 846 | |
Deferred revenue | 1,233 | | | 1,123 | |
Current portion of operating lease liabilities | 150 | | | 228 | |
Current portion of long-term debt and finance leases | 736 | | | 276 | |
Total Current Liabilities | 5,074 | | | 4,493 | |
| | | |
Long-Term Debt, Net of Current Portion | 2,128 | | | 1,883 | |
| | | |
Noncurrent Liabilities | | | |
Long-term operating lease liabilities, net of current portion | 1,113 | | | 1,393 | |
Deferred income taxes | 662 | | | 574 | |
Deferred revenue | 1,366 | | | 1,374 | |
Obligation for pension and post-retirement medical benefits | 368 | | | 348 | |
Other liabilities | 361 | | | 305 | |
Total Noncurrent Liabilities | 3,870 | | | 3,994 | |
| | | |
Commitments and Contingencies (Note 7) | | | |
| | | |
Shareholders' Equity | | | |
Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding | — | | | — | |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2023 - 138,004,646 shares; 2022 - 136,883,042 shares, Outstanding: 2023 - 127,120,173 shares; 2022 - 127,533,916 shares | 1 | | | 1 | |
Capital in excess of par value | 659 | | | 577 | |
Treasury stock (common), at cost: 2023 - 10,884,473 shares; 2022 - 9,349,944 shares | (744) | | | (674) | |
Accumulated other comprehensive loss | (360) | | | (388) | |
Retained earnings | 4,537 | | | 4,300 | |
| 4,093 | | | 3,816 | |
Total Liabilities and Shareholders' Equity | $ | 15,165 | | | $ | 14,186 | |
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| | | | | | | |
(in millions, except share amounts) | September 30, 2017 | | December 31, 2016 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities | | | |
Accounts payable | $ | 97 |
| | $ | 92 |
|
Accrued wages, vacation and payroll taxes | 345 |
| | 397 |
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Air traffic liability | 1,103 |
| | 849 |
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Other accrued liabilities | 886 |
| | 878 |
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Current portion of long-term debt | 334 |
| | 319 |
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Total Current Liabilities | 2,765 |
| | 2,535 |
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| | | |
Long-Term Debt, Net of Current Portion | 2,367 |
| | 2,645 |
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Other Liabilities and Credits | |
| | |
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Deferred income taxes | 682 |
| | 463 |
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Deferred revenue | 682 |
| | 640 |
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Obligation for pension and postretirement medical benefits | 323 |
| | 331 |
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Other liabilities | 429 |
| | 417 |
|
| 2,116 |
| | 1,851 |
|
Commitments and Contingencies |
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Shareholders' Equity | |
| | |
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Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding | — |
| | — |
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Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2017 - 129,860,836 shares; 2016 - 129,189,634 shares, Outstanding: 2017 - 123,387,158 shares; 2016 - 123,328,051 shares | 1 |
| | 1 |
|
Capital in excess of par value | 156 |
| | 110 |
|
Treasury stock (common), at cost: 2017 - 6,473,678 shares; 2016 - 5,861,583 shares | (494 | ) | | (443 | ) |
Accumulated other comprehensive loss | (289 | ) | | (305 | ) |
Retained earnings | 4,117 |
| | 3,568 |
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| 3,491 |
| | 2,931 |
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Total Liabilities and Shareholders' Equity | $ | 10,739 |
| | $ | 9,962 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share amounts) | 2023 | | 2022 | | 2023 | | 2022 |
Operating Revenue | | | | | | | |
Passenger revenue | $ | 2,618 | | | $ | 2,615 | | | $ | 7,200 | | | $ | 6,544 | |
Mileage Plan other revenue | 159 | | | 146 | | | 483 | | | 433 | |
Cargo and other revenue | 62 | | | 67 | | | 190 | | | 190 | |
Total Operating Revenue | 2,839 | | | 2,828 | | | 7,873 | | | 7,167 | |
| | | | | | | |
Operating Expenses | | | | | | | |
Wages and benefits | 782 | | | 686 | | | 2,259 | | | 1,931 | |
Variable incentive pay | 45 | | | 48 | | | 149 | | | 140 | |
Aircraft fuel, including hedging gains and losses | 694 | | | 877 | | | 1,932 | | | 2,000 | |
Aircraft maintenance | 118 | | | 92 | | | 367 | | | 331 | |
Aircraft rent | 48 | | | 76 | | | 161 | | | 222 | |
Landing fees and other rentals | 183 | | | 161 | | | 502 | | | 435 | |
Contracted services | 100 | | | 83 | | | 290 | | | 243 | |
Selling expenses | 84 | | | 82 | | | 231 | | | 218 | |
Depreciation and amortization | 113 | | | 104 | | | 330 | | | 310 | |
Food and beverage service | 62 | | | 52 | | | 176 | | | 143 | |
Third-party regional carrier expense | 58 | | | 53 | | | 164 | | | 145 | |
Other | 185 | | | 207 | | | 544 | | | 536 | |
Special items - fleet transition and other | 156 | | | 155 | | | 355 | | | 376 | |
Special items - labor and related | — | | | 90 | | | 51 | | | 90 | |
Total Operating Expenses | 2,628 | | | 2,766 | | | 7,511 | | | 7,120 | |
Operating Income | 211 | | | 62 | | | 362 | | | 47 | |
| | | | | | | |
Non-operating Income (Expense) | | | | | | | |
Interest income | 23 | | | 17 | | | 62 | | | 35 | |
Interest expense | (34) | | | (31) | | | (90) | | | (84) | |
Interest capitalized | 7 | | | 3 | | | 21 | | | 8 | |
Special items - net non-operating | (8) | | | — | | | (14) | | | — | |
Other - net | (6) | | | 14 | | | (22) | | | 38 | |
Total Non-operating Income (Expense) | (18) | | | 3 | | | (43) | | | (3) | |
Income Before Income Tax | 193 | | | 65 | | | 319 | | | 44 | |
Income tax expense | 54 | | | 25 | | | 82 | | | 8 | |
Net Income | $ | 139 | | | $ | 40 | | | $ | 237 | | | $ | 36 | |
| | | | | | | |
Basic Earnings Per Share: | $ | 1.09 | | | $ | 0.32 | | | $ | 1.86 | | | $ | 0.28 | |
Diluted Earnings Per Share: | $ | 1.08 | | | $ | 0.31 | | | $ | 1.84 | | | $ | 0.28 | |
Shares used for computation: | | | | | | | |
Basic | 127.187 | | | 126.783 | | | 127.375 | | | 126.440 | |
Diluted | 129.188 | | | 128.370 | | | 129.085 | | | 128.087 | |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 |
Operating Revenues | | | | | | | |
Passenger | | | | | | | |
Mainline | $ | 1,562 |
| | $ | 1,073 |
| | $ | 4,390 |
| | $ | 3,036 |
|
Regional | 262 |
| | 249 |
| | 725 |
| | 682 |
|
Total passenger revenue | 1,824 |
| | 1,322 |
| | 5,115 |
| | 3,718 |
|
Freight and mail | 32 |
| | 31 |
| | 88 |
| | 82 |
|
Other—net | 264 |
| | 213 |
| | 768 |
| | 607 |
|
Total Operating Revenues | 2,120 |
| | 1,566 |
| | 5,971 |
| | 4,407 |
|
| | | | | | | |
Operating Expenses | | | | | |
| | |
|
Wages and benefits | 475 |
| | 340 |
| | 1,392 |
| | 1,008 |
|
Variable incentive pay | 40 |
| | 31 |
| | 98 |
| | 95 |
|
Aircraft fuel, including hedging gains and losses | 368 |
| | 225 |
| | 1,051 |
| | 593 |
|
Aircraft maintenance | 88 |
| | 64 |
| | 271 |
| | 197 |
|
Aircraft rent | 70 |
| | 25 |
| | 204 |
| | 80 |
|
Landing fees and other rentals | 124 |
| | 89 |
| | 338 |
| | 232 |
|
Contracted services | 76 |
| | 63 |
| | 234 |
| | 183 |
|
Selling expenses | 91 |
| | 58 |
| | 269 |
| | 162 |
|
Depreciation and amortization | 95 |
| | 101 |
| | 275 |
| | 281 |
|
Food and beverage service | 50 |
| | 31 |
| | 145 |
| | 93 |
|
Third-party regional carrier expense | 30 |
| | 25 |
| | 84 |
| | 72 |
|
Special items—merger-related costs | 24 |
| | 22 |
| | 88 |
| | 36 |
|
Other | 150 |
| | 92 |
| | 424 |
| | 267 |
|
Total Operating Expenses | 1,681 |
| | 1,166 |
| | 4,873 |
| | 3,299 |
|
Operating Income | 439 |
| | 400 |
| | 1,098 |
| | 1,108 |
|
| | | | | | | |
Nonoperating Income (Expense) | | | | | |
| | |
|
Interest income | 9 |
| | 7 |
| | 25 |
| | 20 |
|
Interest expense | (26 | ) | | (11 | ) | | (77 | ) | | (33 | ) |
Interest capitalized | 5 |
| | 6 |
| | 13 |
| | 21 |
|
Other—net | — |
| | — |
| | (1 | ) | | (2 | ) |
| (12 | ) | | 2 |
| | (40 | ) | | 6 |
|
Income before income tax | 427 |
| | 402 |
| | 1,058 |
| | 1,114 |
|
Income tax expense | 161 |
| | 146 |
| | 397 |
| | 414 |
|
Net Income | $ | 266 |
| | $ | 256 |
| | $ | 661 |
| | $ | 700 |
|
| | | | | | | |
Basic Earnings Per Share: | $ | 2.15 |
| | $ | 2.08 |
| | $ | 5.35 |
| | $ | 5.66 |
|
Diluted Earnings Per Share: | $ | 2.14 |
| | $ | 2.07 |
| | $ | 5.31 |
| | $ | 5.63 |
|
Shares used for computation: | | | | | | | |
|
Basic | 123.467 |
| | 123.149 |
| | 123.501 |
| | 123.648 |
|
Diluted | 124.220 |
| | 123.833 |
| | 124.341 |
| | 124.393 |
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Cash dividend declared per share: | $ | 0.30 |
| | $ | 0.275 |
| | $ | 0.90 |
| | $ | 0.825 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2023 | | 2022 | | 2023 | | 2022 |
Net Income | $ | 139 | | | $ | 40 | | | $ | 237 | | | $ | 36 | |
Other comprehensive income (loss), net of tax | | | | | | | |
Marketable securities | 2 | | | (26) | | | 18 | | | (86) | |
Employee benefit plans | 3 | | | 1 | | | 11 | | | 2 | |
Interest rate derivative instruments | — | | | 5 | | | (1) | | | 18 | |
Total other comprehensive income (loss), net of tax | $ | 5 | | | $ | (20) | | | $ | 28 | | | $ | (66) | |
| | | | | | | |
Total Comprehensive Income (Loss), Net of Tax | $ | 144 | | | $ | 20 | | | $ | 265 | | | $ | (30) | |
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net Income | $ | 266 |
| | $ | 256 |
| | $ | 661 |
| | $ | 700 |
|
| | | | | | | |
Other Comprehensive Income (Loss): | | | | | | | |
Related to marketable securities: | | | | | | | |
Unrealized holding gain (loss) arising during the period | 1 |
| | (2 | ) | | 5 |
| | 17 |
|
Reclassification of (gain) loss into Other—net nonoperating income (expense) | (1 | ) | | — |
| | — |
| | (1 | ) |
Income tax effect | — |
| | — |
| | (2 | ) | | (6 | ) |
Total | — |
| | (2 | ) | | 3 |
| | 10 |
|
| | | | | | | |
Related to employee benefit plans: | | | | | | | |
Reclassification of net pension expense into Wages and benefits | 5 |
| | 5 |
| | 16 |
| | 15 |
|
Income tax effect | (2 | ) | | (1 | ) | | (5 | ) | | (5 | ) |
Total | 3 |
| | 4 |
| | 11 |
| | 10 |
|
| | | | | | | |
Related to interest rate derivative instruments: | | | | | | | |
Unrealized holding gain (loss) arising during the period | — |
| | 1 |
| | (2 | ) | | (6 | ) |
Reclassification of (gain) loss into Aircraft rent | 2 |
| | 1 |
| | 4 |
| | 4 |
|
Income tax effect | (1 | ) | | (1 | ) | | (1 | ) | | 1 |
|
Total | 1 |
| | 1 |
| | 1 |
| | (1 | ) |
| | | | | | | |
Other Comprehensive Income | 4 |
| | 3 |
| | 15 |
| | 19 |
|
| | | | | | | |
Comprehensive Income | $ | 270 |
| | $ | 259 |
| | $ | 676 |
| | $ | 719 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total | | | | |
Balance at December 31, 2022 | 127.534 | | | $ | 1 | | | $ | 577 | | | $ | (674) | | | $ | (388) | | | $ | 4,300 | | | $ | 3,816 | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (142) | | | (142) | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 23 | | | — | | | 23 | | | | | |
Common stock repurchase | (0.414) | | | — | | | — | | | (18) | | | — | | | — | | | (18) | | | | | |
Stock-based compensation | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.123 | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | | | |
Balance at March 31, 2023 | 127.243 | | | $ | 1 | | | $ | 587 | | | $ | (692) | | | $ | (365) | | | $ | 4,158 | | | $ | 3,689 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 240 | | | 240 | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
Common stock repurchase | (0.872) | | | — | | | — | | | (39) | | | — | | | — | | | (39) | | | | | |
Stock-based compensation | 0.017 | | | — | | | 26 | | | — | | | — | | | — | | | 26 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued for employee stock purchase plan | 0.924 | | | — | | | 34 | | | — | | | — | | | — | | | 34 | | | | | |
Stock issued under stock plans | 0.036 | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | | | |
Balance at June 30, 2023 | 127.348 | | | $ | 1 | | | $ | 648 | | | $ | (731) | | | $ | (365) | | | $ | 4,398 | | | $ | 3,951 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 139 | | | 139 | | | | | |
Other comprehensive income | — | | | — | | | — | | | — | | | 5 | | | — | | | 5 | | | | | |
Common stock repurchase | (0.249) | | | — | | | — | | | (13) | | | — | | | — | | | (13) | | | | | |
Stock-based compensation | — | | | — | | | 11 | | | — | | | — | | | — | | | 11 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.021 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
Balance at September 30, 2023 | 127.120 | | $ | 1 | | | $ | 659 | | | $ | (744) | | | $ | (360) | | | $ | 4,537 | | | $ | 4,093 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Common Stock Outstanding | | Common Stock | | Capital in Excess of Par Value | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total | | | | |
Balance at December 31, 2021 | 125.906 | | | $ | 1 | | | $ | 494 | | | $ | (674) | | | $ | (262) | | | $ | 4,242 | | | $ | 3,801 | | | | | |
| | | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (143) | | | (143) | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (30) | | | — | | | (30) | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 13 | | | — | | | — | | | — | | | 13 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued under stock plans | 0.182 | | | — | | | (4) | | | — | | | — | | | — | | | (4) | | | | | |
Balance at March 31, 2022 | 126.088 | | | $ | 1 | | | $ | 503 | | | $ | (674) | | | $ | (292) | | | $ | 4,099 | | | $ | 3,637 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 139 | | | 139 | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (16) | | | — | | | (16) | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | 0.017 | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock issued for employee stock purchase plan | 0.643 | | | — | | | 30 | | | — | | | — | | | — | | | 30 | | | | | |
Stock issued under stock plans | 0.012 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | |
Balance at June 30, 2022 | 126.760 | | | $ | 1 | | | $ | 542 | | | $ | (674) | | | $ | (308) | | | $ | 4,238 | | | $ | 3,799 | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 40 | | | 40 | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (20) | | | — | | | (20) | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | | | |
Stock issued under stock plans | 0.074 | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | | | |
Balance at September 30, 2022 | 126.834 | | $ | 1 | | | $ | 549 | | | $ | (674) | | | $ | (328) | | | $ | 4,278 | | | $ | 3,826 | | | | | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | | | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30, |
(in millions) | | | | | | 2023 | | 2022 |
Cash Flows from Operating Activities: | | | | | | | | |
Net Income | | | | | | $ | 237 | | | $ | 36 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | |
Depreciation and amortization | | | | | | 330 | | | 310 | |
Stock-based compensation and other | | | | | | 73 | | | 33 | |
Special items - fleet transition and other | | | | | | 344 | | | 376 | |
Special items - labor and related | | | | | | 51 | | | — | |
| | | | | | | | |
Changes in certain assets and liabilities: | | | | | | | | |
Changes in deferred income taxes | | | | | | 90 | | | — | |
Increase in accounts receivable | | | | | | (45) | | | (59) | |
Increase in air traffic liability | | | | | | 179 | | | 304 | |
Increase in deferred revenue | | | | | | 102 | | | 123 | |
| | | | | | | | |
Federal income tax refund | | | | | | — | | | 260 | |
Other - net | | | | | | (258) | | | 26 | |
Net cash provided by operating activities | | | | | | 1,103 | | | 1,409 | |
Cash Flows from Investing Activities: | | | | | | | | |
Property and equipment additions | | | | | | | | |
Aircraft and aircraft purchase deposits | | | | | | (669) | | | (688) | |
Other flight equipment | | | | | | (153) | | | (156) | |
Other property and equipment | | | | | | (169) | | | (103) | |
Total property and equipment additions | | | | | | (991) | | | (947) | |
Purchases of marketable securities | | | | | | (519) | | | (1,670) | |
Sales and maturities of marketable securities | | | | | | 806 | | | 1,731 | |
| | | | | | | | |
Other investing activities | | | | | | (106) | | | (2) | |
Net cash used in investing activities | | | | | | (810) | | | (888) | |
Cash Flows from Financing Activities: | | | | | | | | |
Proceeds from issuance of long-term debt, net of issuance costs | | | | | | 313 | | | — | |
Long-term debt payments | | | | | | (242) | | | (333) | |
Common stock repurchases | | | | | | (70) | | | — | |
| | | | | | | | |
Other financing activities | | | | | | 11 | | | 37 | |
Net cash provided by (used in) financing activities | | | | | | 12 | | | (296) | |
Net increase in cash and cash equivalents | | | | | | 305 | | | 225 | |
Cash, cash equivalents, and restricted cash at beginning of period | | | | | | 369 | | | 494 | |
Cash, cash equivalents, and restricted cash at end of the period | | | | | | $ | 674 | | | $ | 719 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 661 |
| | $ | 700 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 275 |
| | 281 |
|
Stock-based compensation and other | 43 |
| | 19 |
|
Changes in certain assets and liabilities: | | | |
Changes in deferred tax provision | 217 |
| | 47 |
|
Increase in air traffic liability | 254 |
| | 116 |
|
Increase in deferred revenue | 46 |
| | 60 |
|
Other—net | (139 | ) | | (17 | ) |
Net cash provided by operating activities | 1,357 |
| | 1,206 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Property and equipment additions: | |
| | |
|
Aircraft and aircraft purchase deposits | (679 | ) | | (408 | ) |
Other flight equipment | (70 | ) | | (35 | ) |
Other property and equipment | (92 | ) | | (66 | ) |
Total property and equipment additions, including capitalized interest | (841 | ) | | (509 | ) |
Purchases of marketable securities | (1,408 | ) | | (775 | ) |
Sales and maturities of marketable securities | 1,069 |
| | 638 |
|
Other investing activities | 38 |
| | 5 |
|
Net cash used in investing activities | (1,142 | ) | | (641 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Proceeds from issuance of debt | — |
| | 1,546 |
|
Long-term debt payments | (265 | ) | | (93 | ) |
Common stock repurchases | (50 | ) | | (193 | ) |
Dividends paid | (111 | ) | | (102 | ) |
Other financing activities | 27 |
| | 22 |
|
Net cash provided (used) by financing activities | (399 | ) | | 1,180 |
|
Net increase (decrease) in cash and cash equivalents | (184 | ) | | 1,745 |
|
Cash and cash equivalents at beginning of year | 328 |
| | 73 |
|
Cash and cash equivalents at end of the period | $ | 144 |
| | $ | 1,818 |
|
| | | |
Supplemental disclosure: | |
| | |
|
Cash paid during the period for: | | | |
Interest (net of amount capitalized) | $ | 68 |
| | $ | 12 |
|
Income taxes | 129 |
| | 321 |
|
| | | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30, |
(in millions) | | | | | | 2023 | | 2022 |
Supplemental disclosure: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest, net of amount capitalized | | | | | | $ | 85 | | | $ | 72 | |
| | | | | | | | |
Income taxes, net of refunds received | | | | | | 14 | | | — | |
| | | | | | | | |
Non-cash transactions: | | | | | | | | |
Right-of-use assets acquired through operating leases | | | | | | 120 | | | 419 | |
Operating leases converted to finance leases | | | | | | 505 | | | — | |
Property and equipment acquired through the issuance of debt | | | | | | 179 | | | — | |
| | | | | | | | |
Reconciliation of cash, cash equivalents, and restricted cash: | | | | | | | | |
Cash and cash equivalents | | | | | | 647 | | | 688 | |
Restricted cash included in Other noncurrent assets | | | | | | 27 | | | 31 | |
Total cash, cash equivalents, and restricted cash at end of the period | | | | | | $ | 674 | | | $ | 719 | |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska Horizon,and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska, and starting December 14, 2016, Virgin America. The Company conducts substantially all of its operations through these subsidiaries.other immaterial business units. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP")(GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2016.2022. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 20172023 and the results of operations for the three and nine months ended September 30, 20172023 and 2016.2022. Such adjustments were of a normal recurring nature. Certain rows, columns, figures, or percentages may not recalculate due to rounding.
In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenuesrevenue and expenses.expenses, including impairment charges. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three and nine months ended September 30, 20172023 are not necessarily indicative of operating results for the entire year.
Recently Issued Accounting Pronouncements
NOTE 2. FLEET TRANSITION
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" (Topic 606), which requires an entity to recognize the amountfirst quarter of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This comprehensive new standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations" to clarify the guidance on determining whether2022, the Company is consideredannounced plans to accelerate the principal ortransition of its mainline operations to an all-Boeing 737 fleet. It also announced plans to transition its regional operations to an all-Embraer fleet. The removal of all A320 and Q400 aircraft from operating service was completed in January 2023. The removal of all A321neo aircraft from operating service was completed in September 2023. At September 30, 2023, Alaska had reached agreements with multiple lessors to exit its ten A321neo operating leases and purchase the agentaircraft. Three aircraft purchases closed by September 30, 2023. Subsequent to quarter end, Alaska finalized an agreement to sell the ten aircraft to American Airlines. The remaining seven purchases and all sales to American Airlines are expected to occur in the fourth quarter of 2023 and first quarter of 2024. As a revenue transaction where a third party is providing goods or services to a customer. Entities are permitted to use either a full retrospective or cumulative effect transition method, and are required to adopt all partsresult of the new revenue standard usingagreements, the same transition method. The new standard is effective for the Company on January 1, 2018.
At this time, the Company believes the most significant impact to the financial statements will be to Mileage Plan™ revenues and liabilities. The Company currently uses the incremental cost approach for miles earned through travel. As this approach will be eliminatedoperating leases associated with the standard, the Company will be required to allocate a portion of the ticket price through a relative selling price model and defer revenue recognition until the ticket is flown or unused mileage credits expire. Additionally, unused companion certificatesseven aircraft that were previously recognized at expiration will be subject to advanced breakage under the new standard. The Company estimates a net increase to Mileage Plan deferred revenuesnot purchased by September 30, 2023 were considered modified, and upon evaluation were reclassified as finance leases.
Valuation of approximately $340 million to $380 million at the time of adoption. The allocated value to miles earned through travel will offset passenger revenue during the period they are issued, rather than recorded using the incremental cost approach. As the program is growing significantly, the Company expects revenue recognized under Topic 606 will be less on an annual basis than current accounting practice.Long-Lived Assets
The adoption of the new standard is also expected to result in a change in income statement classification of the majority of ancillary revenues from Other revenue to Passenger revenue. This will affect common industry metrics, such as PRASM and RASM. Certain commission revenue from interline arrangements that were previously offset against related expense will now be classified as Other revenue, which will impact RASM and CASM. Unused ticket revenue that was previously recorded at the time of expiration will now be recorded at the original departure date if that ticket has not been changed or refunded prior to that date, based on estimates of expected expiration. This concept is referred to as ticket breakage. The Company estimates the change in ticket breakage methodology will not have a significant impact on the statements of operations, but will decrease air traffic liability by approximately $70 million to $80 million.
The Company continues to evaluatereviews its long-lived assets for impairment whenever events or circumstances indicate that the total carrying value of an asset or asset group may not be recoverable. In the second quarter, the Company performed an impairment analysis for the A321neo fleet and model the full impactrecorded an impairment charge of the standard and will apply the full retrospective transition method. The overall impact to equity as of the beginning of the retroactive reporting period, including the changes discussed above, as well as other less material changes, is expected to be between $160 million and $190$156 million.
In February 2016, the FASB issued ASU 2016-02, "Leases" (Topic 842), which requires lesseesthird quarter, the Company determined there was additional impairment related to recognize assets and liabilities for leases currently classified as operating leases. Under the A321neo fleet due to new standard, a lessee will recognize a liability onpurchase activity in the balance sheet representingperiod. The Company estimated the lease payments owed, and a right-of-use-asset representing its right to use the underlying assetfair market value for the lease term. For leasesA321neo aircraft using available market price information with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assetsadjustments based on quantitative and lease liabilities. Atqualitative considerations. Based on this time,fair market value, the Company believesrecorded an impairment charge of $123 million, reflecting the most significant impact to the financial statements will relate to the recording of a right-of-use asset associated with leased aircraft. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed for impact of the ASU. The new standard is effective for the Company on January 1, 2019. Early adoption of the standard is permitted. The Company has determined that it will not early adopt the standard.
In March 2016, the FASB issued ASU 2016-09, "Compensation—Stock Compensation" (Topic 718),amount by which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU was adopted prospectively as of January 1, 2017. Prior periods have not been adjusted. The adoption of the standard did not have a material impact on the Company's statements of operations or financial position.
In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other" (Topic 350), which eliminates step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the impliedcarrying value exceeded fair value of a reporting unit’s goodwillthe aircraft. This charge is included within Special items - fleet transition and other in the condensed consolidated statements of operations.
Other Fleet Related Disclosure
The ten A321neo aircraft that have been removed from operating service are classified as Assets held for sale in the condensed consolidated balance sheets as of September 30, 2023. Seven of these aircraft are classified as finance leases, whose lease liabilities are reflected within Current portion of long-term debt and finance leases and total $452 million as of September 30, 2023. Interest expense associated with the carrying amountfinance leases of that goodwill. The ASU is effective for the Company beginning January 1, 2019. Early adoption of the standard is permitted. Beginning in fiscal 2017, the Company will be required to perform an impairment test for goodwill arising from its acquisition of Virgin America and has adopted the standard effective January 1, 2017.
In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits" (Topic 715), which will require the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statements of operations. All other components of net periodic benefit cost will be required to be presented in Nonoperating income (expense) in the statements of operations. These components will not be eligible for capitalization in assets. The ASU is effective for the Company beginning January 1, 2018. Changes to the statements of operations under the ASU are applicable retrospectively. The adoption of this standard will have no impact on Income before income tax or Net income for the periods subject to retrospective reclassification. See Note 6 for the current components of the Company's net periodic benefit costs.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact and has not yet determined whether it will early adopt.
NOTE 2. ACQUISITION OF VIRGIN AMERICA
Virgin America
On December 14, 2016, the Company acquired 100% of the outstanding common shares and voting interest of Virgin America for $57 per share, or total cash consideration of $2.6 billion. Virgin America offers scheduled air transportation throughout the United States and Mexico primarily from its hub cities of Los Angeles, San Francisco and, to a lesser extent, Dallas Love Field, to other major business and leisure destinations in North America. The Company believes the acquisition of Virgin America will provide broader national reach and position it to better serve guests living on the West Coast. The combined airline has approximately 1,200 daily departures and leverages Alaska's strength in the Pacific Northwest with Virgin America's strength in California. The Company believes that combining loyalty programs and networks will provide greater benefits for its guests and expand its international partner portfolio, giving guests an even more expansive global reach.
Merger-related costs
The Company incurred pretax merger-related costs of $24 million and $22$8 million for the three months ended September 30, 2017 and 2016, respectively, and $88 million and $36 million forthird quarter of 2023 was recognized within Special items - net non-operating in the nine months ended September 30, 2017 and 2016, respectively. Costs classified as merger-related are directly attributable to merger activities and are recorded as "Special items—merger-related costs" within thecondensed consolidated statements of operations. The Company expects to continue to incur merger-related costs in the future as the integration continues.
Fair values of the assets acquired and the liabilities assumed
The transaction has been accounted for as a business combination using the acquisition method of accounting, which requires, among other things, assets acquired and liabilities assumed to beSpecial charges were also recognized on the balance sheet at their fair values as of the acquisition date. As of September 30, 2017 the fair values of property and equipment and certain liabilities, included in other accrued liabilities and other liabilities, goodwill, intangible assets and deferred income taxes have been prepared on a preliminary basis and are subject to further adjustments as the Company completes its analysis. There were no significant fair value adjustments made during the three and nine months ended September 30, 2017. The Company will finalize the amounts recognized by December 14, 2017.
Fair values2023 for other fleet transition costs, including accelerated aircraft ownership expenses, certain aircraft maintenance work performed as a result of the assets acquiredfleet retirements, adjustments to estimated costs to return the A320 fleet, and penalty rent for Airbus aircraft which have not yet been returned to the liabilities assumedlessor as of the acquisition datelease expiration date.
The following table summarizes our special charges for fleet transition costs for the three and nine months ended September 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | | 2023 | | 2022 | | 2023 | | 2022 |
Impairment of long-lived assets(a) | | $ | 120 | | | $ | — | | | $ | 271 | | | $ | 70 | |
| | | | | | | | |
Other fleet transition costs | | 36 | | | 155 | | | 84 | | | 306 | |
Special items - fleet transition and other | | $ | 156 | | | $ | 155 | | | $ | 355 | | | $ | 376 | |
| | | | | | | | |
| | | | | | | | |
(a) Net of other immaterial activity recognized in the three and nine months ended September 30, 2023.
NOTE 3. REVENUE
Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue is passenger ancillary revenue such as bag fees, on-board food and beverage, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from the co-branded credit card and other partners, and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
The Company disaggregates revenue by segment in Note 10. The level of detail within the Company’s condensed consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing, and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
Passenger revenue recognized in the condensed consolidated statements of operations (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Passenger ticket revenue, net of taxes and fees | $ | 2,226 | | | $ | 2,252 | | | $ | 6,081 | | | $ | 5,536 | |
Passenger ancillary revenue | 135 | | | 127 | | | 362 | | | 337 | |
Mileage Plan passenger revenue | 257 | | | 236 | | | 757 | | | 671 | |
Total Passenger revenue | $ | 2,618 | | | $ | 2,615 | | | $ | 7,200 | | | $ | 6,544 | |
Mileage Plan Loyalty Program
Mileage Plan revenue included in the condensed consolidated statements of operations (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Passenger revenue | $ | 257 | | | $ | 236 | | | $ | 757 | | | $ | 671 | |
Mileage Plan other revenue | 159 | | | 146 | | | 483 | | | 433 | |
Total Mileage Plan revenue | $ | 416 | | | $ | 382 | | | $ | 1,240 | | | $ | 1,104 | |
Cargo and Other Revenue
Cargo and other revenue included in the condensed consolidated statements of operations (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Cargo revenue | $ | 29 | | | $ | 37 | | | $ | 97 | | | $ | 102 | |
Other revenue | 33 | | | 30 | | | 93 | | | 88 | |
Total Cargo and other revenue | $ | 62 | | | $ | 67 | | | $ | 190 | | | $ | 190 | |
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $33 million and $65 million from the prior year-end air traffic liability balance for the three months ended September 30, 2023 and 2022, and $621 million and $587 million from the prior year-end air traffic liability balance for the nine months ended September 30, 2023 and 2022.
Mileage Plan assets and liabilities
The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $91 million of such receivables as of September 30, 2023 and $83 million as of December 14, 2016, at September 30, 2017 and December 31, 2016 were as follows2022.
The table below presents a roll forward of the total frequent flyer liability (in millions): | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Total Deferred Revenue balance at January 1 | $ | 2,497 | | | $ | 2,358 | |
Travel miles and companion certificate redemption - Passenger revenue | (712) | | | (632) | |
Miles redeemed on partner airlines - Other revenue | (86) | | | (45) | |
Increase in liability for mileage credits issued | 900 | | | 800 | |
Total Deferred Revenue balance at September 30 | $ | 2,599 | | | $ | 2,481 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | $ | 645 |
| | $ | 645 |
|
Receivables | 54 |
| | 44 |
|
Prepaid expenses and other current assets | 18 |
| | 16 |
|
Property and equipment—provisional | 561 |
| | 560 |
|
Intangible assets—provisional | 141 |
| | 143 |
|
Goodwill—provisional | 1,934 |
| | 1,934 |
|
Other assets | 89 |
| | 84 |
|
Total assets | 3,442 |
| | 3,426 |
|
|
| | |
Accounts payable | 22 |
| | 22 |
|
Accrued wages, vacation and payroll taxes | 54 |
| | 51 |
|
Air traffic liabilities | 172 |
| | 172 |
|
Other accrued liabilities—provisional | 197 |
| | 196 |
|
Current portion of long-term debt | 125 |
| | 125 |
|
Long-term debt, net of current portion | 360 |
| | 360 |
|
Deferred income taxes—provisional | (307 | ) | | (304 | ) |
Deferred revenue | 126 |
| | 126 |
|
Other liabilities—provisional | 97 |
| | 82 |
|
Total liabilities | 846 |
| | 830 |
|
|
| | |
Total purchase price | $ | 2,596 |
| | $ | 2,596 |
|
NOTE 3.4. FAIR VALUE MEASUREMENTS
In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.
Fair Value of Financial Instruments on a Recurring Basis
As of September 30, 2017,2023, total cost basis for all marketable securities was $1.6 billion. There were no significant differences between the cost basis and$1.9 billion, compared to a total fair value of $1.8 billion. The decline in value is primarily due to changes in interest rates. Management does not believe any individual classunrealized losses are the result of marketable securities.expected credit losses based on its evaluation of industry and duration exposure, credit ratings of the securities, liquidity profiles, and other observable information as of September 30, 2023.
Fair values of financial instruments on the condensed consolidated balance sheetsheets (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| | | | | | | | | | | |
Assets | | | | | | | | | | | |
Marketable securities | | | | | | | | | | | |
U.S. government and agency securities | $ | 508 | | | $ | — | | | $ | 508 | | | $ | 505 | | | $ | — | | | $ | 505 | |
Equity mutual funds | 5 | | | — | | | 5 | | | 5 | | | — | | | 5 | |
Foreign government bonds | — | | | 10 | | | 10 | | | — | | | 25 | | | 25 | |
Asset-backed securities | — | | | 216 | | | 216 | | | — | | | 261 | | | 261 | |
Mortgage-backed securities | — | | | 123 | | | 123 | | | — | | | 196 | | | 196 | |
Corporate notes and bonds | — | | | 889 | | | 889 | | | — | | | 1,025 | | | 1,025 | |
Municipal securities | — | | | 53 | | | 53 | | | — | | | 62 | | | 62 | |
Total Marketable securities | 513 | | | 1,291 | | | 1,804 | | | 510 | | | 1,569 | | | 2,079 | |
Derivative instruments | | | | | | | | | | | |
Fuel hedge contracts - call options | — | | | 40 | | | 40 | | | — | | | 44 | | | 44 | |
Interest rate swap agreements | — | | | 13 | | | 13 | | | — | | | 15 | | | 15 | |
Total Assets | $ | 513 | | | $ | 1,344 | | | $ | 1,857 | | | $ | 510 | | | $ | 1,628 | | | $ | 2,138 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | |
September 30, 2017 | Level 1 | | Level 2 | | Total |
Assets | | | | | |
Marketable securities | | | | | |
U.S. government and agency securities | $ | 359 |
| | $ | — |
| | $ | 359 |
|
Foreign government bonds | — |
| | 48 |
| | 48 |
|
Asset-backed securities | — |
| | 232 |
| | 232 |
|
Mortgage-backed securities | — |
| | 113 |
| | 113 |
|
Corporate notes and bonds | — |
| | 828 |
| | 828 |
|
Municipal securities | — |
| | 16 |
| | 16 |
|
Total Marketable securities | 359 |
| | 1,237 |
| | 1,596 |
|
Derivative instruments | | | | | |
Fuel hedge call options | — |
| | 10 |
| | 10 |
|
Interest rate swap agreements | — |
| | 8 |
| | 8 |
|
Total Assets | 359 |
| | 1,255 |
| | 1,614 |
|
| | | | | |
Liabilities | | | | | |
Derivative instruments | | | | | |
Interest rate swap agreements | — |
| | (11 | ) | | (11 | ) |
Total Liabilities | — |
| | (11 | ) | | (11 | ) |
|
| | | | | | | | | | | |
December 31, 2016 | Level 1 | | Level 2 | | Total |
Assets | | | | | |
Marketable securities | | | | | |
U.S. government and agency securities | $ | 287 |
| | $ | — |
| | $ | 287 |
|
Foreign government bonds | — |
| | 36 |
| | 36 |
|
Asset-backed securities | — |
| | 138 |
| | 138 |
|
Mortgage-backed securities | — |
| | 89 |
| | 89 |
|
Corporate notes and bonds | — |
| | 691 |
| | 691 |
|
Municipal securities | — |
| | 11 |
| | 11 |
|
Total Marketable securities | 287 |
| | 965 |
| | 1,252 |
|
Derivative instruments | | | | | |
Fuel hedge call options | — |
| | 20 |
| | 20 |
|
Total Assets | 287 |
| | 985 |
| | 1,272 |
|
| | | | | |
Liabilities | | | | | |
Derivative instruments | | | | | |
Interest rate swap agreements | — |
| | (5 | ) | | (5 | ) |
Total Liabilities | — |
| | (5 | ) | | (5 | ) |
The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts isare determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest SOFR-based forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
Activity for marketable securities (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Proceeds from sales and maturities | $ | 528 |
| | $ | 280 |
| | $ | 1,069 |
| | $ | 638 |
|
Maturities for marketable securities (in millions): | | | | | | | | | | | |
September 30, 2023 | Cost Basis | | Fair Value |
Due in one year or less | $ | 403 | | | $ | 395 | |
Due after one year through five years | 1,386 | | | 1,320 | |
Due after five years | 73 | | | 68 | |
Due after 10 years | 18 | | | 16 | |
No maturity date | 4 | | | 5 | |
Total | $ | 1,884 | | | $ | 1,804 | |
|
| | | | | | | |
September 30, 2017 | Cost Basis | | Fair Value |
Due in one year or less | $ | 193 |
| | $ | 193 |
|
Due after one year through five years | 1,367 |
| | 1,367 |
|
Due after five years through 10 years | 36 |
| | 36 |
|
Due after 10 years | — |
| | — |
|
Total | $ | 1,596 |
| | $ | 1,596 |
|
Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2017.
Fair Value of Other Financial Instruments
The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.
Cash, and Cash Equivalents, and Restricted Cash: CarriedCash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper, and certificates of deposit. They are carried at amortized cost, which approximates fair value.
The carrying amountCompany's restricted cash balances are primarily used to guarantee various letters of the Company's variable-rate debtcredit, self-insurance programs, or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value. For
Debt: To estimate the fair value of all fixed-rate debt as of September 30, 2023, the Company uses the income approach to determine the estimated fair value, calculated as the sum of futureby discounting cash flows discounted ator estimation using quoted market prices, utilizing borrowing rates for comparable debt over the weightedremaining life of the outstanding debt. The estimated fair value of the fixed-rate Enhanced Equipment Trust Certificate (EETC) debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $566 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as certain inputs used are unobservable.it is not actively traded and is valued using discounted cash flows which is an unobservable input.
Fixed-rate debt that is not carried at fair value on the condensed consolidated balance sheetsheets and the estimated fair value of long-term fixed-rate debt is as follows (in millions): | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| | | |
| | | |
Fixed-rate debt | $ | 1,520 | | | $ | 1,660 | |
| | | |
Estimated fair value | $ | 1,372 | | | $ | 1,473 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Carrying amount | $ | 1,024 |
| | $ | 1,179 |
|
Fair value | 1,034 |
| | 1,199 |
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating and finance lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. NoRefer to Note 2 for details regarding impairment was recognizedcharges recorded in the three and nine months ended September 30, 2017 or September 30, 2016.2023.
NOTE 4. FREQUENT FLYER PROGRAMS
Frequent flyer program deferred revenue and liabilities included in the consolidated balance sheets (in millions):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Current Liabilities: | | | |
Other accrued liabilities | $ | 509 |
| | $ | 484 |
|
Other Liabilities and Credits: | | | |
Deferred revenue | 682 |
| | 638 |
|
Other liabilities | 24 |
| | 21 |
|
Total | $ | 1,215 |
| | $ | 1,143 |
|
Frequent flyer program revenue included in the consolidated statements of operations (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Passenger revenues | $ | 94 |
| | $ | 73 |
| | $ | 276 |
| | $ | 215 |
|
Other—net revenues | 122 |
| | 107 |
| | 369 |
| | 318 |
|
Total | $ | 216 |
| | $ | 180 |
| | $ | 645 |
| | $ | 533 |
|
NOTE 5. LONG-TERM DEBT
Long-term debt obligations on the condensed consolidated balance sheetsheets (in millions): | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Fixed-rate notes payable due through 2029 | $ | 85 | | | $ | 113 | |
Fixed-rate PSP notes payable due through 2031 | 600 | | | 600 | |
Fixed-rate EETC payable due through 2025 & 2027 | 835 | | | 947 | |
Variable-rate notes payable due through 2035 | 907 | | | 514 | |
Less debt issuance costs | (15) | | | (15) | |
Total debt | 2,412 | | | 2,159 | |
Less current portion(a) | 284 | | | 276 | |
Long-term debt, less current portion | $ | 2,128 | | | $ | 1,883 | |
| | | |
Weighted-average fixed-interest rate | 3.4 | % | | 3.5 | % |
Weighted-average variable-interest rate | 6.8 | % | | 5.8 | % |
(a) Excludes finance lease liabilities recognized within Current portion of long-term debt and finance leases in the condensed consolidated balance sheets as of September 30, 2023. |
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Fixed-rate notes payable due through 2028 | $ | 1,024 |
| | $ | 1,179 |
|
Variable-rate notes payable due through 2028 | 1,693 |
| | 1,803 |
|
Less debt issuance costs | (16 | ) | | (18 | ) |
Total debt | 2,701 |
| | 2,964 |
|
Less current portion | 334 |
| | 319 |
|
Long-term debt, less current portion | $ | 2,367 |
| | $ | 2,645 |
|
| | | |
Weighted-average fixed-interest rate | 4.3 | % | | 4.4 | % |
Weighted-average variable-interest rate | 2.6 | % | | 2.4 | % |
Approximately $216 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2023, resulting in an effective weighted-average interest rate for the full debt portfolio of 4.3%.
During the nine months ended September 30, 2017,2023, the Company incurred debt of $495 million from multiple lenders and sources. New debt includes proceeds of $316 million which is secured by aircraft. Additionally, $179 million was incurred as part of an agreement to finance certain E175 deliveries. Debt from this agreement is reflected as a non-cash transaction within the supplemental disclosures in the condensed consolidated statements of cash flows. Also during the nine months ended September 30, 2023, the Company made scheduled debt payments of $265$240 million and prepayments of $2 million.
Debt Maturity
At September 30, 2017,2023, long-term debt principal payments for the next five years and thereafter are as follows (in millions): | | | | | |
| Total |
Remainder of 2023 | $ | 45 | |
2024 | 286 | |
2025 | 343 | |
2026 | 292 | |
2027 | 597 | |
Thereafter | 864 | |
Total Principal Payments | $ | 2,427 | |
|
| | | |
| Total |
Remainder of 2017 | $ | 55 |
|
2018 | 350 |
|
2019 | 422 |
|
2020 | 449 |
|
2021 | 422 |
|
Thereafter | 1,016 |
|
Total | $ | 2,714 |
|
Bank Lines of Credit
The CompanyAlaska has three credit facilities with availability totaling $475 million. All three$626 million as of September 30, 2023. One of the credit facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility increased from $100for $150 million to $250 million in June 2017. It expires in June 2021 and is secured by aircraft. The second credit facility increased from $52 million to $75 million in September 2017. It expires in September 2018 with a mechanism for annual renewal and is secured by aircraft. The third credit facility increased from $100 million to $150 million in March 2017. It expires in March 20222025 and is secured by certain accounts receivable, spare engines, spare parts, and ground service equipment. TheA second credit facility, which is secured by aircraft, was amended by the Company in the third quarter to increase its size to $400 million and extend its term to June 2026. Both facilities have variable interest rates based on SOFR plus a specified margin. A third credit facility for $76 million expires in June 2024 and is secured by aircraft.
Alaska has secured letters of credit against the $75 millionthird facility, but has no plans to borrow using either of the other two other facilities. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is$500 million. Alaska was in compliance with this covenant at September 30, 2017.2023.
NOTE 6. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for the qualified defined-benefit plans includedinclude the following components (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Service cost | $ | 8 | | | $ | 12 | | | $ | 22 | | | $ | 34 | |
Pension expense included in Wages and benefits | 8 | | | 12 | | | 22 | | | 34 | |
| | | | | | | |
Interest cost | 27 | | | 17 | | | 81 | | | 49 | |
Expected return on assets | (28) | | | (32) | | | (85) | | | (96) | |
Amortization of prior service cost (credit) | — | | | (1) | | | — | | | (1) | |
Recognized actuarial loss | 5 | | | 2 | | | 17 | | | 6 | |
Pension expense included in Non-operating Income (Expense) | $ | 4 | | | $ | (14) | | | $ | 13 | | | $ | (42) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Service cost | $ | 10 |
| | $ | 9 |
| | $ | 30 |
| | $ | 27 |
|
Interest cost | 19 |
| | 18 |
| | 55 |
| | 55 |
|
Expected return on assets | (27 | ) | | (27 | ) | | (80 | ) | | (81 | ) |
Amortization of prior service cost (credit) | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
Recognized actuarial loss (gain) | 7 |
| | 7 |
| | 20 |
| | 19 |
|
Total | $ | 8 |
| | $ | 6 |
| | $ | 24 |
| | $ | 19 |
|
The Company contributed $15 million to the defined-benefit pension plan during the three months ended September 30, 2017.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of September 30, 20172023 (in millions): | | | | | | | | | | | | | | | | |
| | Aircraft-Related Commitments(a) | | Capacity Purchase Agreements and Other Obligations (b) | | |
Remainder of 2023 | | $ | 460 | | | $ | 56 | | | |
2024 | | 1,754 | | | 224 | | | |
2025 | | 1,438 | | | 227 | | | |
2026 | | 688 | | | 219 | | | |
2027 | | 334 | | | 220 | | | |
Thereafter | | 591 | | | 739 | | | |
Total | | $ | 5,265 | | | $ | 1,685 | | | |
(a)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Aircraft Leases | | Facility Leases | | Aircraft Purchase Commitments | | Capacity Purchase Agreements (a) | | Aircraft Maintenance Deposits | | Aircraft Maintenance and Parts Management |
Remainder of 2017 | $ | 77 |
| | $ | 34 |
| | $ | 168 |
| | $ | 21 |
| | $ | 15 |
| | $ | 8 |
|
2018 | 342 |
| | 73 |
| | 956 |
| | 118 |
| | 61 |
| | 32 |
|
2019 | 344 |
| | 65 |
| | 806 |
| | 151 |
| | 65 |
| | 35 |
|
2020 | 317 |
| | 63 |
| | 352 |
| | 158 |
| | 68 |
| | 37 |
|
2021 | 280 |
| | 55 |
| | 273 |
| | 165 |
| | 63 |
| | 40 |
|
Thereafter | 1,263 |
| | 204 |
| | 355 |
| | 1,250 |
| | 90 |
| | — |
|
Total | $ | 2,623 |
| | $ | 494 |
| | $ | 2,910 |
| | $ | 1,863 |
| | $ | 362 |
| | $ | 152 |
|
| |
(a) | Includes all non-aircraft lease costs associated with capacity purchase agreements. |
Lease Commitments
Aircraft lease commitments include future obligations for all(b)Primarily comprised of the Company's operating airlines—Alaska, Virgin America and Horizon,non-lease costs associated with capacity purchase agreements, as well as aircraft leases operated by third-parties. At September 30, 2017, the Company had lease contracts for 10 Boeing 737 ("B737") aircraft, 55 Airbus aircraft, 15 Bombardier Q400 aircraft,other various sponsorship agreements and 21 Embraer 175 ("E175") with SkyWest Airlines, Inc. ("SkyWest"). The Company has an additional eight scheduled lease deliveries of A321neo aircraft through 2018, as well as 14 scheduled lease deliveries of E175 aircraft through 2018 to be flown by Skywest. All lease contracts have remaining non-cancelable lease terms ranging from 2017 to 2030. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft deliveries in 2020. Options to lease are not reflected in the commitments table above.investment commitments.
Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $145 million and $82 million for the three months ended September 30, 2017 and 2016, and $406 million and $226 million for the nine months ended September 30, 2017 and 2016.
Aircraft Purchase Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. AsDetails for contractual aircraft commitments as of September 30, 2017,2023 are outlined below.
| | | | | | | | | | | | | | | | | |
| Firm Orders | | Options and Other Rights | | Total |
Aircraft Type | 2023-2027 | | 2025-2030 | | 2023-2030 |
B737 | 89 | | 105 | | 194 |
E175 | 9 | | 13 | | 22 |
Total | 98 | | 118 | | 216 |
The B737 fleet commitments outlined above represent the Company hadcontractual commitments as defined in Alaska's existing order with Boeing as of September 30, 2023. Boeing has communicated to Alaska that certain B737 deliveries contracted in 2023 are expected to be delayed into 2024.
Alaska has contractual agreements as of September 30, 2023 to purchase 48 B737 aircraft (16 B737 NextGen aircraft and 32 B737 MAX aircraft, with deliveriesseven of its leased A321neo aircraft. These transactions are expected to occur in the remainderfourth quarter of 2017 through 2023)2023 and 23 E175first quarter of 2024. The obligations for these aircraft, with deliveriesincluding both the remaining lease payments and subsequent purchase, are reflected within Current portion of long-term debt and finance leases in 2018 through 2019, which reflects Horizon's deferralthe condensed consolidated balance sheets as of three E175 aircraft from 2017 to 2018. The Company also has cancelable purchase commitments forSeptember 30, Airbus A320neo aircraft with deliveries from 2020 through 2022. In addition, the Company has options to purchase 37 B737 aircraft2023 and 30 E175 aircraft. The cancelable purchase commitments and option payments are not reflected in the tabletables above. Refer to Note 2 to the condensed consolidated financial statements for additional details.
Capacity Purchase Agreements ("CPAs")
At September 30, 2017, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA with Alaska. In addition, Alaska has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada and with Peninsula Airways, Inc. ("PenAir") to fly certain routes in the state of Alaska. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.
Aircraft Maintenance Deposits
Virgin America is contractually required to make maintenance deposit payments to aircraft lessors, which represent maintenance reserves made solely to collateralize the lessor for future maintenance events should the Company not perform required maintenance. Most lease agreements provide that maintenance reserves are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance reserves held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event.
Aircraft Maintenance and Parts Management
Through its acquisition of Virgin America, the Company has a separate maintenance-cost-per-hour contractmaintenance commitments include contractual commitments for management and repair of certain rotable parts to support airframe and engine maintenance and repair. This agreement requiresagreements requiring monthly payments based upon utilization, such as flight hours, cycles, and age of the aircraft, and, inaircraft. In turn, the agreement transfersthese maintenance agreements transfer certain risks to the third-party service provider. There are minimum payments under this agreement. Accordingly, payments could differ materially based on actual aircraft utilization.
Subsequent to September 30, 2017, Alaska entered into a similar contracthas contracts for maintenance on its B737-800 and B737-900ER aircraft engines. Payments under this agreement are not reflected in the table above.engines through 2026 and 2032, respectively. Horizon has a contract for maintenance on certain E175 aircraft engines through 2033.
Contingencies
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all
As part of the 2016 acquisition of Virgin America, flight attendantsAlaska assumed responsibility for damages based on alleged violationsthe Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of CaliforniaAlaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and City$160 million. Alaska stopped making royalty payments in 2019 after ending all use of San Francisco wage and hour laws. Plaintiffs received class certification in November 2016.the Virgin America filedbrand. On February 16, 2023, the commercial court issued a motion for summary judgment seeking to dismiss all claims on various federal preemption grounds. In January 2017,ruling adopting Virgin Group’s interpretation of the Court denied in part and granted in part Virgin America’s motion.license agreement. The Company has appealed the decision and believes the claims in thisthe case are without factual and legal merit, and intends to defend this lawsuit.
Management believesa position supported by Virgin America’s representations during pre-merger due diligence. Alaska also commenced a separate claim for breach of the ultimate disposition of these matters is not likely to materiallyagreement against the Virgin Group that may affect the Company's financial position or results of operations. This forward-looking statement is based on management's current understanding ofCompany’s total liability in the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries.matter.
NOTE 8. SHAREHOLDERS' EQUITY
Dividends
During the three months ended September 30, 2017, the Company declared and paid cash dividends of $0.30 per share, or $37 million. During the nine months ended September 30, 2017, the Company declared and paid cash dividends of $0.90 per share, or $111 million.
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. TheIn March 2020, the Company suspended the share repurchase program was paused inas required by the second quarter of 2016 in anticipation of the acquisition of Virgin America.CARES Act. These restrictions ended on October 1, 2022. The Company resumedrestarted the share repurchase program in February 2023 pursuant to the second quarter of 2017.existing repurchase program. As of September 30, 2017,2023, the Company has repurchased 4.79.1 million shares for $363$613 million under this program. Subsequent to September 30, 2017, the CompanyNo shares were repurchased an additional 369,182 shares for $25 million.in 2022.
Share repurchasepurchase activity (in millions, except share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | | | | | Nine Months Ended September 30, 2023 | | | | |
| Shares | | Amount | | | | | | Shares | | Amount | | | | |
2015 Repurchase Program—$1 billion | 248,988 | | | $ | 13 | | | | | | | 1,534,529 | | | $ | 70 | | | | | |
CARES Act Warrant Issuances |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
2015 Repurchase Program—$1 billion | 355,415 |
| | $ | 28 |
| | — |
| | $ | — |
| | 612,095 |
| | $ | 50 |
| | 2,594,809 |
| | $ | 193 |
|
As taxpayer protection required under the Payroll Support Program (PSP) under the CARES Act, the Company granted the U.S. government a total of 1,455,437 warrants to purchase ALK common stock in 2020 and 2021. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.
Accumulated Other Comprehensive Loss
ComponentsAs of accumulated other comprehensive loss, netSeptember 30, 2023, there are 1,882,517 total warrants outstanding, with a weighted average strike price of tax (in millions):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Marketable securities | $ | — |
| | $ | (3 | ) |
Employee benefit plans | (287 | ) | | (299 | ) |
Interest rate derivatives | (2 | ) | | (3 | ) |
Total | $ | (289 | ) | | $ | (305 | ) |
$39.06. The value of the warrants was estimated using a Black-Scholes option pricing model. The total fair value of all outstanding warrants was $30 million, recorded in stockholders' equity at issuance.
Earnings Per Share ("EPS")(EPS)
Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options, and restricted stock units, and warrants, using the treasury-stock method. For the three and nine months ended September 30, 2017 and 2016, anti-dilutive sharesAnti-dilutive common stock equivalents excluded from the calculation of EPSdiluted earnings per share were not material.1.2 million and 1.9 million for the three and nine months ended September 30, 2023, and 1.4 million and 1.7 million for the three and nine months ended September 30, 2022.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS
A roll forward of the amounts included in accumulated other comprehensive loss, net of tax (in millions), is shown below for the three and nine months ended September 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Marketable Securities | | Employee Benefit Plan | | Interest Rate Derivatives | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at June 30, 2023, net of tax effect of $116 | $ | (64) | | | $ | (311) | | | $ | 10 | | | $ | (365) | |
Reclassifications into earnings, net of tax impact of $(1) | 2 | | 3 | | — | | 5 |
Change in value, net of tax impact of $0 | — | | — | | — | | — |
Balance at September 30, 2023, net of tax effect of $115 | $ | (62) | | | $ | (308) | | | $ | 10 | | | $ | (360) | |
| | | | | | | |
Balance at December 31, 2022, net of tax effect of $122 | $ | (80) | | | $ | (319) | | | $ | 11 | | | $ | (388) | |
Reclassifications into earnings, net of tax effect of $(5) | 9 | | | 11 | | | — | | | 20 | |
Change in value, net of tax effect of $(2) | 9 | | | — | | | (1) | | | 8 | |
Balance at September 30, 2023, net of tax effect of $115 | $ | (62) | | | $ | (308) | | | $ | 10 | | | $ | (360) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Marketable Securities | | Employee Benefit Plan | | Interest Rate Derivatives | | Total |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at June 30, 2022, net of tax effect of $98 | $ | (64) | | | $ | (251) | | | $ | 7 | | | $ | (308) | |
Reclassifications into earnings, net of tax impact of $0 | 2 | | 1 | | — | | 3 |
Change in value, net of tax impact of $6 | (28) | | — | | 5 | | (23) |
Balance at September 30, 2022, net of tax effect of $104 | $ | (90) | | | $ | (250) | | | $ | 12 | | | $ | (328) | |
| | | | | | | |
Balance at December 31, 2021, net of tax effect of $83 | (4) | | | (252) | | | (6) | | | (262) | |
Reclassifications into earnings, net of tax effect of $1 | 6 | | | 2 | | | — | | | 8 | |
Change in value, net of tax effect of $20 | (92) | | | — | | | 18 | | | (74) | |
Balance at September 30, 2022, net of tax effect of $104 | $ | (90) | | | $ | (250) | | | $ | 12 | | | $ | (328) | |
NOTE 9.10. OPERATING SEGMENT INFORMATION
Alaska Air Group has threetwo operating airlines—airlines – Alaska Virgin America and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon as well as with third-party carriersand SkyWest, and PenAir, under which Alaska receives all passenger revenues.revenue.
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 three reportable operating segments:
•Mainline - includes Alaska's and Virgin America’s scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, Costa Rica, and Cuba.
Belize.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under CPAs.a CPA. This segment includes the actual revenuesrevenue and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the CompanyCompany's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
Operating segment information is as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenue | | | | | | | | | | | | | |
Passenger revenue | $ | 2,225 | | | $ | 393 | | | $ | — | | | $ | — | | | $ | 2,618 | | | $ | — | | | $ | 2,618 | |
CPA revenue | — | | | — | | | 104 | | | (104) | | | — | | | — | | | — | |
Mileage Plan other revenue | 146 | | | 13 | | | — | | | — | | | 159 | | | — | | | 159 | |
Cargo and other revenue | 60 | | | — | | | — | | | 2 | | | 62 | | | — | | | 62 | |
Total Operating Revenue | 2,431 | | | 406 | | | 104 | | | (102) | | | 2,839 | | | — | | | 2,839 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,484 | | | 297 | | | 89 | | | (92) | | | 1,778 | | | 156 | | | 1,934 | |
Fuel expense | 621 | | | 108 | | | — | | | — | | | 729 | | | (35) | | | 694 | |
Total Operating Expenses | 2,105 | | | 405 | | | 89 | | | (92) | | | 2,507 | | | 121 | | | 2,628 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-operating Income (Expense) | — | | | — | | | (11) | | | 1 | | | (10) | | | (8) | | | (18) | |
Income (Loss) Before Income Tax | $ | 326 | | | $ | 1 | | | $ | 4 | | | $ | (9) | | | $ | 322 | | | $ | (129) | | | $ | 193 | |
Pretax Margin | | | | | | | | | 11.4 | % | | | | 6.8 | % |
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenue | | | | | | | | | | | | | |
Passenger revenue | $ | 2,217 | | | $ | 398 | | | $ | — | | | $ | — | | | $ | 2,615 | | | $ | — | | | $ | 2,615 | |
CPA revenue | — | | | — | | | 93 | | | (93) | | | — | | | — | | | — | |
Mileage Plan other revenue | 133 | | | 13 | | | — | | | — | | | 146 | | | — | | | 146 | |
Cargo and other revenue | 65 | | | — | | | — | | | 2 | | | 67 | | | — | | | 67 | |
Total Operating Revenue | 2,415 | | | 411 | | | 93 | | | (91) | | | 2,828 | | | — | | | 2,828 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,352 | | | 292 | | | 94 | | | (94) | | | 1,644 | | | 245 | | | 1,889 | |
Fuel expense | 625 | | | 121 | | | — | | | — | | | 746 | | | 131 | | | 877 | |
Total Operating Expenses | 1,977 | | | 413 | | | 94 | | | (94) | | | 2,390 | | | 376 | | | 2,766 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-operating Income (Expense) | 8 | | | — | | | (5) | | | — | | | 3 | | | — | | | 3 | |
Income (Loss) Before Income Tax | $ | 446 | | | $ | (2) | | | $ | (6) | | | $ | 3 | | | $ | 441 | | | $ | (376) | | | $ | 65 | |
Pretax Margin | | | | | | | | | 15.6 | % | | | | 2.3 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | |
Passenger | | | | | | | | | | | | | |
Mainline | $ | 1,562 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,562 |
| | $ | — |
| | $ | 1,562 |
|
Regional | — |
| | 262 |
| | — |
| | — |
| | 262 |
| | — |
| | 262 |
|
Total passenger revenues | 1,562 |
| | 262 |
| | — |
| | — |
| | 1,824 |
| | — |
| | 1,824 |
|
CPA revenues | — |
| | — |
| | 112 |
| | (112 | ) | | — |
| | — |
| | — |
|
Freight and mail | 30 |
| | 1 |
| | 1 |
| | — |
| | 32 |
| | — |
| | 32 |
|
Other—net | 242 |
| | 21 |
| | 1 |
| | — |
| | 264 |
| | — |
| | 264 |
|
Total operating revenues | 1,834 |
| | 284 |
| | 114 |
| | (112 | ) | | 2,120 |
| | — |
| | 2,120 |
|
Operating expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,077 |
| | 219 |
| | 105 |
| | (112 | ) | | 1,289 |
| | 24 |
| | 1,313 |
|
Economic fuel | 328 |
| | 45 |
| | — |
| | — |
| | 373 |
| | (5 | ) | | 368 |
|
Total operating expenses | 1,405 |
| | 264 |
| | 105 |
| | (112 | ) | | 1,662 |
| | 19 |
| | 1,681 |
|
Nonoperating income (expense) | | | | | | | | | | | | | |
Interest income | 11 |
| | — |
| | — |
| | (2 | ) | | 9 |
| | — |
| | 9 |
|
Interest expense | (23 | ) | | — |
| | (4 | ) | | 1 |
| | (26 | ) | | — |
| | (26 | ) |
Other | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Total Nonoperating income (expense) | (7 | ) | | — |
| | (4 | ) | | (1 | ) | | (12 | ) | | — |
| | (12 | ) |
Income (loss) before income tax | $ | 422 |
| | $ | 20 |
| | $ | 5 |
| | $ | (1 | ) | | $ | 446 |
| | $ | (19 | ) | | $ | 427 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | |
Passenger | | | | | | | | | | | | | |
Mainline | $ | 1,073 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,073 |
| | $ | — |
| | $ | 1,073 |
|
Regional | — |
| | 249 |
| | — |
| | — |
| | 249 |
| | — |
| | 249 |
|
Total passenger revenues | 1,073 |
| | 249 |
| | — |
| | — |
| | 1,322 |
| | — |
| �� | 1,322 |
|
CPA revenues | — |
| | — |
| | 109 |
| | (109 | ) | | — |
| | — |
| | — |
|
Freight and mail | 30 |
| | 1 |
| | — |
| | — |
| | 31 |
| | — |
| | 31 |
|
Other—net | 190 |
| | 21 |
| | 1 |
| | 1 |
| | 213 |
| | — |
| | 213 |
|
Total operating revenues | 1,293 |
| | 271 |
| | 110 |
| | (108 | ) | | 1,566 |
| | — |
| | 1,566 |
|
Operating expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 727 |
| | 202 |
| | 99 |
| | (109 | ) | | 919 |
| | 22 |
| | 941 |
|
Economic fuel | 188 |
| | 34 |
| | — |
| | — |
| | 222 |
| | 3 |
| | 225 |
|
Total operating expenses | 915 |
| | 236 |
| | 99 |
| | (109 | ) | | 1,141 |
| | 25 |
| | 1,166 |
|
Nonoperating income (expense) | | | | | | | | | | | | | |
Interest income | 7 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Interest expense | (7 | ) | | — |
| | (2 | ) | | (2 | ) | | (11 | ) | | — |
| | (11 | ) |
Other | 5 |
| | — |
| | — |
| | 1 |
| | 6 |
| | — |
| | 6 |
|
Total Nonoperating income (expense) | 5 |
| | — |
| | (2 | ) | | (1 | ) | | 2 |
| | — |
| | 2 |
|
Income (loss) before income tax | $ | 383 |
| | $ | 35 |
| | $ | 9 |
| | $ | — |
| | $ | 427 |
| | $ | (25 | ) | | $ | 402 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenue | | | | | | | | | | | | | |
Passenger revenue | $ | 6,143 | | | $ | 1,057 | | | $ | — | | | $ | — | | | $ | 7,200 | | | $ | — | | | $ | 7,200 | |
CPA revenue | — | | | — | | | 274 | | | (274) | | | — | | | — | | | — | |
Mileage Plan other revenue | 447 | | | 36 | | | — | | | — | | | 483 | | | — | | | 483 | |
Cargo and other revenue | 184 | | | — | | | — | | | 6 | | | 190 | | | — | | | 190 | |
Total Operating Revenue | 6,774 | | | 1,093 | | | 274 | | | (268) | | | 7,873 | | | — | | | 7,873 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 4,342 | | | 832 | | | 260 | | | (261) | | | 5,173 | | | 406 | | | 5,579 | |
Fuel expense | 1,672 | | | 274 | | | — | | | — | | | 1,946 | | | (14) | | | 1,932 | |
Total Operating Expenses | 6,014 | | | 1,106 | | | 260 | | | (261) | | | 7,119 | | | 392 | | | 7,511 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-operating Income (Expense) | (3) | | | — | | | (29) | | | 3 | | | (29) | | | (14) | | | (43) | |
Income (Loss) Before Income Tax | $ | 757 | | | $ | (13) | | | $ | (15) | | | $ | (4) | | | $ | 725 | | | $ | (406) | | | $ | 319 | |
Pretax Margin | | | | | | | | | 9.2 | % | | | | 4.1 | % |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating Revenue | | | | | | | | | | | | | |
Passenger revenue | $ | 5,488 | | | $ | 1,056 | | | $ | — | | | $ | — | | | $ | 6,544 | | | $ | — | | | $ | 6,544 | |
CPA revenue | — | | | — | | | 288 | | | (288) | | | — | | | — | | | — | |
Mileage Plan other revenue | 392 | | | 41 | | | — | | | — | | | 433 | | | — | | | 433 | |
Cargo and other revenue | 186 | | | — | | | — | | | 4 | | | 190 | | | — | | | 190 | |
Total Operating Revenue | 6,066 | | | 1,097 | | | 288 | | | (284) | | | 7,167 | | | — | | | 7,167 | |
Operating Expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 3,808 | | | 843 | | | 291 | | | (288) | | | 4,654 | | | 466 | | | 5,120 | |
Fuel expense | 1,623 | | | 313 | | | — | | | — | | | 1,936 | | | 64 | | | 2,000 | |
Total Operating Expenses | 5,431 | | | 1,156 | | | 291 | | | (288) | | | 6,590 | | | 530 | | | 7,120 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non-operating Income (Expense) | 12 | | | — | | | (15) | | | — | | | (3) | | | — | | | (3) | |
Income (Loss) Before Income Tax | $ | 647 | | | $ | (59) | | | $ | (18) | | | $ | 4 | | | $ | 574 | | | $ | (530) | | | $ | 44 | |
Pretax Margin | | | | | | | | | 8.0 | % | | | | 0.6 | % |
(a)Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and excludes certain charges.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | |
Passenger | | | | | | | | | | | | | |
Mainline | $ | 4,390 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,390 |
| | $ | — |
| | $ | 4,390 |
|
Regional | — |
| | 725 |
| | — |
| | — |
| | 725 |
| | — |
| | 725 |
|
Total passenger revenues | 4,390 |
| | 725 |
| | — |
| | — |
| | 5,115 |
| | — |
| | 5,115 |
|
CPA revenues | — |
| | — |
| | 317 |
| | (317 | ) | | — |
| | — |
| | — |
|
Freight and mail | 84 |
| | 3 |
| | 1 |
| | — |
| | 88 |
| | — |
| | 88 |
|
Other—net | 708 |
| | 57 |
| | 3 |
| | — |
| | 768 |
| | — |
| | 768 |
|
Total operating revenues | 5,182 |
| | 785 |
| | 321 |
| | (317 | ) | | 5,971 |
| | — |
| | 5,971 |
|
Operating expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 3,101 |
| | 625 |
| | 324 |
| | (316 | ) | | 3,734 |
| | 88 |
| | 3,822 |
|
Economic fuel | 924 |
| | 120 |
| | — |
| | — |
| | 1,044 |
| | 7 |
| | 1,051 |
|
Total operating expenses | 4,025 |
| | 745 |
| | 324 |
| | (316 | ) | | 4,778 |
| | 95 |
| | 4,873 |
|
Nonoperating income (expense) | | | | | | | | | | | | | |
Interest income | 27 |
| | — |
| | — |
| | (2 | ) | | 25 |
| | — |
| | 25 |
|
Interest expense | (68 | ) | | — |
| | (9 | ) | | — |
| | (77 | ) | | — |
| | (77 | ) |
Other | 11 |
| | — |
| | 1 |
| | — |
| | 12 |
| | — |
| | 12 |
|
Total Nonoperating income (expense) | (30 | ) | | — |
| | (8 | ) | | (2 | ) | | (40 | ) | | — |
| | (40 | ) |
Income (loss) before income tax | 1,127 |
| | 40 |
| | (11 | ) | | (3 | ) | | 1,153 |
| | (95 | ) | | 1,058 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | |
Passenger | | | | | | | | | | | | | |
Mainline | $ | 3,036 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,036 |
| | $ | — |
| | $ | 3,036 |
|
Regional | — |
| | 682 |
| | — |
| | — |
| | 682 |
| | — |
| | 682 |
|
Total passenger revenues | 3,036 |
| | 682 |
| | — |
| | — |
| | 3,718 |
| | — |
| | 3,718 |
|
CPA revenues | — |
| | — |
| | 322 |
| | (322 | ) | | — |
| | — |
| | — |
|
Freight and mail | 79 |
| | 3 |
| | — |
| | — |
| | 82 |
| | — |
| | 82 |
|
Other—net | 546 |
| | 57 |
| | 3 |
| | 1 |
| | 607 |
| | — |
| | 607 |
|
Total operating revenues | 3,661 |
| | 742 |
| | 325 |
| | (321 | ) | | 4,407 |
| | — |
| | 4,407 |
|
Operating expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 2,107 |
| | 580 |
| | 305 |
| | (322 | ) | | 2,670 |
| | 36 |
| | 2,706 |
|
Economic fuel | 512 |
| | 90 |
| | — |
| | — |
| | 602 |
| | (9 | ) | | 593 |
|
Total operating expenses | 2,619 |
| | 670 |
| | 305 |
| | (322 | ) | | 3,272 |
| | 27 |
| | 3,299 |
|
Nonoperating income (expense) | | | | | | | | | | | | | |
Interest income | 19 |
| | — |
| | 1 |
| | — |
| | 20 |
| | — |
| | 20 |
|
Interest expense | (23 | ) | | — |
| | (7 | ) | | (3 | ) | | (33 | ) | | — |
| | (33 | ) |
Other | 15 |
| | — |
| | — |
| | 4 |
| | 19 |
| | — |
| | 19 |
|
Total Nonoperating income (expense) | 11 |
| | — |
| | (6 | ) | | 1 |
| | 6 |
| | — |
| | 6 |
|
Income (loss) before income tax | 1,053 |
| | 72 |
| | 14 |
| | 2 |
| | 1,141 |
| | (27 | ) | | 1,114 |
|
(c)Includes special items and mark-to-market fuel hedge accounting adjustments. | | |
(a) | Includes consolidating entries, Parent Company, McGee Air Services, and other immaterial business units. |
| |
(b) | The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain income and charges. |
| |
(c) | Includes merger-related costs and mark-to-market fuel-hedge accounting charges. |
Total assets were as follows (in millions): | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Mainline | $ | 20,468 | | | $ | 19,733 | |
Horizon | 1,320 | | | 1,157 | |
Consolidating & Other | (6,623) | | | (6,704) | |
Consolidated | $ | 15,165 | | | $ | 14,186 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Mainline | $ | 16,382 |
| | $ | 15,260 |
|
Horizon | 914 |
| | 690 |
|
Consolidating & Other | (6,557 | ) | | (5,988 | ) |
Consolidated | $ | 10,739 |
| | $ | 9,962 |
|
NOTE 10. SUBSEQUENT EVENTS
On October 30, 2017, the Company received a final decision from a third-party arbitration panel on increased wage rates and retirement contributions for pilots of Alaska Airlines and Virgin America.
| | |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")(MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.2022. This overview summarizes the MD&A, which includes the following sections:
•Third Quarter Review—highlights from the third quarter of 20172023 outlining some of the major events that happenedoccurred during the period and how they affected our financial performance.
period.
•Results of Operations—an in-depth analysis of our revenuesrevenue by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2017.2023. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. As Virgin America was acquired on December 14, 2016, its financial and operational results are reflected in the three and nine months ended September 30, 2017 but not in the comparative prior period. However, for comparability purposes, we have added "Combined Comparative" information for the prior year, which is more fully described below. This section includes forward-looking statements regarding our view of the remainder of 2017.
2023.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRD QUARTER REVIEW
OurThird Quarter Results
We recorded consolidated pretax income was $427 million duringfor the third quarter of 2017,2023 under GAAP of $193 million, compared to $402consolidated pretax income of $65 million in the third quarter of 2016. The increase in2022. Increased pretax income is primarily the result of $25a $183 million was primarily driven bydecrease in aircraft fuel costs, and an increase$81 million decrease in revenues of $554 million,special operating and non-operating charges. These decreases were partially offset by a $372$134 million increase in non-fuelother operating expense and a $143 million increase in fuel expense.categories.
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 revenuesrevenue and operating expenses as compared to 2022, and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.
Operational Milestones
Operations Performance
DuringIn the third quarter, our airlines leveraged our foundational strength of operational excellence, leading the industry in completion rate and finishing with an on-time performance higher than 80%. Additionally, Alaska completed its transition back to a single-fleet operator following the retirement of its A321neo aircraft in September. Subsequent to quarter end, Alaska reached an agreement with American Airlines to sell all ten A321neos, with sales expected to be completed by the first 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.2024.
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
EachUnder the terms 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 singleexisting 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(ALPA), Alaska's pilots' wages underwent a third-party arbitration panel duringmarket review in the third quarter. On October 30, 2017, we receivedFollowing this review, Alaska executed a decision from the arbitration panel on new wage rates and retirement contributionsLetter of Agreement with ALPA for pilots of Alaska Airlines and Virgin America. This award is binding and is effective November 1, 2017. The wage rates equatea one-time market rate adjustment 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 inpay rates effective AprilSeptember 1, 20182023.
Alaska is actively negotiating for new contracts with its mainline flight attendants represented by the Association of Flight Attendants, whose contract became amendable in December 2022, and April 1, 2019.its mainline mechanics represented by the Aircraft Mechanics Fraternal Association, whose contract became amendable in October 2023. Horizon is actively negotiating for a new
The decision increases contribution rates forcontract with its pilots, represented by the International Brotherhood of Teamsters, whose contract becomes amendable 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.December 2024.
We estimate the impact 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.
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% inFor the fourth quarter of 2017,2023, we anticipate our cost discipline and approximately 9%operational excellence will continue to benefit unit costs, with CASMex expected to be down 3% to 5% on capacity up 11% to 14% as compared to the prior year. Although we have seen some slowing in the first quarter of 2018. demand environment, we expect our diversified product offerings and Mileage Plan revenue streams will lift total revenue up 1% to 4% over 2022. For the full year, headwinds from fuel prices which were not previously contemplated, coupled with decreased revenue expectations, have led us to reduce our expected full year adjusted pretax margin to 7% to 8%.
We believecontinue to remain focused on setting intentional targets and taking the appropriate steps to deliver on those targets. Changes to the operating environment and industry trends could lead to adjustments to the guidance provided as management aligns our business to be appropriately responsive. As we leverage our network and diversified revenue offerings for growth, our people are focused on keeping costs low and running a strong operation. These are competitive advantages we have cultivated over many years 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, givewill continue to serve 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 Group2023 and Virgin America for the 2016 comparative periods:beyond.
|
| | | | |
| 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 merger-related costs, mark-to-market gains or losses or other individualaircraft fuel and special revenues or expensesitems is useful information to investors because:
•By excluding fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe it provides managementthat we have better visibility into the results of operations as we focus on cost-reduction and our non-fuel costproductivity initiatives. 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 expense and certain special items such as merger-related costs, is one of the most important measures used by management and by the Air Groupour Board of Directors in assessing quarterly and annual cost performance.
Adjusted income before income tax and •CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.
CASM excluding fuelexpense 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.
•Adjusted income before income tax (and other items as specified in our plan documents) is an important metric for the employee annual incentive plan, which covers the majority of employees within the Alaska Air Group organization.
•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,revenue, we do not, (nornor are we able to)to, evaluate unit revenuesrevenue 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 revenuesrevenue 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,nonrecurring, infrequent, or unusual in nature.
OPERATING STATISTICS SUMMARY (unaudited)
AsBelow are operating statistics we use to measure operating performance. We often refer to unit revenue and adjusted unit costs, which are non-GAAP measures. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change |
Consolidated Operating Statistics:(a) | | | | | | | | | | | |
Revenue passengers (000) | 12,210 | | 11,437 | | 7% | | 33,654 | | 31,137 | | 8% |
RPMs (000,000) "traffic" | 15,718 | | 14,143 | | 11% | | 43,208 | | 38,475 | | 12% |
ASMs (000,000) "capacity" | 18,582 | | 16,349 | | 14% | | 51,447 | | 45,743 | | 12% |
Load factor | 84.6% | | 86.5% | | (1.9) pts | | 84.0% | | 84.1% | | (0.1) pts |
Yield | 16.66¢ | | 18.48¢ | | (10)% | | 16.66¢ | | 17.01¢ | | (2)% |
RASM | 15.28¢ | | 17.30¢ | | (12)% | | 15.30¢ | | 15.67¢ | | (2)% |
CASMex(b) | 9.57¢ | | 10.05¢ | | (5)% | | 10.05¢ | | 10.17¢ | | (1)% |
Economic fuel cost per gallon(b) | $3.26 | | $3.66 | | (11)% | | $3.14 | | $3.38 | | (7)% |
Fuel gallons (000,000) | 224 | | 204 | | 10% | | 620 | | 573 | | 8% |
ASMs per fuel gallon | 83.0 | | 80.1 | | 4% | | 83.0 | | 79.8 | | 4% |
Departures (000) | 111.8 | | 110.4 | | 1% | | 311.6 | | 309.3 | | 1% |
Average full-time equivalent employees (FTEs) | 23,879 | | 22,878 | | 4% | | 23,386 | | 22,354 | | 5% |
Mainline Operating Statistics: | | | | | | | | | | | |
Revenue passengers (000) | 9,681 | | 8,671 | | 12% | | 26,735 | | 23,557 | | 13% |
RPMs (000,000) "traffic" | 14,471 | | 12,846 | | 13% | | 39,967 | | 34,818 | | 15% |
ASMs (000,000) "capacity" | 17,123 | | 14,782 | | 16% | | 47,584 | | 41,221 | | 15% |
Load factor | 84.5% | | 86.9% | | (2.4) pts | | 84.0% | | 84.5% | | (0.5) pts |
Yield | 15.37¢ | | 17.26¢ | | (11)% | | 15.37¢ | | 15.76¢ | | (2)% |
RASM | 14.20¢ | | 16.34¢ | | (13)% | | 14.24¢ | | 14.72¢ | | (3)% |
CASMex(b) | 8.67¢ | | 9.15¢ | | (5)% | | 9.12¢ | | 9.24¢ | | (1)% |
Economic fuel cost per gallon(b) | $3.22 | | $3.61 | | (11)% | | $3.11 | | $3.35 | | (7)% |
Fuel gallons (000,000) | 193 | | 173 | | 12% | | 538 | | 484 | | 11% |
ASMs per fuel gallon | 88.7 | | 85.4 | | 4% | | 88.4 | | 85.2 | | 4% |
Departures (000) | 72.3 | | 65.3 | | 11% | | 202.1 | | 182.7 | | 11% |
Average full-time equivalent employees (FTEs) | 18,619 | | 17,453 | | 7% | | 18,184 | | 17,035 | | 7% |
Aircraft utilization | 11.9 | | 10.5 | | 13% | | 11.5 | | 10.4 | | 11% |
Average aircraft stage length | 1,386 | | 1,347 | | 3% | | 1,379 | | 1,348 | | 2% |
Operating fleet(d) | 220 | | 232 | | (12) a/c | | 220 | | 232 | | (12) a/c |
Regional Operating Statistics:(c) | | | | | | | | | | | |
Revenue passengers (000) | 2,529 | | 2,767 | | (9)% | | 6,919 | | 7,579 | | (9)% |
RPMs (000,000) "traffic" | 1,247 | | 1,297 | | (4)% | | 3,241 | | 3,657 | | (11)% |
ASMs (000,000) "capacity" | 1,459 | | 1,567 | | (7)% | | 3,862 | | 4,522 | | (15)% |
Load factor | 85.5% | | 82.8% | | 2.7 pts | | 83.9% | | 80.9% | | 3.0 pts |
Yield | 31.57¢ | | 30.69¢ | | 3% | | 32.61¢ | | 28.88¢ | | 13% |
RASM | 27.85¢ | | 26.23¢ | | 6% | | 28.30¢ | | 24.26¢ | | 17% |
Departures (000) | 39.5 | | 45.2 | | (13)% | | 109.5 | | 126.6 | | (14)% |
Operating fleet(d) | 83 | | 94 | | (11) a/c | | 83 | | 94 | | (11) 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 for the three and nine months ended September 30, 2017 and not for the prior period.third-party carriers.
(d)Excludes all aircraft removed from operating service.
|
| | | | | | | | | | | |
| 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 |
| |
(a)
| Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements. |
| |
(b)
| See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages. |
| |
(c)
| Data presented includes information related to flights operated by Horizon and third-party carriers. |
| |
(d)
| See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America. |
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 20172023 TO THREE MONTHS ENDED SEPTEMBER 30, 20162022
Our consolidated net income for the three months ended September 30, 20172023 was $266$139 million, or $2.14$1.08 per diluted share, compared to a consolidated net income of $256$40 million, or $2.07$0.31 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.2022.
Excluding the impact of merger-related costsspecial items and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of 20172023 was $278$237 million, or $2.24$1.83 per diluted share, compared to an adjusted net income of $272$325 million, or $2.20$2.53 per diluted share, infor the third quarter of 2016.2022. The following tables reconciletable reconciles 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, |
| 2023 | | 2022 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income per share | $ | 139 | | | $ | 1.08 | | | $ | 40 | | | $ | 0.31 | |
Mark-to-market fuel hedge adjustments | (35) | | | (0.27) | | | 131 | | | 1.02 | |
Special items - fleet transition and other | 156 | | | 1.20 | | | 155 | | | 1.21 | |
Special items - labor and related | — | | | — | | | 90 | | | 0.70 | |
Special items - net non-operating | 8 | | | 0.06 | | | — | | | — | |
Income tax effect of reconciling items above | (31) | | | (0.24) | | | (91) | | | (0.71) | |
Non-GAAP adjusted net income per share | $ | 237 | | | $ | 1.83 | | | $ | 325 | | | $ | 2.53 | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
CASM excluding fuel and special items reconciliation is summarized below: | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in cents) | 2023 | | 2022 | | % Change |
Consolidated: | | | | | |
CASM | 14.14 | ¢ | | 16.91 | ¢ | | (16) | % |
Less the following components: | | | | | |
Aircraft fuel, including hedging gains and losses | 3.73 | | | 5.36 | | | (30) | % |
Special items - fleet transition and other | 0.84 | | | 0.95 | | | (12) | % |
Special items - labor and related | — | | | 0.55 | | | (100) | % |
| | | | | |
| | | | | |
CASM excluding fuel and special items | 9.57 | ¢ | | 10.05 | ¢ | | (5) | % |
| | | | | |
Mainline: | | | | | |
CASM | 13.01 | ¢ | | 16.20 | ¢ | | (20) | % |
Less the following components: | | | | | |
Aircraft fuel, including hedging gains and losses | 3.42 | | | 5.52 | | | (38) | % |
| | | | | |
Special items - fleet transition and other | 0.92 | | | 0.92 | | | — | % |
Special items - labor and related | — | | | 0.61 | | | (100) | % |
| | | | | |
| | | | | |
CASM excluding fuel and special items | 8.67 | ¢ | | 9.15 | ¢ | | (5) | % |
|
| | | | | | | | | | |
| 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 | ¢ | | — | % |
OPERATING REVENUE
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, or 35%, duringrevenue was approximately flat in the third quarter of 20172023 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $108 million or 5%.2022. 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) | 2023 | | 2022 | | % Change |
Passenger revenue | $ | 2,618 | | | $ | 2,615 | | | — | % |
Mileage Plan other revenue | 159 | | | 146 | | | 9 | % |
Cargo and other revenue | 62 | | | 67 | | | (7) | % |
Total Operating Revenue | $ | 2,839 | | | $ | 2,828 | | | — | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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, Passenger revenue for the third quarter of 2023 was approximately flat compared to the same period in 2022. While passenger traffic rose 11% due to increased departures flown by larger aircraft in our Mainline fleet, softening of the demand environment led to a 10% decrease in yield following record highs in the prior year. Additionally, cancellations for travel to Maui following wildfires in August resulted in approximately $20 million in decreased passenger revenue for the third quarter of 2017 increased by $489 million, or 46%, on a 48% increase in capacity driven bycompared to the acquisition of Virgin America, partially offset by a 2% decrease in unit revenues. prior year.
Mileage Plan other revenue
On a Combined Comparativeconsolidated basis, Mainline passengerMileage Plan other revenue for the third quarter of 20172023 increased by 6%, due to a 7% increase in capacity, slightly offset by a 1% decrease in unit revenues compared to the combined third quarter of 2016.$13 million, or 9%. The increase in capacity was driven by higher commissions from our continued network expansionbank card partners due to increased spend levels and aircraft added to our fleet since the third quarter of 2016. The decrease in PRASM was driven byannual membership fees.
OPERATING EXPENSES
Total operating expenses 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 acutely in our California markets.
Passenger Revenue—Regional
Regional passenger revenue increased$138 million, or 5%, 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%.2022. 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) | 2023 | | 2022 | | % Change |
Fuel expense | $ | 694 | | | $ | 877 | | | (21) | % |
Non-fuel operating expenses, excluding special items | 1,778 | | | 1,644 | | | 8 | % |
| | | | | |
Special items - fleet transition and other | 156 | | | 155 | | | 1 | % |
Special items - labor and related | — | | | 90 | | | (100) | % |
| | | | | |
| | | | | |
Total Operating Expenses | $ | 2,628 | | | $ | 2,766 | | | (5) | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 Expenseexpense
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 $183 million, or 64%21%, compared to the third quarter of 2016. On a Combined Comparative basis, aircraft fuel expense increased $62 million or 20%.2022. The elements of the change are illustrated in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | |
| 2023 | | 2022 | | | |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal | | | |
Raw or "into-plane" fuel cost | $ | 711 | | | $ | 3.18 | | | $ | 775 | | | $ | 3.80 | | | | |
(Gain)/loss on settled hedges | 18 | | | 0.08 | | | (29) | | | (0.14) | | | | |
Consolidated economic fuel expense | $ | 729 | | | $ | 3.26 | | | $ | 746 | | | $ | 3.66 | | | | |
Mark-to-market fuel hedge adjustments | (35) | | | (0.16) | | | 131 | | | 0.64 | | | | |
GAAP fuel expense | $ | 694 | | | $ | 3.10 | | | $ | 877 | | | $ | 4.30 | | | | |
Fuel gallons | | | 224 | | | | | 204 | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 decreased 8% in the third quarter of 2023 compared to the third quarter of 2022, due to lower per gallon costs, partially offset by increased fuel consumption. Raw fuel expense per gallon for the three months ended September 30, 2017 increaseddecreased by 16% due to higher West Coastlower all-in jet fuel prices. West Coast jetJet 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 increasefuel, both of which have decreased in raw fuel price per gallon during the third quarter of 2017 was primarily driven by a 76% increase in refining margins and an 8% increase in crude oil prices, when2023 compared to the prior year. Fuel gallons consumed increased 10%, driven by 15 million gallons, or 8%, in line with the increase inincreased 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.
WeLosses recognized total losses of $5 million and $4 million for hedges that settled during the third quarter were $18 million in 2023, compared to gains of 2017 and 2016 as reported.$29 million in the same period in 2022. These amounts represent the net cash paid including thefor premium expense, recognized foroffset by any cash received from those hedges.hedges at settlement.
Non-fuel Expenses and Non-special Itemsexpenses
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 other special items. Significant operating expense variances from 20162022 are more fully described below. | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
(in millions) | 2023 | | 2022 | | % Change |
Wages and benefits | $ | 782 | | | $ | 686 | | | 14 | % |
Variable incentive pay | 45 | | | 48 | | | (6) | % |
Aircraft maintenance | 118 | | | 92 | | | 28 | % |
Aircraft rent | 48 | | | 76 | | | (37) | % |
Landing fees and other rentals | 183 | | | 161 | | | 14 | % |
Contracted services | 100 | | | 83 | | | 20 | % |
Selling expenses | 84 | | | 82 | | | 2 | % |
Depreciation and amortization | 113 | | | 104 | | | 9 | % |
Food and beverage service | 62 | | | 52 | | | 19 | % |
Third-party regional carrier expense | 58 | | | 53 | | | 9 | % |
Other | 185 | | | 207 | | | (11) | % |
Total non-fuel operating expenses, excluding special items | $ | 1,778 | | | $ | 1,644 | | | 8 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
Wages and Benefitsbenefits
Wages and benefits increased during the third quarter of 2017 by $135 million, or 40%. On a Combined Comparative basis, total wages and benefits increased by $63$96 million, or 15%.14%, in the third quarter of 2023. 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) | 2023 | | 2022 | | % Change |
Wages | $ | 602 | | | $ | 514 | | | 17 | % |
Pension - Defined benefit plans | 7 | | | 11 | | | (36) | % |
Defined contribution plans | 51 | | | 39 | | | 31 | % |
Medical and other benefits | 85 | | | 85 | | | — | % |
Payroll taxes | 37 | | | 37 | | | — | % |
Total Wages and benefits | $ | 782 | | | $ | 686 | | | 14 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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, wagesWages increased 16% with an 18% increase$88 million, or 17%, on 4% growth in FTEs. The increaseWhen combined with FTE increases, higher wage rates stemming from market adjustments and annual step increases were the primary driver for incremental year-over-year expense for wages.
Incremental expense for defined contribution plans was driven by the change in FTEs is attributable to the growth in our business,wages as well as the growthhigher matching contributions for several labor groups. Decreased defined benefit expense was driven by changes in McGee Air Services which has brought certain airport ground service positions in-house that were previously reflectedactuarial assumptions.
Aircraft maintenance
Aircraft maintenance expense increased by $26 million, or 28%, in our Contracted services expense. Additionally, irregular operations and flight cancellations during the third quarter resultedof 2023. The increase was primarily driven by the new B737-900ER power-by-the-hour contract in significant overtime for our customer service agents and reservations agents.2023, as well as increased aircraft utilization.
Aircraft rent
Depreciation and Amortization
Depreciation and amortizationAircraft rent expense decreased by $6$28 million, or 6%37%, duringin 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%. This2023. The decrease was primarily driven by a change in the estimated useful livesretirement of certain B73723 leased A320 aircraft. The A321neo fleet retirement also contributed to the decrease, as seven aircraft were reclassified from operating leases to finance leases and three aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016,were purchased during 2023. These decreases were partially offset by delivery of four leased B737-9 aircraft additions since September 30, 2016.the third quarter of 2022.
Landing fees and other rentals
Landing fees and other rentals increased by $22 million, or 14%, in the third quarter of 2023. The increase was driven primarily by higher terminal rent costs resulting from both rate and volume increases at many of our facilities. Landing fees also increased due to higher rates and larger landing weights due to a shift in the mix of flying from Regional to Mainline and upgauging our fleet.
Contracted services
Contracted services increased by $17 million, or 20%, in the third quarter of 2023. The increase was driven primarily by higher rates charged by vendors for services as well as an increase in passengers.
Food and beverage service
Food and beverage service increased by $10 million, or 19%, in the third quarter of 2023. The increase was driven by a combination of 7% growth in revenue passengers and higher costs for food, food service supplies, and transportation.
Other Operating Expensesexpense
Other operating expenses increasedexpense decreased by $58$22 million, or 63%11%, duringin 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%.2023. The increase isdecrease was 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 one-time employee recognition costs of $28 million recorded in 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 we2022, partially offset by increases to miscellaneous variable costs in 2023 consistent with increased capacity.
Special items - fleet transition and other
We recorded nonoperating expenseexpenses associated with the Company's fleet transition of $12 million compared to income of $2$156 million in the same period in 2016. On a Combined Comparative basis, nonoperating expense increased by $9 million, primarily duethird quarter of 2023. Refer to interest expense incurred inNote 2 to the current year on the debt issued in 2016 to finance the acquisition of Virgin America.consolidated financial statements for additional details.
Additional Segment InformationADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of10 to the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.results.
Mainline
Mainline recordedoperations reported an 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 profit of $20$326 million in the third quarter of 20172023, compared to $35a profit of $446 million in the same period in 2022. The $120 million decrease was driven primarily by a $132 million increase in non-fuel operating expenses. Compared to the prior year, non-fuel operating expenses increased primarily due to higher wage rates across various labor groups. Higher variable costs, largely consistent with the overall growth in capacity and departures, also contributed to the increase.
Regional
Regional operations reported adjusted pretax profit of $1 million in the third quarter of 2016.2023, compared to a loss of $2 million in the same period in 2022. The decrease in pretax profit$3 million improvement was attributable to higher non-fuel operatingdriven by decreased fuel expense due to increasedon less capacity and the operational disruptions at Horizon during the third quarter. Increased costs werea lower price per gallon, partially offset by a $13 million increase in operating revenues as described in Passenger Revenue—Regional.decreased revenue on less capacity and higher wage rates.
Horizon
Horizon incurred areported an adjusted pretax profit of $5$4 million in the third quarter of 20172023, compared to $9a loss of $6 million in the third quarter of 2016.same period in 2022. The change in pretax profit$10 million improvement was primarily driven by updates to internal rates under Horizon's CPA with Alaska and cost savings following Horizon’s transition to a $4 million increase in operating revenue,single fleet. These improvements were partially offset by higher non-fuel operating expenses attributable to higher wage and pilot traininginterest expense as a result of the increase in FTEs, along with other increased costs associated with flight cancellations during the current quarter. debt financing of new E175 deliveries in 2023.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 20172023 TO NINE MONTHS ENDED SEPTEMBER 30, 20162022
Our consolidated net income for the nine months ended September 30, 20172023 was $661$237 million, or $5.31$1.84 per diluted share, compared to consolidated net income of $700$36 million, or $5.63$0.28 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.2022.
Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, ourOur adjusted net income for the nine months ended September 30, 20172023 was $721$545 million, or $5.79$4.22 per diluted share, compared to an adjusted net income of $717$438 million, or $5.77$3.42 per diluted share, infor the nine months ended September 30, 2016.2022. The following tables reconciletable reconciles our adjusted net income and dilutedadjusted EPS to amounts as reported in accordance with GAAP: | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income per share | $ | 237 | | | $ | 1.84 | | | $ | 36 | | | $ | 0.28 | |
Mark-to-market fuel hedge adjustments | (14) | | | (0.11) | | | 64 | | | 0.50 | |
Special items - fleet transition and other | 355 | | | 2.75 | | | 376 | | | 2.94 | |
Special items - labor and related | 51 | | | 0.39 | | | 90 | | | 0.70 | |
Special items - net non-operating | 14 | | | 0.11 | | | — | | | — | |
Income tax effect of reconciling items above | (98) | | | (0.76) | | | (128) | | | (1.00) | |
Non-GAAP adjusted net income per share | $ | 545 | | | $ | 4.22 | | | $ | 438 | | | $ | 3.42 | |
|
| | | | | | | | | | | | | | | |
| 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 areCASM excluding fuel and special items reconciliation is summarized below: | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in cents) | 2023 | | 2022 | | % Change |
Consolidated: | | | | | |
CASM | 14.60 | ¢ | | 15.56 | ¢ | | (6) | % |
Less the following components: | | | | | |
| | | | | |
Aircraft fuel, including hedging gains and losses | 3.76 | | | 4.37 | | | (14) | % |
Special items - fleet transition and other | 0.69 | | | 0.82 | | | (16) | % |
Special items - labor and related | 0.10 | | | 0.20 | | | (50) | % |
| | | | | |
| | | | | |
CASM excluding fuel and special items | 10.05 | ¢ | | 10.17 | ¢ | | (1) | % |
| | | | | |
Mainline: | | | | | |
CASM | 13.47 | ¢ | | 14.59 | ¢ | | (8) | % |
Less the following components: | | | | | |
| | | | | |
Aircraft fuel, including hedging gains and losses | 3.49 | | | 4.44 | | | (21) | % |
Special items - fleet transition and other | 0.75 | | | 0.69 | | | 9 | % |
Special items - labor and related | 0.11 | | | 0.22 | | | (50) | % |
| | | | | |
| | | | | |
CASM excluding fuel and special items | 9.12 | ¢ | | 9.24 | ¢ | | (1) | % |
|
| | | | | | | | | | |
| 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 | % |
OPERATING REVENUE
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 revenue increased$1.6 billion, $706 million, or 35%10%, during the first nine months of 20172023 compared to the same period in 2016. On a Combined Comparative basis, total operating revenues increased $330 million, or 6%.2022. 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) | 2023 | | 2022 | | % Change |
Passenger revenue | $ | 7,200 | | | $ | 6,544 | | | 10 | % |
Mileage Plan other revenue | 483 | | | 433 | | | 12 | % |
Cargo and other revenue | 190 | | | 190 | | | — | % |
Total Operating Revenue | $ | 7,873 | | | $ | 7,167 | | | 10 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 20172023 increased45% by $656 million, or 10%, on a 45%12% increase in capacity,passenger traffic, partially offset by a 2% decrease in yield. The increase was primarily driven primarily by increased departures flown by larger aircraft in our Mainline fleet. Redemptions by Mileage Plan members also provided a benefit over the acquisition of Virgin America,prior year, with greater redemption on both Alaska and flat PRASM comparedpartner airlines.
We expect to see fourth quarter Passenger revenue consistent with the same periodprior year due to increases in 2016. passenger traffic being offset by decreased yields.
Mileage Plan other revenue
On a Combined Comparativeconsolidated basis, mainline passengerMileage Plan other revenue increased $50 million, or 12%, in the first nine months of 2023. The increase was driven by higher commissions from our bank card partners due to increased spend levels, annual membership fees, and credit card acquisitions.
We expect to see continued strength in Mileage Plan other revenue for the nine months ended September 30, 2017remainder of 2023, enabled by higher commissions from 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.card spend.
Passenger Revenue—Regional
OPERATING EXPENSES
Regional passenger revenue
Total operating expenses increased by $43 $391 million,, or 6%5%, 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%.2022. 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) | 2023 | | 2022 | | % Change | |
Fuel expense | $ | 1,932 | | | $ | 2,000 | | | (3) | % | |
Non-fuel operating expenses, excluding special items | 5,173 | | | 4,654 | | | 11 | % | |
| | | | | | |
Special items - fleet transition and other | 355 | | | 376 | | | (6) | % | |
Special items - labor and related | 51 | | | 90 | | | (43) | % | |
| | | | | | |
| | | | | | |
Total Operating Expenses | $ | 7,511 | | | $ | 7,120 | | | 5 | % | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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 Expenseexpense
Aircraft fuel expense increased $458decreased $68 million, or 77%3%, compared to the nine months ended September 30, 2016. On a Combined Comparative basis, aircraft fuel expense increased $229 million, or 28%.2022. The elements of the change are illustrated in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 1,899 | | | $ | 3.06 | | | $ | 2,103 | | | $ | 3.67 | |
(Gain)/loss on settled hedges | 47 | | | 0.08 | | | (167) | | | (0.29) | |
Consolidated economic fuel expense | $ | 1,946 | | | $ | 3.14 | | | $ | 1,936 | | | $ | 3.38 | |
Mark-to-market fuel hedge adjustments | (14) | | | (0.02) | | | 64 | | | 0.11 | |
GAAP fuel expense | $ | 1,932 | | | $ | 3.12 | | | $ | 2,000 | | | $ | 3.49 | |
Fuel gallons | | | 620 | | | | | 573 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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,Raw fuel expense decreased 10% in the raw fuel pricefirst nine months of 2023 compared to the first nine months of 2022, due to lower per gallon costs, partially offset by increased 21%fuel consumption. Raw fuel expense per gallon decreased by approximately 17% due to higher West Coastlower all-in jet fuel prices. West Coast jetJet 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 increasefuel, both of which have decreased in raw fuel price per gallon during the first nine months of 2017 was2023 compared to the prior year. Fuel gallons consumed increased 8%, driven by a 19% increase in crude oil prices and a 38% increase in refining margins.increased capacity.
WeEconomic fuel expense includes losses recognized losses of $14 million and $12 million for hedges that settled in the first nine months of 2017 and 2016 as reported.2023 of $47 million, compared to gains of $167 million in the same period in 2022. These amounts represent the cash paid for premium expense, offset by any cash received from those hedges.hedges at settlement.
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 duerange between $3.30 to our current estimate of higher crude prices and higher refining margins.$3.40 per gallon.
Non-fuel Expense and Non- special itemsexpenses
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2023 | | 2022 | | % Change |
Wages and benefits | $ | 2,259 | | | $ | 1,931 | | | 17 | % |
Variable incentive pay | 149 | | | 140 | | | 6 | % |
Aircraft maintenance | 367 | | | 331 | | | 11 | % |
Aircraft rent | 161 | | | 222 | | | (27) | % |
Landing fees and other rentals | 502 | | | 435 | | | 15 | % |
Contracted services | 290 | | | 243 | | | 19 | % |
Selling expenses | 231 | | | 218 | | | 6 | % |
Depreciation and amortization | 330 | | | 310 | | | 6 | % |
Food and beverage service | 176 | | | 143 | | | 23 | % |
Third-party regional carrier expense | 164 | | | 145 | | | 13 | % |
Other | 544 | | | 536 | | | 1 | % |
Total non-fuel operating expenses, excluding special items | $ | 5,173 | | | $ | 4,654 | | | 11 | % |
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 Benefitsbenefits
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$328 million, or 13%17%, compared to 2016.in the first nine months of 2023. The primary components of wages and benefits are shown in the following table: | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2023 | | 2022 | | % Change |
Wages | $ | 1,736 | | | $ | 1,467 | | | 18 | % |
Pension - Defined benefit plans | 22 | | | 34 | | | (35) | % |
Defined contribution plans | 151 | | | 116 | | | 30 | % |
Medical and other benefits | 228 | | | 207 | | | 10 | % |
Payroll taxes | 122 | | | 107 | | | 14 | % |
Total Wages and benefits | $ | 2,259 | | | $ | 1,931 | | | 17 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| 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$269 million, or 15%18%, on a 14%5% growth in FTEs. When combined with FTE increases, higher wage rates stemming from market adjustments and annual step increases were the primary driver for incremental year-over-year expense for wages and related taxes. Higher stock-based compensation also contributed to the increase in FTEs. The increasewages, driven by additional stock award grants within the period.
Incremental expense for defined contribution plans was driven by the change in FTEs is attributable to the growth of our business and increased staffing during irregular operations,wages 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 ishigher matching contributions for several labor groups. Increased expense for medical and other benefits was primarily driven by higher wage rates for certain labor groups. The first nine months of 2017 also include $9 million of ratification bonusan increase in claims compared to the prior year and incremental FTEs. Decreased defined benefit expense was driven by changes in connection with the agreement reached with Horizon's pilots during the second quarter.actuarial assumptions.
For the full year, weWe expect to see higher wages and benefits to increase at a rate greater than capacity growth on a combined comparative basis,for the remainder of 2023 due to higherthe increase in wage rates for certain labor groupsrates. Wages and the continued growth of McGee Air Services. Our forecast includes the impact of the pilot arbitration decision which was received subsequentbenefits could also increase further in 2023 due to quarter end, and results in an estimated $24 million of incremental costsagreements we may reach in the fourth quarter of 2017.with represented labor groups.
Variable Incentive PayAircraft maintenance
Variable incentive payAircraft maintenance expense increased duringby $36 million, or 11%, in 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 we are tracking in relation to the current year's goals.
For the full year, we expect variable incentive pay expense to be lower than in 2016 on a combined comparative basis, due to lower achievement against performance-based pay metrics than prior year.
Depreciation and Amortization
Depreciation and amortization expense decreased $6 million, or 2% compared to 2016. On a Combined Comparative basis, depreciation and amortization decreased $35 million, or 11%. This decrease2023. The increase was primarily driven by a change in the estimated useful lives of certain B737 operatingnew B737-900ER power-by-the-hour contract and increased aircraft and related parts from 20 years to 25 years, which was effective October 1, 2016,utilization, partially offset by $35 million of lease return costs in the first quarter of 2022 that did not recur in 2023 as all lease return costs associated with the Company's fleet transition have been recorded to Special items - fleet transition and other since the announcement of our fleet transition plan in the second quarter of 2022.
We expect aircraft additions since September 30, 2016.
For the full year, we expect depreciation and amortizationmaintenance to be 5-6% lower than in 2016 on a combined comparative basisincrease for the sameremainder of 2023 as compared to 2022 due primarily to the B737-900ER power-by-the-hour contract, which will total approximately $100 million for the year. Higher aircraft utilization will also contribute to an increase in aircraft maintenance.
Aircraft rent
Aircraft rent expense decreased by $61 million, or 27%, in the first nine months of 2023. The decrease was driven by the retirement of 23 leased A320 aircraft. The A321neo fleet retirement also contributed to the decrease, as seven aircraft were reclassified from operating leases to finance leases and three aircraft were purchased during 2023. These decreases were partially offset by delivery of four leased B737-9 aircraft since the third quarter of 2022.
We expect aircraft rent will remain below 2022 levels for the remainder of 2023, due to the net reduction in overall leased aircraft described above.
Landing fees and other rentals
Landing fees and other rentals increased by $67 million, or 15%, in the first nine months of 2023. The increase was driven primarily by higher terminal rent costs resulting from both rate and volume increases at many of our facilities. Landing fees also increased due to higher rates and larger landing weights due a shift in the mix of flying from Regional to Mainline and upgauging our fleet.
We expect landing fees and other rentals to increase for the remainder of 2023 as compared to 2022 due to increased capacity and higher rates at airports.
Contracted services
Contracted services increased by $47 million, or 19%, in the first nine months of 2023. The increase was primarily driven by higher rates charged by vendors for services as well as an increase in passengers.
We expect contracted services to increase for the remainder of 2023 as compared to 2022 due to the reasons mentioneddescribed above.
Food and Beverage Servicebeverage service
Food and beverage service expense increased $52by $33 million, or 56%. On23%, in the first nine months of 2023. The increase was driven by a Combined Comparative basis,combination of 8% growth in revenue passengers and higher costs for food, food service supplies, and transportation.
We expect the factors described above will continue to have a similar impact on food and beverage service expense increased $13 million, or 10% duefor the remainder of 2023 as compared to increased number of passengers, premium class offerings and enhancements to our onboard menu offerings to provide higher quality food and beverage products.2022.
For the full year, we expect food and beverageThird-party regional carrier 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-Party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest and Pen Air under our CPAs,the CPA with Alaska, increased $12$19 million, or 17% compared to 2016. The increase is primarily due to the additional six E175 aircraft operated by SkyWest in the current year.
For the full year, we expect Third-party regional carrier expense to increase due to increased flying by our regional partners.
Other Operating Expenses
Other operating expenses increased by $157 million, or 59%13%, 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 2017,2023. The increase in third-party regional carrier expense is driven by incremental SkyWest-operated departures. SkyWest departures have risen due to the annualization of ten E175 aircraft operating under the CPA which were delivered during the first half of 2022. Higher wage rates for flight crews have also contributed to the increase.
We expect third-party regional carrier expense will continue to be higher for the remainder of 2023 as compared to $362022 due to incremental departures and block hours, as well as higher wage rates for flight crews.
Other expense
Other expense increased $8 million, as reported and $44 million on a Combined Comparative basisor 1%, in the first nine months of 2016.2023. Costs incurredincreased as a result of crew-related expenses due to contract improvements for Alaska pilots, coupled with additional professional services and software expenses. These increases were partially offset by one-time employee recognition costs of $28 million recorded in the third quarter of 2022.
We expect other expense will continue to be higher for the remainder of 2023 as compared to 2022 due to overall growth throughout our network.
Special items - fleet transition
We recorded expenses associated with the Company's fleet transition of $355 million in the first nine months of 2017 consisted primarily of severance2023. Refer to Note 2 to the consolidated financial statements for additional details.
Special items - labor and retention and IT integration costs.other
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 nonoperatingrecorded a nonrecurring expense of $40 million, compared to income of $6$51 million in the same period in 2016. On a Combined Comparative basis, nonoperating expense increased by $32 million, primarilyfirst quarter of 2023 due to interest expense incurred in the current year on the debt issued in 2016a Letter of Agreement with Alaska pilots, represented by ALPA. The charge is a one-time adjustment of accrued benefits related to finance the acquisitionexpected future cash payments of Virgin America.pilots' unused sick leave upon retirement.
Additional Segment InformationADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of10 to the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.results.
Mainline
Mainline operations reported an adjusted pretax profit was $1.13 billion in the first nine months of 2017, compared to $1.05 billion in the same period in 2016. On a Combined Comparative basis, Mainline adjusted 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 profit was driven by a $181 million increase in Mainline fuel expense, a $190 million increase in Mainline non-fuel operating expenses, and a $27 million increase in nonoperating expense. These increases were offset by a $287 million increase in Mainline passenger revenue. Higher raw fuel prices and an increase in gallons consumed drove the increase 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 contributed a pretax profit of $40$757 million in the first nine months of 2017,2023, compared to $72a profit of $647 million in the same period in 2022. The $110 million improvement was driven by a $708 million increase in operating revenue, partially offset by a $534 million increase in non-fuel operating expense and a $49 million increase in fuel expense.
As compared to the prior year, higher revenue is primarily attributable to a 15% increase in traffic driven by the increase in capacity. Non-fuel operating expenses increased, driven by higher wage rates and higher variable costs, largely consistent with the overall growth in capacity and departures. Additional gallons consumed and prior year gains from settled hedges drove the increase in fuel expense.
Regional
Regional operations reported an adjusted pretax loss of $13 million in the first nine months of 2016.2023, compared to a loss of $59 million in the same period in 2022. The decrease in pretax profit$46 million improvement was attributable to higher non-fuel operatingprimarily driven by decreased fuel expense due in large part to increased capacitya lower price per gallon and higher raw fuel costs, partially offset by a $43 million increase in operating revenues as described in Passenger Revenue—Regional.fewer gallons consumed.
Horizon
Horizon incurred areported an adjusted pretax loss of $11$15 million in the first nine months of 2017,2023, compared to pretax profita loss of $14$18 million in the same period in 2016.2022. The change$3 million improvement was driven by decreased operating expenses consistent with less flying and other cost savings following Horizon’s transition to a single fleet, as well as updates to internal rates under Horizon’s CPA with Alaska. These improvements were partially offset by lower overall CPA revenue consistent with less flying, as well as higher non-fuel expenses and lower CPA Revenues (100% of which are from Alaska and eliminated in consolidation). Non-fuel expenses increased primarily due to higher wage and traininginterest expense as a result of the increase in FTE’s, increased costs associated with flight cancellations primarily due to a shortagedebt financing of pilots necessary to fly the schedule, and a $9 million ratification bonus expensenew E175 deliveries in connection with the agreement with Horizon's pilots.2023.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
Our existing•Existing cash and marketable securities balance of $1.7 billion, and our expected cash$2.5 billion;
•Cash flows from operations;
operations of $1.1 billion;
Our 64•62 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$550 million. Information about these facilities can be found in Note 5 to the condensed consolidated financial statements.
During the ninethree months ended September 30, 2017,2023, we took free and clear delivery of ten B737-900ER aircraft and ten E175five owned Boeing 737-9 aircraft. We incurred new of debt of $361 million and made debt payments totaling $265$93 million. We ended the quarter with a debt-to-capitalization ratio of 48%, within our target range of 40% to 50%. We continued share repurchases, spending $13 million in the third quarter, pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.
We believe that our current cash and paid dividends totaling $111 million.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) | September 30, 2023 | | December 31, 2022 | | Change |
Cash and marketable securities | $ | 2,451 | | | $ | 2,417 | | | 1 % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 29 | % | | 29 | % | | — |
Long-term debt, net of current portion | 2,128 | | | 1,883 | | | 13% |
Shareholders’ equity | $ | 4,093 | | | $ | 3,816 | | | 7% |
| | | | | | | | | | | | | | | | | |
Debt-to-capitalization, including operating and finance leases | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 | | Change |
Long-term debt, net of current portion | $ | 2,128 | | | $ | 1,883 | | | 13% |
Capitalized operating leases | 1,263 | | | 1,621 | | | (22)% |
Capitalized finance leases(a) | 452 | | | — | | | NM |
Adjusted debt, net of current portion of long-term debt | $ | 3,843 | | | $ | 3,504 | | | 10% |
Shareholders' equity | 4,093 | | | 3,816 | | | 7% |
Total invested capital | $ | 7,936 | | | $ | 7,320 | | | 8% |
| | | | | |
Debt-to-capitalization, including operating and finance leases | 48 | % | | 48 | % | | — |
(a)To best reflect our leverage at September 30, 2023, we included our capitalized finance lease balances, which are recognized within the Current portion of long-term debt and finance leases line 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 |
| | | | | | | | | | | |
Adjusted net debt to earnings before interest, taxes, depreciation, amortization, special items, and rent |
(in millions) | September 30, 2023 | | December 31, 2022 |
Current portion of long-term debt and finance leases | $ | 736 | | | $ | 276 | |
Current portion of operating lease liabilities | 150 | | | 228 | |
Long-term debt | 2,128 | | | 1,883 | |
Long-term operating lease liabilities, net of current portion | 1,113 | | | 1,393 | |
Total adjusted debt | 4,127 | | | 3,780 | |
Less: Cash and marketable securities | 2,451 | | | 2,417 | |
Adjusted net debt | $ | 1,676 | | | $ | 1,363 | |
| | | |
(in millions) | Twelve Months Ended September 30, 2023 | | Twelve Months Ended December 31, 2022 |
GAAP Operating Income(a) | $ | 385 | | | $ | 70 | |
Adjusted for: | | | |
Special items | 520 | | | 580 | |
Mark-to-market fuel hedge adjustments | (2) | | | 76 | |
Depreciation and amortization | 435 | | | 415 | |
Aircraft rent | 230 | | | 291 | |
EBITDAR | $ | 1,568 | | | $ | 1,432 | |
Adjusted net debt to EBITDAR | 1.1x | | 1.0x |
| |
(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 nine months of 2017,2023, net cash provided by operating activities was $1.4$1.1 billion, compared to $1.2$1.4 billion duringin 2022. Cash provided by ticket sales and from our co-branded credit card agreement are the same period in 2016. primary sources of our operating cash flow. Our primary use of operating cash flow is for operating expenses, including payments for employee wages and benefits, payments to suppliers for goods and services, and payments to lessors and airport authorities for rents and landing fees. Operating cash flow also includes payments to, or refunds from, federal, state, and local taxing authorities.
The $151$306 million increasenet decrease in our operating cash flows is primarily attributablewas due to increased ticket salesa combination of factors. 2022 operating cash flows included federal income tax refunds of $260 million. Additionally, growth in our air traffic liability decreased $125 million and payments made in 2023 for future travelour 2022 performance-based pay program were approximately $110 million higher than payments in 2022 for our 2021 program. These amounts were partially offset by an improved net income compared to the prior year resulting from 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.year.
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$810 million during the first nine months of 2017, compared to $641 million during the same period of 2016. Our capital expenditures were $841 million in the first nine months of 2017, an increase of $332 million compared to the nine months ended September 30, 2016. This is primarily driven by more aircraft purchases and higher spend on other equipment compared to 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 the first nine months of 2017.2023, compared to $888 million in 2022. The change was due to a combination of factors. Marketable securities activity was $287 million of net sales during the first nine months of 2023, compared to $61 million in 2022. This amount was partially offset by an increase in capital expenditures, which were $44 million higher compared to 2022. Cash used in investing during the first nine months of 2023 was also impacted by the purchase of three previously leased A321neo aircraft, included in Other investing activities, which are expected to be sold to American Airlines in the fourth quarter of 2023 and first quarter of 2024.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities was $12 million during the first nine months of 2023, compared to cash used in financing activities of $296 million in 2022. The change was largely driven by $313 million in new debt proceeds and $91 million less in payments for outstanding long-term debt compared to 2022. These amounts were partially offset by common stock repurchases of $70 million in 2023 and a decrease of cash flows from other financing activities of $26 million.
MATERIAL CASH COMMITMENTS
Material cash requirements include the following contractual and other obligations:
Aircraft Commitments
As of September 30, 2023, Alaska has firm orders to purchase 89 B737 aircraft with deliveries between 2023 and 2027 and a firm commitment to lease one B737-9 aircraft with delivery in 2023. Alaska has rights for 105 additional B737-10 aircraft between 2026 and 2030. Alaska also has commitments to lease two B737-800 freighters with deliveries in 2023 and 2024.
Boeing has communicated to Alaska that certain B737 deliveries contracted in 2023 are expected to be delayed into 2024. The anticipated fleet delivery schedule outlined below reflects the expected impact of these delays. Alaska continues to work with Boeing to structure delivery timelines in a manner that supports Alaska's capacity growth plans.
As of September 30, 2023, Horizon has commitments to purchase nine E175 aircraft with deliveries between 2024 and 2026. Horizon has options to acquire 13 E175 aircraft between 2025 and 2026. The E175 deliveries expected through the end of 2024 are covered under a financing agreement executed in the second quarter of 2023. Capital expenditures for these deliveries, which are included within aircraft-related commitments in the contractual obligations table below, reflects our full-year expectation for capital expenditures and additional expenditures ifwill be reflected as a non-cash transaction in the condensed consolidated statements of cash flows. Subsequent to quarter end, two of Horizon's 13 E175 options are exercised. expired.
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. We intend to finance future aircraft deliveries and option exercises using cash flow from operations or long-term debt.
|
| | | | | | | | | | | |
(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 monthsTo best reflect our expectations 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,future fleet activity, we have firm ordersincorporated anticipated delivery delays and other modifications of our order book as agreed to purchase or lease 93 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neoin principle 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 toBoeing into 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,
which summarizes
our expected fleet
activitycount by year, as of
September 30, 2017:November 2, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual Fleet | | Anticipated Fleet Activity | |
Aircraft | September 30, 2023 | | 2023 Changes | | | | Dec 31, 2023 | | 2024 Changes | | Dec 31, 2024 | | 2025 Changes | | Dec 31, 2025 | |
B737-700 Freighters | 3 | | | — | | | | | 3 | | | — | | | 3 | | | — | | | 3 | | |
B737-800 Freighters | — | | | 1 | | | | | 1 | | | 1 | | | 2 | | | — | | | 2 | | |
B737-700 | 11 | | | — | | | | | 11 | | | — | | | 11 | | | — | | | 11 | | |
B737-800 | 59 | | | — | | | | | 59 | | | — | | | 59 | | | — | | | 59 | | |
B737-900 | 12 | | | — | | | | | 12 | | | — | | | 12 | | | — | | | 12 | | |
B737-900ER | 79 | | | — | | | | | 79 | | | — | | | 79 | | | — | | | 79 | | |
B737-8 | — | | | 1 | | | | | 1 | | | 7 | | | 8 | | | 12 | | | 20 | | |
B737-9 | 56 | | | 8 | | | | | 64 | | | 17 | | | 81 | | | — | | | 81 | | |
B737-10 | — | | | — | | | | | — | | | — | | | — | | | 11 | | | 11 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total Mainline Fleet | 220 | | | 10 | | | | | 230 | | | 25 | | | 255 | | | 23 | | | 278 | | |
| | | | | | | | | | | | | | | | |
E175 operated by Horizon | 41 | | | — | | | | | 41 | | | 3 | | | 44 | | | 3 | | | 47 | | |
E175 operated by third party | 42 | | | — | | | | | 42 | | | — | | | 42 | | | 1 | | | 43 | | |
Total Regional Fleet | 83 | | | — | | | | | 83 | | | 3 | | | 86 | | | 4 | | | 90 | | |
Total | 303 | | | 10 | | | | | 313 | | | 28 | | | 341 | | | 27 | | | 368 | | |
|
| | | | | | | | | | | | | | | | | |
| 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)
| 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. |
For future firm orders, and if we exercise our options for additional deliveries, we may finance the aircraft through internally generated cash, 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 and, 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 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Fourth Quarter of 2023 | 50 | % | | $96 | | $7 |
Full Year 2023 | 50 | % | | $96 | | $7 |
First Quarter of 2024 | 50 | % | | $90 | | $5 |
Second Quarter of 2024 | 40 | % | | $90 | | $5 |
Third Quarter of 2024 | 30 | % | | $88 | | $5 |
Fourth Quarter of 2024 | 20 | % | | $87 | | $5 |
Full Year 2024 | 35 | % | | $89 | | $5 |
First Quarter of 2025 | 10 | % | | $92 | | $5 |
Full Year 2025 | 2 | % | | $92 | | $5 |
|
| | | | | | | | | | |
| 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 other obligations as of November 2, 2023 and reflects anticipated delivery delays and other modifications of our order book as agreed to in principle with Boeing. For agreements with variable terms, amounts included reflect our minimum obligations. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Remainder of 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Beyond 2027 | | Total |
Debt obligations | $ | 45 | | | $ | 286 | | | $ | 343 | | | $ | 292 | | | $ | 597 | | | $ | 864 | | | $ | 2,427 | |
Lease commitments(a) | 454 | | | 265 | | | 195 | | | 194 | | | 188 | | | 841 | | | 2,137 | |
| | | | | | | | | | | | | |
Aircraft-related commitments(b) | 460 | | | 1,211 | | | 1,337 | | | 1,093 | | | 587 | | | 591 | | | 5,279 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Interest obligations(c) | 23 | | | 120 | | | 104 | | | 102 | | | 92 | | | 150 | | | 591 | |
CPA and other obligations | 56 | | | 224 | | | 227 | | | 219 | | | 220 | | | 739 | | | 1,685 | |
Total | $ | 1,038 | | | $ | 2,106 | | | $ | 2,206 | | | $ | 1,900 | | | $ | 1,684 | | | $ | 3,185 | | | $ | 12,119 | |
(a)Lease commitments include minimum payments for aircraft operated under operating leases and aircraft removed from operating service which remain under operating and finance leases, as we have remaining cash obligations under existing terms. It also includes minimum lease payments for facilities.
(b)Includes contractual commitments for aircraft, engines, and aircraft maintenance. Option deliveries are excluded from minimum commitments until exercise.
(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of September 30, 20172023.
Debt Obligations and Interest Obligations
The Company primarily issues debt to fund purchases of aircraft or other capital expenditures. During the nine months ended September 30, 2023, the Company incurred new debt of $495 million and repaid $242 million in existing debt. At September 30, 2023, our debt portfolio carries a weighted average interest rate of 4.3%. Interest is paid with regular debt service. Refer to Note 5 to the consolidated financial statements for further discussion of our debt and interest balances.
CPA and Other Obligations
We have obligations primarily associated with the non-lease components of our capacity purchase agreement between Alaska and SkyWest, as well as other various sponsorship agreements and investment commitments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 |
|
Leased Aircraft Return Costs | |
(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. |
For many of our leased aircraft, contractual terms require us 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 to return 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 to remove the leased asset from operation. If the leased aircraft is removed from the operating fleet, the estimated cost to return is accrued at the time of removal. If a leased aircraft has a known early retirement date in the future, the estimated cost to return is accrued through the retirement date. 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. A total of $165 million is accrued for upcoming lease returns at September 30, 2023, including costs recorded in prior year periods.
Credit Card Agreements
We haveAlaska has 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.
Sustainability Commitments
Deferred As part of our efforts to reach net-zero carbon emissions by 2040, we have outlined a five-part path that we expect to include operational efficiency, fleet renewal, sustainable aviation fuel (SAF), enabling new technologies including zero emission aircraft in the future, and using credible offsetting and removal technologies to close the gaps to our emissions target in future years. We anticipate these efforts will require cash outlays, not all of which are reflected in our contractual commitments. Finding and establishing relationships with suppliers to meet these commitments is in process. Currently, Alaska has agreements to purchase approximately 200 million gallons of neat SAF to be delivered through 2030. These agreements are dependent on suppliers' ability to obtain all required governmental and regulatory approvals, achieve commercial operation, and produce sufficient quantities of SAF. Financial commitments that have been contractually established and have met defined minimum obligations, including those related to Alaska Star Ventures, are included within the CPA and other obligations row in the above table.
Income Taxes
For federal income tax purposes, the majority of our assetsproperty and equipment 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 basisproperty and equipment difference will reverse into taxable income, potentially resulting in an increase in income taxes paid.payable.
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 and cash taxes payable in the short term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices)prices, among other factors out of our control), usage of net operating losses, whether "bonus depreciation"bonus depreciation provisions are available, pending 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 estimates forduring the three and nine months ended September 30, 2017.2023. 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, 2016.2022.
GLOSSARY OF AIRLINE TERMS
Adjusted net debt - long-term debt, including current portion, plus capitalized operating and finance 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";ASM; represents all operating expenses including fuel and special items
CASMex - operating costs excluding fuel and special items per ASM;ASM, or "unit cost"; 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)and finance 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, Airbus A320, and Airbus 320 familyA321neo jets and all associated revenuesrevenue 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, 2016.2022.
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ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of September 30, 2017,2023, 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, 2017.2023.
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, 2017,2023, 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 understandingbe probable and estimable.
As part of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions2016 acquisition of judges and juries.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America, flight attendantsAlaska assumed responsibility for damages based on alleged violationsthe Virgin trademark license agreement with the Virgin Group. In 2019, pursuant to that agreement's venue provision, the Virgin Group sued Alaska in England, alleging that the agreement requires Alaska to pay $8 million per year as a minimum annual royalty through 2039, adjusted annually for inflation and irrespective of CaliforniaAlaska's actual use (or non-use) of the mark. The possible range of contractual liability is between $10 million and City$160 million. Alaska stopped making royalty payments in 2019 after ending all use of San Francisco wagethe Virgin brand. On February 16, 2023, the commercial court issued a ruling adopting Virgin Group’s interpretation of the license agreement. The Company has appealed the decision and hour laws. Plaintiffs received class certification 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 America believes the claims in thisthe case are without factual and legal merit, and intends to defend this lawsuit.a position supported by Virgin America’s representations during pre-merger due diligence. Alaska also commenced a separate claim for breach of the agreement against the Virgin Group that may affect the Company’s total liability in the matter.
There have been no material changes to theSee Part I, Item 1A. "Risk Factors," in our 2022 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 of shares of our common stock during the third quarter of 2017.2023. | | | | | | | | | | | | | | | | | |
| 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, 2023 - July 31, 2023 | 141,538 | | | $ | 51.08 | | | |
August 1, 2023 - August 31, 2023 | 107,450 | | | $ | 46.99 | | | |
September 1, 2023 - September 30, 2023 | — | | | $ | — | | | |
Total | 248,988 | | | $ | 49.32 | | | $ | 387 | |
|
| | | | | | | | | | |
| 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 |
| | |
September 1, 2017 - September 30, 2017 | — |
| | — |
| | |
Total | 355,415 |
| | $ | 78.61 |
| | $ | 637 |
|
The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.
As of September 30, 2023, a total of 1,882,517 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 (928,126 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. An additional 427,080 warrants were issued in conjunction with a draw on the CARES Act Loan in 2020 at a strike price of $31.61. These warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term. 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”).
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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.During the three months ended September 30, 2023, no director or officer of Alaska Air Group adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of Regulation S-K promulgated under the Securities Exchange Act of 1934.
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./s/ EMILY HALVERSON | |
Emily Halverson | |
/s/ CHRISTOPHER M. BERRY | |
Christopher M. Berry | |
Vice President Finance and Controller | |
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November 2, 20172023 | |
EXHIBIT INDEX | | | | | | | | | | | | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
| | | | |
| | | | |
3.2 | | 8-K | December 15, 2015 | 3.2 |
10.1#† | | 10-Q | | |
10.2#† | | 10-Q | | |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
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 | | | |
104† | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | |
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† | Filed herewith |
* | Indicates management contract or compensatory plan or arrangement. |
# | Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K Item 601(b)(10). |
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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 | | | |