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, 20182019
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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Title of each class | Name of each exchange on which registered | Ticker Symbol |
Common stock, $0.01 par value | New York Stock Exchange | ALK |
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19300 International Boulevard, | Seattle, Washington | WA | 98188 |
Telephone: (206) 392-5040 |
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. Yesx☒ 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). Yesx☒ 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 123,299,895123,173,426 common shares, par value $0.01, outstanding at October 31, 20182019.
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, 20182019
TABLE OF CONTENTS
As used in this Form 10-Q, the terms “Air Group,” the “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. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc), and Horizon Air Industries, Inc. are referred to as “Alaska,” “Virgin America” 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 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;
our ability to achieve anticipated synergies and timing thereof in connection with our acquisition of Virgin America;
our ability to successfully integrate the Boeing and Airbus operations into those of Alaska;operations;
labor disputes and our ability to attract and retain qualified personnel;
operational disruptions;
general economic conditions, including the impact of those conditions on customer travel behavior;
the concentration of our revenue from a few key markets;
an aircraft accident or incident;
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.
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 other risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 20172018, and Item 1A. "Risk Factors" included herein. 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, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
ASSETS | | | | | | |
Current Assets | | | | | | |
Cash and cash equivalents | $ | 174 |
| | $ | 194 |
| $ | 237 |
| | $ | 105 |
|
Marketable securities | 1,223 |
| | 1,427 |
| 1,382 |
| | 1,131 |
|
Total cash and marketable securities | 1,397 |
| | 1,621 |
| 1,619 |
| | 1,236 |
|
Receivables—net | 422 |
| | 341 |
| |
Inventories and supplies—net | 57 |
| | 57 |
| |
Receivables - net | | 377 |
| | 366 |
|
Inventories and supplies - net | | 63 |
| | 60 |
|
Prepaid expenses and other current assets | 180 |
| | 133 |
| 143 |
| | 125 |
|
Total Current Assets | 2,056 |
| | 2,152 |
| 2,202 |
| | 1,787 |
|
| | | | | | |
Property and Equipment | |
| | |
| |
| | |
|
Aircraft and other flight equipment | 7,911 |
| | 7,559 |
| 8,492 |
| | 8,221 |
|
Other property and equipment | 1,322 |
| | 1,222 |
| 1,272 |
| | 1,363 |
|
Deposits for future flight equipment | 429 |
| | 494 |
| 463 |
| | 439 |
|
| 9,662 |
| | 9,275 |
| 10,227 |
| | 10,023 |
|
Less accumulated depreciation and amortization | 3,167 |
| | 2,991 |
| 3,393 |
| | 3,242 |
|
Total Property and Equipment—Net | 6,495 |
| | 6,284 |
| |
Total Property and Equipment - Net | | 6,834 |
| | 6,781 |
|
| | | | | | |
Operating lease assets | | 1,647 |
| | — |
|
Goodwill | 1,943 |
| | 1,943 |
| 1,943 |
| | 1,943 |
|
Intangible assets | 128 |
| | 133 |
| |
Intangible assets - net | | 123 |
| | 127 |
|
Other noncurrent assets | 271 |
| | 234 |
| 234 |
| | 274 |
|
Other Assets | 2,342 |
| | 2,310 |
| 3,947 |
| | 2,344 |
|
| | | | | | |
Total Assets | $ | 10,893 |
| | $ | 10,746 |
| $ | 12,983 |
| | $ | 10,912 |
|
Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| | (in millions, except share amounts) | September 30, 2018 | | December 31, 2017 | September 30, 2019 | | December 31, 2018 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | |
Current Liabilities | | | | | | |
Accounts payable | $ | 114 |
| | $ | 120 |
| $ | 120 |
| | $ | 132 |
|
Accrued wages, vacation and payroll taxes | 334 |
| | 418 |
| 391 |
| | 415 |
|
Air traffic liability | 950 |
| | 806 |
| 1,032 |
| | 788 |
|
Other accrued liabilities | 452 |
| | 400 |
| 476 |
| | 416 |
|
Deferred revenue | 693 |
| | 635 |
| 794 |
| | 705 |
|
Current portion of operating lease liabilities | | 268 |
| | — |
|
Current portion of long-term debt | 345 |
| | 307 |
| 265 |
| | 486 |
|
Total Current Liabilities | 2,888 |
| | 2,686 |
| 3,346 |
| | 2,942 |
|
| | | | | | |
Long-Term Debt, Net of Current Portion | 1,684 |
| | 2,262 |
| 1,444 |
| | 1,617 |
|
Other Liabilities and Credits | |
| | |
| |
| | | | |
Noncurrent Liabilities | | |
| | |
|
Long-term operating lease liabilities, net of current portion | | 1,376 |
| | — |
|
Deferred income taxes | 494 |
| | 370 |
| 708 |
| | 512 |
|
Deferred revenue | 1,138 |
| | 1,090 |
| 1,177 |
| | 1,169 |
|
Obligation for pension and postretirement medical benefits | 470 |
| | 453 |
| 467 |
| | 503 |
|
Other liabilities | 428 |
| | 425 |
| 213 |
| | 418 |
|
| 2,530 |
| | 2,338 |
| 3,941 |
| | 2,602 |
|
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 | — |
| | — |
| — |
| | — |
|
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2018 - 130,786,648 shares; 2017 - 129,903,498 shares, Outstanding: 2018 - 123,360,846 shares; 2017 - 123,060,638 shares | 1 |
| | 1 |
| |
Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2019 - 131,770,976 shares; 2018 - 130,813,476 shares, Outstanding: 2019 - 123,277,911 shares; 2018 - 123,194,430 shares | | 1 |
| | 1 |
|
Capital in excess of par value | 224 |
| | 164 |
| 297 |
| | 232 |
|
Treasury stock (common), at cost: 2018 - 7,425,802 shares; 2017 - 6,842,860 shares | (556 | ) | | (518 | ) | |
Treasury stock (common), at cost: 2019 - 8,493,065 shares; 2018 - 7,619,046 shares | | (621 | ) | | (568 | ) |
Accumulated other comprehensive loss | (428 | ) | | (380 | ) | (421 | ) | | (448 | ) |
Retained earnings | 4,550 |
| | 4,193 |
| 4,996 |
| | 4,534 |
|
| 3,791 |
| | 3,460 |
| 4,252 |
| | 3,751 |
|
Total Liabilities and Shareholders' Equity | $ | 10,893 |
| | $ | 10,746 |
| $ | 12,983 |
| | $ | 10,912 |
|
Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share amounts) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Operating Revenues | | | | | | | | | | | | | | |
Passenger revenue | $ | 2,043 |
| | $ | 1,958 |
| | 5,725 |
| | 5,505 |
| $ | 2,211 |
| | $ | 2,043 |
| | 6,038 |
| | 5,724 |
|
Mileage Plan other revenue | 114 |
| | 105 |
| | 329 |
| | 314 |
| 118 |
| | 114 |
| | 346 |
| | 329 |
|
Cargo and other | 55 |
| | 47 |
| | 146 |
| | 133 |
| 60 |
| | 55 |
| | 169 |
| | 147 |
|
Total Operating Revenues | 2,212 |
| | 2,110 |
| | 6,200 |
| | 5,952 |
| 2,389 |
| | 2,212 |
| | 6,553 |
| | 6,200 |
|
Operating Expenses | | | | | |
| | |
| | | | | |
| | |
|
Wages and benefits | 549 |
| | 477 |
| | 1,629 |
| | 1,397 |
| 608 |
| | 549 |
| | 1,732 |
| | 1,629 |
|
Variable incentive pay | 27 |
| | 40 |
| | 104 |
| | 98 |
| 46 |
| | 27 |
| | 125 |
| | 104 |
|
Aircraft fuel, including hedging gains and losses | 513 |
| | 368 |
| | 1,397 |
| | 1,051 |
| 486 |
| | 513 |
| | 1,408 |
| | 1,397 |
|
Aircraft maintenance | 107 |
| | 88 |
| | 320 |
| | 271 |
| 106 |
| | 107 |
| | 341 |
| | 320 |
|
Aircraft rent | 82 |
| | 70 |
| | 233 |
| | 204 |
| 82 |
| | 82 |
| | 247 |
| | 233 |
|
Landing fees and other rentals | 135 |
| | 124 |
| | 371 |
| | 338 |
| 143 |
| | 135 |
| | 388 |
| | 371 |
|
Contracted services | 70 |
| | 76 |
| | 227 |
| | 234 |
| 72 |
| | 70 |
| | 214 |
| | 227 |
|
Selling expenses | 79 |
| | 92 |
| | 245 |
| | 277 |
| 77 |
| | 79 |
| | 236 |
| | 245 |
|
Depreciation and amortization | 99 |
| | 95 |
| | 290 |
| | 275 |
| 106 |
| | 99 |
| | 317 |
| | 290 |
|
Food and beverage service | 53 |
| | 50 |
| | 158 |
| | 145 |
| 57 |
| | 53 |
| | 159 |
| | 158 |
|
Third-party regional carrier expense | 38 |
| | 30 |
| | 114 |
| | 84 |
| 42 |
| | 38 |
| | 125 |
| | 114 |
|
Other | 141 |
| | 150 |
| | 423 |
| | 421 |
| 137 |
| | 141 |
| | 411 |
| | 423 |
|
Special items—merger-related costs | 22 |
| | 23 |
| | 67 |
| | 86 |
| |
Special items—other | — |
| | — |
| | 25 |
| | — |
| |
Special items - merger-related costs | | 5 |
| | 22 |
| | 39 |
| | 67 |
|
Special items - other | | — |
| | — |
| | — |
| | 25 |
|
Total Operating Expenses | 1,915 |
| | 1,683 |
| | 5,603 |
| | 4,881 |
| 1,967 |
| | 1,915 |
| | 5,742 |
| | 5,603 |
|
Operating Income | 297 |
| | 427 |
| | 597 |
| | 1,071 |
| 422 |
| | 297 |
| | 811 |
| | 597 |
|
Nonoperating Income (Expense) | | | | | |
| | |
| | | | | |
| | |
|
Interest income | 11 |
| | 9 |
| | 29 |
| | 25 |
| 11 |
| | 11 |
| | 31 |
| | 29 |
|
Interest expense | (22 | ) | | (26 | ) | | (71 | ) | | (77 | ) | (18 | ) | | (22 | ) | | (60 | ) | | (71 | ) |
Interest capitalized | 5 |
| | 5 |
| | 14 |
| | 13 |
| 4 |
| | 5 |
| | 11 |
| | 14 |
|
Other—net | (7 | ) | | 2 |
| | (20 | ) | | 1 |
| (3 | ) | | (7 | ) | | (20 | ) | | (20 | ) |
Total Nonoperating Income (Expense) | (13 | ) | | (10 | ) | | (48 | ) | | (38 | ) | (6 | ) | | (13 | ) | | (38 | ) | | (48 | ) |
Income Before Income Tax | 284 |
| | 417 |
| | 549 |
| | 1,033 |
| 416 |
| | 284 |
| | 773 |
| | 549 |
|
Income tax expense | 67 |
| | 158 |
| | 135 |
| | 388 |
| 94 |
| | 67 |
| | 185 |
| | 135 |
|
Net Income | $ | 217 |
| | $ | 259 |
| | $ | 414 |
| | $ | 645 |
| $ | 322 |
| | $ | 217 |
| | $ | 588 |
| | $ | 414 |
|
| | | | | | | | | | | | | | |
Basic Earnings Per Share: | $ | 1.76 |
| | $ | 2.10 |
| | $ | 3.36 |
| | $ | 5.22 |
| $ | 2.61 |
| | $ | 1.76 |
| | $ | 4.76 |
| | $ | 3.36 |
|
Diluted Earnings Per Share: | $ | 1.75 |
| | $ | 2.09 |
| | $ | 3.34 |
| | $ | 5.19 |
| $ | 2.60 |
| | $ | 1.75 |
| | $ | 4.74 |
| | $ | 3.34 |
|
Shares used for computation: | | | | | | | |
| | | | | | | |
|
Basic | 123.224 |
| | 123.467 |
| | 123.216 |
| | 123.501 |
| 123.280 |
| | 123.224 |
| | 123.330 |
| | 123.216 |
|
Diluted | 123.864 |
| | 124.220 |
| | 123.804 |
| | 124.341 |
| 124.067 |
| | 123.864 |
| | 124.051 |
| | 123.804 |
|
| | | | | | | | |
Cash dividend declared per share: | $ | 0.32 |
| | $ | 0.30 |
| | $ | 0.96 |
| | $ | 0.90 |
| |
Certain historical information has been adjusted to reflect the adoption of new accounting standards. 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, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Net Income | $ | 217 |
| | $ | 259 |
| | $ | 414 |
| | $ | 645 |
| $ | 322 |
| | $ | 217 |
| | $ | 588 |
| | $ | 414 |
|
| | | | | | | | | | | | | | |
Other Comprehensive Income (Loss): | | | | | | | | | | | | | | |
Related to marketable securities: | | | | | | | | | | | | | | |
Unrealized holding gain (loss) arising during the period | (2 | ) | | 1 |
| | (19 | ) | | 5 |
| 4 |
| | (2 | ) | | 31 |
| | (19 | ) |
Reclassification of (gain) loss into Other—net nonoperating income (expense) | 2 |
| | (1 | ) | | 5 |
| | — |
| |
Reclassification of (gain) loss into Other - net nonoperating income (expense) | | (5 | ) | | 2 |
| | (3 | ) | | 5 |
|
Income tax effect | 1 |
| | — |
| | 4 |
| | (2 | ) | — |
| | 1 |
| | (7 | ) | | 4 |
|
Total | 1 |
| | — |
| | (10 | ) | | 3 |
| (1 | ) | | 1 |
| | 21 |
| | (10 | ) |
| | | | | | | | | | | | | | |
Related to employee benefit plans: | | | | | | | | | | | | | | |
Reclassification of net pension expense into Wages and benefits | 7 |
| | 5 |
| | 21 |
| | 16 |
| |
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense) | | 8 |
| | 7 |
| | 24 |
| | 21 |
|
Income tax effect | (2 | ) | | (2 | ) | | (5 | ) | | (5 | ) | (2 | ) | | (2 | ) | | (6 | ) | | (5 | ) |
Total | 5 |
| | 3 |
| | 16 |
| | 11 |
| 6 |
| | 5 |
| | 18 |
| | 16 |
|
| | | | | | | | | | | | | | |
Related to interest rate derivative instruments: | | | | | | | | | | | | | | |
Unrealized holding gain (loss) arising during the period | — |
| | — |
| | 8 |
| | (2 | ) | (5 | ) | | — |
| | (17 | ) | | 8 |
|
Reclassification of (gain) loss into Aircraft rent | 2 |
| | 2 |
| | 3 |
| | 4 |
| |
Reclassification of loss into Aircraft rent | | 1 |
| | 2 |
| | 2 |
| | 3 |
|
Income tax effect | (1 | ) | | (1 | ) | | (3 | ) | | (1 | ) | — |
| | (1 | ) | | 3 |
| | (3 | ) |
Total | 1 |
| | 1 |
| | 8 |
| | 1 |
| (4 | ) | | 1 |
| | (12 | ) | | 8 |
|
| | | | | | | | | | | | | | |
Other Comprehensive Income | 7 |
| | 4 |
| | 14 |
| | 15 |
| 1 |
| | 7 |
| | 27 |
| | 14 |
|
| | | | | | | | | | | | | | |
Comprehensive Income | $ | 224 |
| | $ | 263 |
| | $ | 428 |
| | $ | 660 |
| $ | 323 |
| | $ | 224 |
| | $ | 615 |
| | $ | 428 |
|
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 Income (Loss) | | Retained Earnings | | Total |
Balances at December 31, 2018 | 123.194 |
| | $ | 1 |
| | $ | 232 |
| | $ | (568 | ) | | $ | (448 | ) | | $ | 4,534 |
| | $ | 3,751 |
|
Cumulative effect of accounting changes(a) | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | 3 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | 15 |
|
Common stock repurchase | (0.215 | ) | | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
Stock-based compensation | — |
| | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
|
Cash dividend declared ($0.35 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (43 | ) | | (43 | ) |
Stock issued for employee stock purchase plan | 0.391 |
| | — |
| | 20 |
| | — |
| | — |
| | . | | 20 |
|
Stock issued under stock plans | 0.134 |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
Balances at March 31, 2019 | 123.504 |
| | $ | 1 |
| | $ | 261 |
| | $ | (581 | ) | | $ | (433 | ) | | $ | 4,498 |
| | $ | 3,746 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 262 |
| | 262 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Common stock repurchase | (0.194 | ) | | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
Stock-based compensation | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Cash dividend declared ($0.35 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (43 | ) | | (43 | ) |
Stock issued under stock plans | 0.028 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balances at June 30, 2019 | 123.338 |
| | $ | 1 |
| | $ | 270 |
| | $ | (593 | ) | | $ | (422 | ) | | $ | 4,717 |
| | $ | 3,973 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 322 |
| | 322 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Common stock repurchase | (0.465 | ) | | — |
| | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Stock-based compensation | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | 7 |
|
Cash dividend declared ($0.35 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (43 | ) | | (43 | ) |
Stock issued for employee stock purchase plan | 0.394 |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | 20 |
|
Stock issued under stock plans | 0.011 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balances at September 30, 2019 | 123.278 |
| | $ | 1 |
| | $ | 297 |
| | $ | (621 | ) | | $ | (421 | ) | | $ | 4,996 |
| | $ | 4,252 |
|
| |
(a) | Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard. |
Certain historical information has been adjusted to reflect the adoption of new accounting standards. 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 Income (Loss) | | Retained Earnings | | Total |
Balances at December 31, 2017 | 123.061 |
| | $ | 1 |
| | $ | 164 |
| | $ | (518 | ) | | $ | (380 | ) | | $ | 4,193 |
| | $ | 3,460 |
|
Reclassification of tax effects to Retained Earnings | — |
| | — |
| | — |
| | — |
| | (62 | ) | | 62 |
| | — |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Common stock repurchase | (0.186 | ) | | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
Stock-based compensation | — |
| | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
|
Cash dividend declared ($0.32 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (40 | ) | | (40 | ) |
Stock issued for employee stock purchase plan | 0.312 |
| | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
Stock issued under stock plans | 0.163 |
| | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
Balances at March 31, 2018 | 123.350 |
| | $ | 1 |
| | $ | 190 |
| | $ | (531 | ) | | $ | (440 | ) | | $ | 4,219 |
| | $ | 3,439 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 193 |
| | 193 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Common stock repurchase | (0.204 | ) | | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
Stock-based compensation | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Cash dividend declared ($0.32 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (39 | ) | | (39 | ) |
Stock issued under stock plans | 0.058 |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Balances at June 30, 2018 | 123.204 |
| | $ | 1 |
| | $ | 198 |
| | $ | (544 | ) | | $ | (435 | ) | | $ | 4,373 |
| | $ | 3,593 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 217 |
| | 217 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Common stock repurchase | (0.193 | ) | | — |
| | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
Stock-based compensation | — |
| | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
Cash dividend declared ($0.32 per share) | — |
| | — |
| | — |
| | — |
| | — |
| | (40 | ) | | (40 | ) |
Stock issued for employee stock purchase plan | 0.320 |
| | — |
| | 18 |
| | — |
| | — |
| | — |
| | 18 |
|
Stock issued under stock plans | 0.030 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balances at September 30, 2018 | 123.361 |
| | $ | 1 |
| | $ | 224 |
| | $ | (556 | ) | | $ | (428 | ) | | $ | 4,550 |
| | $ | 3,791 |
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | 2019 | | 2018 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 414 |
| | $ | 645 |
| $ | 588 |
| | $ | 414 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
| | |
|
Depreciation and amortization | 290 |
| | 275 |
| 317 |
| | 290 |
|
Stock-based compensation and other | 34 |
| | 43 |
| 20 |
| | 34 |
|
Changes in certain assets and liabilities: | | | | | | |
Changes in deferred tax provision | 122 |
| | 208 |
| 187 |
| | 122 |
|
Increase in air traffic liability | 144 |
| | 223 |
| 244 |
| | 144 |
|
Increase in deferred revenue | 106 |
| | 130 |
| 97 |
| | 106 |
|
Pension contribution | | (65 | ) | | — |
|
Other—net | (124 | ) | | (167 | ) | (7 | ) | | (124 | ) |
Net cash provided by operating activities | 986 |
| | 1,357 |
| 1,381 |
| | 986 |
|
Cash flows from investing activities: | |
| | |
| |
| | |
|
Property and equipment additions: | |
| | |
| |
| | |
|
Aircraft and aircraft purchase deposits | (349 | ) | | (679 | ) | (286 | ) | | (349 | ) |
Other flight equipment | (76 | ) | | (70 | ) | (125 | ) | | (76 | ) |
Other property and equipment | (129 | ) | | (92 | ) | (116 | ) | | (129 | ) |
Total property and equipment additions, including capitalized interest | (554 | ) | | (841 | ) | (527 | ) | | (554 | ) |
Purchases of marketable securities | (672 | ) | | (1,408 | ) | (1,446 | ) | | (672 | ) |
Sales and maturities of marketable securities | 857 |
| | 1,069 |
| 1,228 |
| | 857 |
|
Other investing activities | 36 |
| | 38 |
| 37 |
| | 36 |
|
Net cash used in investing activities | (333 | ) | | (1,142 | ) | (708 | ) | | (333 | ) |
Cash flows from financing activities: | |
| | |
| |
| | |
|
Proceeds from issuance of debt | | 356 |
| | — |
|
Long-term debt payments | (544 | ) | | (265 | ) | (752 | ) | | (544 | ) |
Common stock repurchases | (37 | ) | | (50 | ) | (53 | ) | | (37 | ) |
Dividends paid | (118 | ) | | (111 | ) | (129 | ) | | (118 | ) |
Other financing activities | 33 |
| | 27 |
| 40 |
| | 33 |
|
Net cash used in financing activities | (666 | ) | | (399 | ) | (538 | ) | | (666 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash | (13 | ) | | (184 | ) | 135 |
| | (13 | ) |
Cash, cash equivalents, and restricted cash at beginning of year | 197 |
| | 328 |
| 114 |
| | 197 |
|
Cash, cash equivalents, and restricted cash at end of the period | $ | 184 |
| | $ | 144 |
| $ | 249 |
| | $ | 184 |
|
| | | | | | |
Cash paid during the period for: | | | | | | |
Interest (net of amount capitalized) | $ | 60 |
| | $ | 68 |
| $ | 48 |
| | $ | 60 |
|
Income taxes | — |
| | 129 |
| |
Income taxes, net of refunds received | | 2 |
| | — |
|
| | | | | | |
Reconciliation of cash, cash equivalents, and restricted cash at end of the period | | | | | | |
Cash and cash equivalents | $ | 174 |
| | $ | 144 |
| $ | 237 |
| | $ | 174 |
|
Restricted cash included in Prepaid expenses and other current assets | 10 |
| | — |
| 12 |
| | 10 |
|
Total cash, cash equivalents, and restricted cash at end of the period | $ | 184 |
| | $ | 144 |
| $ | 249 |
| | $ | 184 |
|
| | | | |
Certain historical information has been adjusted to reflect the adoption of new accounting standards. 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 (including Virgin America)America in 2018) and Horizon. OurThe condensed consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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, 20172018. 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, 20182019 and the results of operations for the three and nine months ended September 30, 20182019 and 20172018. Such adjustments were of a normal recurring nature.
Certain reclassifications and rounding adjustments have been made to prior year financial statements to conform to classifications used in the current year.
In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. 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, 20182019 are not necessarily indicative of operating results for the entire year.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.
In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information. The Company plans to utilize this alternative transition method, and will record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new standard is effective for the Company on January 1, 2019. The Company will not early adopt the standard.
At this time, the Company believes the most significant impact to the financial statements from the new lease accounting standard will relate to the recording of a right-of-use asset and related liability associated with leased aircraft. The Company does not expect the new standard to have a material impact on the pattern or amount of expense recognized for aircraft leases on the income statement. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows—Restricted Cash (Topic 230)" related to the presentation of restricted cash on the statement of cash flows, and within the accompanying footnotes. The Company adopted the standard effective January 1, 2018.
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, and is required to be adopted using the modified retrospective approach.
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The standard allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting
from the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the amount initially recorded directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been recorded directly to other comprehensive income using the newly enacted U.S. federal income tax rate. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the standard effective January 1, 2018. As a result, retained earnings increased approximately $62 million in 2018 due to the reclassification of tax effects in AOCI recorded in prior periods at previously enacted tax rates.
NOTE 2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Revenue Recognition and Retirement Benefits Accounting Standards
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Adoption of the new standard resulted in changes to accounting policies for revenue recognition related to frequent flyer activity, certain ancillary revenues such as change fees, air traffic liabilities, and sales and marketing expenses. As a result of adoption, the Company also changed certain financial statement line item disclosure captions. See Note 3 for a discussion of the impact of this standard.
Although less significant, in March 2017 the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which requires the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statement of operations. The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Under this new standard, all components of net periodic benefit cost are presented in Nonoperating income (expense), except service cost, which remains in Wages and benefits.
Certain line item captions on the balance sheet and statement of operations changed as a result of the newly implemented standards. Accordingly, historical financial information presented below as reported has been presented using the new captions. The cumulative impact to retained earnings at January 1, 2016 as a result of the new revenue recognition standard was $171 million. Below are the impacts of these newly adopted accounting standards to the financial statements.
Condensed consolidated statement of operations for the three and nine months ended September 30, 2017 (in millions): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
| | | Adjustments | | | | | | Adjustments | | |
| As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted | | As Reported | | Revenue Recognition | | Retirement Benefits | | As Adjusted |
Operating Revenues | | | | | | | | | | | | | | | |
Passenger Revenue | $ | 1,824 |
| | $ | 134 |
| | $ | — |
| | $ | 1,958 |
| | $ | 5,115 |
| | $ | 390 |
| | $ | — |
| | $ | 5,505 |
|
Mileage plan other revenue | 122 |
| | (17 | ) | | — |
| | 105 |
| | 369 |
| | (55 | ) | | — |
| | 314 |
|
Cargo and other revenue | 174 |
| | (127 | ) | | — |
| | 47 |
| | 487 |
| | (354 | ) | | — |
| | 133 |
|
Total Operating Revenue | 2,120 |
| | (10 | ) | | — |
| | 2,110 |
| | 5,971 |
| | (19 | ) | | — |
| | 5,952 |
|
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | |
Wages and benefits | 475 |
| | — |
| | 2 |
| | 477 |
| | 1,392 |
| | — |
| | 5 |
| | 1,397 |
|
Selling expenses | 91 |
| | 1 |
| | — |
| | 92 |
| | 269 |
| | 8 |
| | — |
| | 277 |
|
Special items—merger-related costs | 24 |
| | (1 | ) | | — |
| | 23 |
| | 88 |
| | (2 | ) | | — |
| | 86 |
|
All other operating expenses | 1,091 |
| | — |
| | — |
| | 1,091 |
| | 3,121 |
| | — |
| | — |
| | 3,121 |
|
Total Operating Expenses | 1,681 |
| | — |
| | 2 |
| | 1,683 |
| | 4,870 |
| | 6 |
| | 5 |
| | 4,881 |
|
| | | | | | | | | | | | | | | |
Operating Income | 439 |
| | (10 | ) | | (2 | ) | | 427 |
| | 1,101 |
| | (25 | ) | | (5 | ) | | 1,071 |
|
| | | | | | | | | | | | | | | |
Nonoperating Income (Expense) | | | | | | | | | | | | | | | |
Other—net | — |
| | — |
| | 2 |
| | 2 |
| | (4 | ) | | — |
| | 5 |
| | 1 |
|
All other nonoperating income (expense) | (12 | ) | | — |
| | — |
| | (12 | ) | | (39 | ) | | — |
| | — |
| | (39 | ) |
| (12 | ) | | — |
| | 2 |
| | (10 | ) | | (43 | ) | | — |
| | 5 |
| | (38 | ) |
Income (loss) before income tax | 427 |
| | (10 | ) | | — |
| | 417 |
| | 1,058 |
| | (25 | ) | | — |
| | 1,033 |
|
Income tax expense (benefit) | 161 |
| | (3 | ) | | — |
| | 158 |
| | 397 |
| | (9 | ) | | — |
| | 388 |
|
Net Income (Loss) | $ | 266 |
| | $ | (7 | ) | | $ | — |
| | $ | 259 |
| | $ | 661 |
| | $ | (16 | ) | | $ | — |
| | $ | 645 |
|
Condensed consolidated statement of cash flows for the nine months ended September 30, 2017 (in millions): |
| | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| As Reported | | Adjustments - Revenue Recognition | | As Adjusted |
Cash flows from operating activities: | | | | | |
Net income | $ | 661 |
| | $ | (16 | ) | | $ | 645 |
|
| | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
|
Depreciation and amortization | 275 |
| | — |
| | 275 |
|
Stock-based compensation and other | 43 |
| | — |
| | 43 |
|
Changes in certain assets and liabilities: | | | | | |
Changes in deferred tax provision | 217 |
| | (9 | ) | | 208 |
|
Increase in air traffic liability | 254 |
| | (31 | ) | | 223 |
|
Increase in deferred revenue | 46 |
| | 84 |
| | 130 |
|
Other—net | (139 | ) | | (28 | ) | | (167 | ) |
Net cash provided by operating activities | 1,357 |
| | — |
| | 1,357 |
|
| | | | | |
Net cash used in investing activities | (1,142 | ) | | — |
| | (1,142 | ) |
| | | | | |
Net cash used in financing activities | (399 | ) | | — |
| | (399 | ) |
| | | | | |
Net increase (decrease) in cash and cash equivalents | (184 | ) | | — |
| | (184 | ) |
Cash and cash equivalents at beginning of year | 328 |
| | — |
| | 328 |
|
Cash and cash equivalents at end of the period | $ | 144 |
| | $ | — |
| | $ | 144 |
|
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 are passenger ancillary revenues, such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan™Plan other revenue includes brand and marketing revenue from our affinitythe Company's co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
The Company disaggregates revenue by segment in Note 9. The level of detaildetails within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
The primary performance obligation on a typical passenger ticket is to provide air travel to the Company’s passenger. Ticket revenue is collected in advance of travel and recorded as Air Traffic Liability (ATL) on the consolidated balance sheets. The Company satisfies its performance obligation and recognizes ticket revenue on each flight segment when the transportation is provided.
Ancillary passenger revenues relate to items such as checked-bag fees, ticket change fees, and on-board food and beverage sales, all of which are provided at time of flight. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue.
Revenue is also recognized for tickets that are expected to expire unused, a concept referred to as “passenger ticket breakage.” Passenger ticket breakage is recorded at the flight date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications.
In addition to selling tickets on its own marketed flights, the Company has interline agreements with partner airlines under which it sells multi-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline. Each segment in a connecting flight represents a separate performance obligation. Revenue on segments sold and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to the partner airline is recognized as a selling expense when the related transportation is provided. Revenue on segments operated by a partner airline is deferred for the full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue.
A portion of revenue from the Mileage Plan™ program is recorded in Passenger revenue. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation for the Company. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis. The standalone selling price for loyalty mileage credits issued is discussed in the LoyaltyMileage Credits section of this Note below. The amount allocated to the mileage credits is deferred on the balance sheet. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue.
Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations.
Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Passenger ticket revenue, including ticket breakage and net of taxes and fees | $ | 1,868 |
| | $ | 1,744 |
| | $ | 5,099 |
| | $ | 4,864 |
|
Passenger ancillary revenue | 157 |
| | 146 |
| | 428 |
| | 401 |
|
Mileage Plan passenger revenue | 186 |
| | 153 |
| | 511 |
| | 459 |
|
Total Passenger revenue | $ | 2,211 |
| | $ | 2,043 |
| | $ | 6,038 |
| | $ | 5,724 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Passenger ticket revenue, including ticket breakage and net of taxes and fees | $ | 1,744 |
| | $ | 1,683 |
| | $ | 4,865 |
| | $ | 4,709 |
|
Passenger ancillary revenue | 146 |
| | 141 |
| | 401 |
| | 391 |
|
Mileage PlanTM passenger revenue | 153 |
| | 134 |
| | 459 |
| | 405 |
|
Total passenger revenue | $ | 2,043 |
| | $ | 1,958 |
| | $ | 5,725 |
| | $ | 5,505 |
|
As passenger tickets and related ancillary services are primarily sold via credit cards, certain amounts due from credit card processors are recorded as airline traffic receivables. These credit card receivables and receivables from our affinity credit card partner represent the majority of the receivables balance on the Balance Sheet.
For performance obligations with performance periods of less than one year, GAAP provides a practical expedient that allows the Company not to disclose the transaction price allocated to remaining performance obligations and the timing of related revenue recognition. As passenger tickets expire one year from ticketing, the Company elected to apply this practical expedient for tickets unused or not exchanged.
Mileage Plan™ Loyalty Program
Loyalty mileage credits
The Company’s Mileage Plan™ loyalty program provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. Mileage credits are earned through travel, purchases using the Mileage Plan™ co-branded credit card and purchases from other participating partners. The program has a 24-month expiration period for unused mileage credits from the month of last account activity. The Company offers redemption of mileage credits through free, discounted or upgraded air travel on Alaska flights or on one of its 15 airline partners, as well as redemption at partner hotels.
The Company uses a relative standalone selling price allocation to allocate consideration to material performance obligations in contracts with customers that include loyalty mileage credits. As directly observable selling prices for mileage credits are not available, the Company determines the standalone selling price of mileage credits primarily using actual ticket purchase prices for similar tickets flown, adjusted for the likelihood of redemption, or breakage. In determining similar tickets flown,
the Company considers current market prices, class of service, type of award, and other factors. For mileage credits accumulated through travel on partner airlines, the Company uses actual consideration received from the partners.
Revenue related to air transportation is deferred in the amount of the relative standalone selling price allocated to the mileage credits as they are issued. The Company satisfies its performance obligation when the mileage credits are redeemed and the related air transportation is delivered.
The Company estimates breakage for the portion of mileage credits not expected to be redeemed using a statistical analysis of historical data, including actual mileage credits expiring, slow-moving and low-credit accounts, among other factors. The breakage rate for the three and nine months ended September 30, 2018 and 2017 was 17.4%. The Company reviews the breakage rate used on an annual basis.
Co-brand credit card agreement and other
In addition to mileage credits, the co-brand credit card agreement, referred to herein as the Agreement, also includes performance obligations for waived bag fees, Companion Fare™ offers to purchase an additional ticket at a discount, marketing, and the use of intellectual property including the brand (unlimited access to the use of the Company’s brand and frequent flyer member lists), which is the predominant element in the Agreement. The affinity card bank partner is the customer for some elements, including the brand and marketing, while the Mileage Plan™ member is the customer for other elements such as mileage credits, bag waivers, and Companion Fares.
At the inception of the Agreement, management estimated the selling price of each of the performance obligations. The objective was to determine the price at which a sale would be transacted if the product or service was sold on a stand-alone basis. The Company determined its best estimate of selling price for each element by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The estimates of the standalone selling prices of each element do not change subsequent to the original valuation of the contract unless the contract is materially modified, but the allocation between elements may change based upon the actual and updated projected volumes of each element delivered during the term of the contract.
Consideration received from the bank is variable and is primarily from consumer spend on the card, among other items. The Company allocates consideration to each of the performance obligations, including mileage credits, waived bag fees, Companion Fares, and brand and marketing, using their relative standalone selling price. Because the performance obligation related to providing use of intellectual property including the brand is satisfied over time, it is recognized in Mileage PlanTM other revenue in the period that those elements are sold. The Company records passenger revenue related to the air transportation and certificates for discounted companion travel when the transportation is delivered.
In contracts with non-bank partners, the Company has identified two performance obligations in most cases - travel and brand. Revenue is recognized using the residual method, where the travel performance obligation is deferred until transportation is provided in the amount of the estimated standalone selling price of the ticket, less breakage. The residual amount, if any, is recognized as commission revenue when the brand element is sold. Mileage credit sales recorded under the residual approach are immaterial to the overall program.
Interline loyalty
The Company has interline arrangements with certain airlines whereby its members may earn and redeem Mileage Plan™ credits on those airlines, and members of a partner airline’s loyalty program may earn and redeem frequent flyer program credits on Alaska. When a Mileage Plan™ member earns credits on a partner airline, the partner airline remits a contractually-agreed upon fee to the Company which is deferred until credits are redeemed. When a Mileage Plan™ member redeems credits on a partner airline, the Company pays a contractually agreed upon fee to the other airline, which offsets the revenue recognized associated with the award travel. When a member of a partner airline redeems frequent flyer credits on Alaska, the partner airline remits a contractually-agreed upon amount to the Company, recognized as Passenger revenue upon travel. If the partner airline’s member earns frequent flyer program credits on an Alaska flight, the Company remits a contractually-agreed upon fee to the partner airline and records a commission expense.
Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Passenger revenue | $ | 186 |
| | $ | 153 |
| | $ | 511 |
| | $ | 459 |
|
Mileage Plan other revenue | 118 |
| | 114 |
| | 346 |
| | 329 |
|
Total Mileage Plan revenue | $ | 304 |
| | $ | 267 |
| | $ | 857 |
| | $ | 788 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Passenger revenue | $ | 153 |
| | $ | 134 |
| | $ | 459 |
| | $ | 405 |
|
Mileage PlanTM other revenue | 114 |
| | 105 |
| | 329 |
| | 314 |
|
Total Mileage Plan™ revenue | $ | 267 |
| | $ | 239 |
| | $ | 788 |
| | $ | 719 |
|
Mileage Plan™ other revenue is primarily brand and marketing revenue from our affinity card products.
Cargo and Other
The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination or is transferred to a third-party carrier for delivery.
The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue. The transaction price for Cargo and other revenue is the price paid by the customer.
Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Cargo revenue | $ | 36 |
| | $ | 36 |
| | $ | 104 |
| | $ | 96 |
|
Other revenue | 24 |
| | 19 |
| | 65 |
| | 51 |
|
Total Cargo and other revenue | $ | 60 |
| | $ | 55 |
| | $ | 169 |
| | $ | 147 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Cargo revenue | $ | 36 |
| | $ | 32 |
| | $ | 96 |
| | $ | 88 |
|
Other revenue | 19 |
| | 15 |
| | 50 |
| | 45 |
|
Total Cargo and other revenue | $ | 55 |
| | $ | 47 |
| | $ | 146 |
| | $ | 133 |
|
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
Air traffic liability included on the condensed consolidated balance sheets represents the remaining obligation associated with passenger tickets and ancillary services. The air traffic liability balance fluctuates with seasonal travel patterns. The Company recognized Passenger revenue of $27$19 million and $23$27 million from the prior year-end air traffic liability balance for the three months ended September 30, 2019 and 2018, and 2017,$582 million and $540 million and $543 million for the nine months ended September 30, 20182019 and 2017.2018.
Mileage PlanTM assets and liabilities
The total deferred revenue liability included on the condensed consolidated balance sheets represents the remaining transaction price that has been allocated to Mileage PlanTM performance obligations not yet satisfied by the Company. In general, the current amounts will be recognized as revenue within 12 months and the long-term amounts will be recognized as revenue over, on average, a period of approximately three to four years. This period of time represents the average time that members have historically taken to earn and redeem miles.
The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $106$103 million of such receivables as of September 30, 20182019 and $101$119 million as of December 31, 2017.2018.
Mileage credits are combined in one homogeneous pool and are not specifically identifiable. As such, loyalty revenues disclosed earlier in this Note are comprised of miles that were part of the deferred revenue and liabilities balances at the beginning of the period and miles that were issued during the period. The table below presents a roll forward of the total frequent flyer liability (in millions): |
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2019 | | 2018 |
Total Deferred Revenue balance at January 1 | | $ | 1,874 |
| | $ | 1,725 |
|
Travel miles and companion certificate redemption - Passenger revenue | | (511 | ) | | (459 | ) |
Miles redeemed on partner airlines - Other revenue | | (84 | ) | | (66 | ) |
Increase in liability for mileage credits issued | | 692 |
| | 631 |
|
Total Deferred Revenue balance at September 30 | | $ | 1,971 |
| | $ | 1,831 |
|
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2018 | | 2017 |
Total Deferred Revenue balance at January 1 | | $ | 1,725 |
| | $ | 1,534 |
|
Travel miles and companion certificate redemption - Passenger revenue | | (459 | ) | | (405 | ) |
Miles redeemed on partner airlines - Other revenue | | (66 | ) | | (54 | ) |
Increase in liability for mileage credits issued | | 631 |
| | 586 |
|
Total Deferred Revenue balance at September 30 | | $ | 1,831 |
| | $ | 1,661 |
|
Selling Costs
Certain costs such as credit card fees, travel agency and other commissions paid, as well as Global Distribution Systems (GDS) booking fees are incurred when the Company sells passenger tickets and ancillary services in advance of the travel date. The Company defers such costs and recognizes them as expenses when the travel occurs. Prepaid expense recorded on the consolidated balance sheets for such costs was $27 million and $24 million as of September 30, 2018 and December 31, 2017. The Company recorded related expense on the condensed consolidated statement of operations of $57 million and $61 million for the three months ended September 30, 2018 and 2017, and $166 million and $183 million for the nine months ended September 30, 2018 and 2017.
NOTE 4.3. 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, 2018,2019, total cost basis for all marketable securities was $1.2$1.4 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.
Fair values of financial instruments on the consolidated balance sheet (in millions):
| | September 30, 2018 | Level 1 | | Level 2 | | Total | |
| | September 30, 2019 | | December 31, 2018 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Assets | | | | | | | | | | | | | | | | |
Marketable securities | | | | | | | | | | | | | | | | |
U.S. government and agency securities | $ | 338 |
| | $ | — |
| | $ | 338 |
| $ | 379 |
| | $ | — |
| | $ | 379 |
| | $ | 293 |
| | $ | — |
| | $ | 293 |
|
Equity mutual funds | | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
|
Foreign government bonds | — |
| | 29 |
| | 29 |
| — |
| | 25 |
| | 25 |
| | — |
| | 26 |
| | 26 |
|
Asset-backed securities | — |
| | 209 |
| | 209 |
| — |
| | 201 |
| | 201 |
| | — |
| | 190 |
| | 190 |
|
Mortgage-backed securities | — |
| | 79 |
| | 79 |
| — |
| | 142 |
| | 142 |
| | — |
| | 92 |
| | 92 |
|
Corporate notes and bonds | — |
| | 559 |
| | 559 |
| — |
| | 609 |
| | 609 |
| | — |
| | 520 |
| | 520 |
|
Municipal securities | — |
| | 9 |
| | 9 |
| — |
| | 21 |
| | 21 |
| | — |
| | 10 |
| | 10 |
|
Total Marketable securities | 338 |
| | 885 |
| | 1,223 |
| 384 |
| | 998 |
| | 1,382 |
| | 293 |
| | 838 |
| | 1,131 |
|
Derivative instruments | | | | | | | | | | | | | | | | |
Fuel hedge—call options | — |
| | 54 |
| | 54 |
| — |
| | 7 |
| | 7 |
| | — |
| | 4 |
| | 4 |
|
Interest rate swap agreements | — |
| | 15 |
| | 15 |
| — |
| | 2 |
| | 2 |
| | — |
| | 10 |
| | 10 |
|
Total Assets | $ | 338 |
| | $ | 954 |
| | $ | 1,292 |
| $ | 384 |
| | $ | 1,007 |
| | $ | 1,391 |
| | $ | 293 |
| | $ | 852 |
| | $ | 1,145 |
|
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Derivative instruments | | | | | | | | | | | | | | | | |
Interest rate swap agreements | — |
| | (3 | ) | | (3 | ) | — |
| | (14 | ) | | (14 | ) | | — |
| | (7 | ) | | (7 | ) |
Total Liabilities | $ | — |
| | $ | (3 | ) | | $ | (3 | ) | $ | — |
| | $ | (14 | ) | | $ | (14 | ) | | $ | — |
| | $ | (7 | ) | | $ | (7 | ) |
|
| | | | | | | | | | | |
December 31, 2017 | Level 1 | | Level 2 | | Total |
Assets | | | | | |
Marketable securities | | | | | |
U.S. government and agency securities | $ | 328 |
| | $ | — |
| | $ | 328 |
|
Foreign government bonds | — |
| | 43 |
| | 43 |
|
Asset-backed securities | — |
| | 209 |
| | 209 |
|
Mortgage-backed securities | — |
| | 99 |
| | 99 |
|
Corporate notes and bonds | — |
| | 726 |
| | 726 |
|
Municipal securities | — |
| | 22 |
| | 22 |
|
Total Marketable securities | 328 |
| | 1,099 |
| | 1,427 |
|
Derivative instruments | | | | | |
Fuel hedge—call options | — |
| | 22 |
| | 22 |
|
Interest rate swap agreements | — |
| | 9 |
| | 9 |
|
Total Assets | $ | 328 |
| | $ | 1,130 |
| | $ | 1,458 |
|
| | | | | |
Liabilities | | | | | |
Derivative instruments | | | | | |
Interest rate swap agreements | — |
| | (8 | ) | | (8 | ) |
Total Liabilities | $ | — |
| | $ | (8 | ) | | $ | (8 | ) |
The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2018.2019.
Maturities for marketable securities (in millions):
|
| | | | | | | |
September 30, 2019 | Cost Basis | | Fair Value |
Due in one year or less | $ | 244 |
| | $ | 244 |
|
Due after one year through five years | 1,105 |
| | 1,118 |
|
Due after five years through 10 years | 15 |
| | 15 |
|
Total | $ | 1,364 |
| | $ | 1,377 |
|
|
| | | | | | | |
September 30, 2018 | Cost Basis | | Fair Value |
Due in one year or less | $ | 126 |
| | $ | 126 |
|
Due after one year through five years | 1,094 |
| | 1,072 |
|
Due after five years through 10 years | 26 |
| | 25 |
|
Total | $ | 1,246 |
| | $ | 1,223 |
|
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, Cash Equivalents and Restricted Cash: Cash 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 cost, which approximates fair value.
The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.
Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of September 30, 2018,2019, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.
Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Fixed-rate debt at cost | $ | 567 |
| | $ | 639 |
|
Non-recurring purchase price accounting fair value adjustment | 2 |
| | 3 |
|
Total fixed-rate debt | $ | 569 |
| | $ | 642 |
|
| | | |
Estimated fair value | $ | 584 |
| | $ | 641 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Fixed-rate debt at cost | $ | 703 |
| | $ | 956 |
|
Non-recurring purchase price accounting fair value adjustment | 3 |
| | 3 |
|
Total fixed-rate debt | $ | 706 |
| | $ | 959 |
|
| | | |
Estimated fair value | $ | 700 |
| | $ | 959 |
|
Assets and Liabilities Measured at Fair Value on Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairment charges were taken in the three and nine months ended September 30, 20182019 and September 30, 2017.2018.
NOTE 5.4. LONG-TERM DEBT
Long-term debt obligations on the consolidated balance sheet (in millions):
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Fixed-rate notes payable due through 2029 | $ | 569 |
| | $ | 642 |
|
Variable-rate notes payable due through 2029 | 1,150 |
| | 1,473 |
|
Less debt issuance costs | (10 | ) | | (12 | ) |
Total debt | 1,709 |
| | 2,103 |
|
Less current portion | 265 |
| | 486 |
|
Long-term debt, less current portion | $ | 1,444 |
| | $ | 1,617 |
|
| | | |
Weighted-average fixed-interest rate | 3.4 | % | | 4.1 | % |
Weighted-average variable-interest rate | 3.2 | % | | 3.9 | % |
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Fixed-rate notes payable due through 2028 | $ | 706 |
| | $ | 959 |
|
Variable-rate notes payable due through 2028 | 1,335 |
| | 1,625 |
|
Less debt issuance costs | (12 | ) | | (15 | ) |
Total debt | 2,029 |
| | 2,569 |
|
Less current portion | 345 |
| | 307 |
|
Long-term debt, less current portion | $ | 1,684 |
| | $ | 2,262 |
|
| | | |
Weighted-average fixed-interest rate | 4.1 | % | | 4.2 | % |
Weighted-average variable-interest rate | 3.4 | % | | 2.8 | % |
Approximately $745 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2019.
During the nine months ended September 30, 20182019, the Company made debt payments of $544$752 million, including the prepayment of $231$532 million of debt.
At During the nine months ended September 30, 20182019, the Company obtained additional secured debt financing of $356 million from multiple lenders. The new debt is secured by a total of 12 aircraft.
At September 30, 2019 long-term debt principal payments for the next five years and thereafter are as follows (in millions):
|
| | | |
| Total |
Remainder of 2019 | $ | 63 |
|
2020 | 268 |
|
2021 | 313 |
|
2022 | 274 |
|
2023 | 234 |
|
Thereafter | 565 |
|
Total | $ | 1,717 |
|
|
| | | |
| Total |
Remainder of 2018 | $ | 123 |
|
2019 | 267 |
|
2020 | 381 |
|
2021 | 363 |
|
2022 | 179 |
|
Thereafter | 725 |
|
Total | $ | 2,038 |
|
Bank Lines of Credit
The Company had threehas 3 credit facilities with availability totaling $516 million as of September 30, 2018.2019. All three3 facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. The second credit facility increased from $75 million tofor $116 million in July 2018. It expires in July 2019,2020, with a mechanism for annual renewal, and is secured by aircraft. A third credit facility for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has secured letters of credit against the $116 million facility, but has no plans to borrow using either of the two other facilities. All three3 credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at September 30, 2018.2019.
NOTE 5. LEASES
In 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for certain operating leases. Under the new standard, a lessee must recognize a liability on the balance sheet representing the lease payments owed, and a lease asset representing its right to use the underlying asset for the lease term. In 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)," which amended Topic 842 to provide a transition method that would not require adjusting comparative period financial information.
The Company transitioned to the new lease accounting standard effective January 1, 2019 utilizing the alternative transition method. Upon transition, the Company recorded a cumulative-effect adjustment to the opening balance of retained earnings of $3 million. The new standard eliminated build-to-suit lease accounting guidance and resulted in the derecognition of build-to-suit assets and liabilities of approximately $150 million each.
The Company elected certain practical expedients under the standard, including the practical expedient allowing a policy election to exclude from recognition short-term lease assets and lease liabilities for leases with an initial term of 12 months or less. Such expense was not material for the nine months ended September 30, 2019. Additionally, the Company elected the available package of practical expedients allowing for no reassessment of lease classification for existing leases, no reassessment of expired contracts, and no reassessments of initial direct costs for existing leases.
The Company has five asset classes for operating leases: aircraft, capacity purchase arrangements with aircraft (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment. All capitalized lease assets have been recorded on the condensed consolidated balance sheet as of September 30, 2019 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities. Consistent with past accounting, operating rent expense is recognized on a straight-line basis over the term of the lease.
At September 30, 2019, the Operating lease assets balance by asset class was as follows (in millions):
|
| | | |
| Operating lease assets |
Aircraft | $ | 974 |
|
CPA aircraft | 609 |
|
Airport and terminal facilities | 18 |
|
Corporate real estate and other | 46 |
|
Total Operating lease assets | $ | 1,647 |
|
Aircraft
At September 30, 2019, the Company had operating leases for 10 Boeing 737 (B737), 62 Airbus, and 8 Bombardier Q400 aircraft. Additionally, the Company operates 32 Embraer 175 (E175) aircraft through its capacity purchase arrangement with SkyWest Airlines, Inc. (SkyWest). Remaining lease terms for these aircraft extend up to 12 years, with options to extend, subject to negotiation at the end of the term. As extension is not certain, and rates are highly likely to be renegotiated, the extended term is only capitalized when it is reasonably determinable. While aircraft rent is primarily fixed, certain leases contain rental adjustments throughout the lease term which would be recognized as variable expense as incurred. Variable lease expense for aircraft was $1 million and $4 million for the three and nine months ended September 30, 2019, respectively.
Capacity purchase agreements with aircraft (CPA aircraft)
At September 30, 2019, Alaska had CPAs with three carriers, including the Company’s wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. Alaska also has CPAs with SkyWest to fly certain routes in the Lower 48 and Canada, and with Peninsula Aviation Services, 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. As Horizon is a wholly-owned subsidiary, intercompany leases between Alaska and Horizon have not been recognized under the standard. The agreement with PenAir does not contain a leasing arrangement, resulting in no asset or liability recognized.
Remaining lease terms for CPA aircraft range from 8 years to 11 years. Financial arrangements of the CPAs include a fixed component, representing the costs to operate each aircraft and is capitalized under the new lease accounting standard. CPAs also include variable rent based on actual levels of flying, which is expensed as incurred. Variable lease expense for CPA aircraft for the three and nine months ended September 30, 2019 was not material.
Airport and terminal facilities
The Company leases ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas at numerous airports. For this asset class, the Company has elected to combine lease and non-lease components. The majority of airport and terminal facility leases are not capitalized because they do not meet the definition of controlled assets under the standard, or because the lease payments are entirely variable. For airports where leased assets are identified, and where the contract includes fixed lease payments, operating lease assets and lease liabilities have been recorded. The Company is also commonly responsible for maintenance, insurance and other facility-related expenses and services under these agreements. These costs are recognized as variable expense in the period incurred. Airport and terminal facilities variable lease expense was $86 million and $231 million for the three and nine months ended September 30, 2019, respectively.
In 2018, the Company leased 12 airport slots at LaGuardia Airport and eight airport slots at Reagan National Airport to a third party. For these leases, the Company recorded $3 million and $9 million of lease income during the three and nine months ended September 30, 2019, respectively.
Corporate real estate and other leases
Leased corporate real estate is primarily for office space in hub cities, data centers, land leases, and reservation centers. For this asset class, the Company has elected to combine lease and non-lease components under the standard. Other leased assets are comprised of other ancillary contracts and items including leased flight simulators and spare engines. Variable lease expense related to corporate real estate and other leases for the nine months ended September 30, 2019 was $8 million.
Components of Lease Expense
The impact of leases, including variable lease cost, on earnings for the three and nine months ended September 30, 2019 was as follows (in millions): |
| | | | | | | | |
| Classification | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Expense | | | | |
Aircraft | Aircraft rent | $ | 62 |
| | $ | 186 |
|
CPA aircraft | Aircraft rent | 20 |
| | 61 |
|
Airport and terminal facilities | Landing fees and other rentals | 87 |
| | 233 |
|
Corporate real estate and other | Landing fees and other rentals | 5 |
| | 14 |
|
Total lease expense | | $ | 174 |
| | $ | 494 |
|
Revenue | | | | |
Lease income | Cargo and other revenues | (3 | ) | | (9 | ) |
Net lease impact | | $ | 171 |
| | $ | 485 |
|
Total rent expense for the three and nine months ended September 30, 2018 was $165 million and $455 million, respectively.
Supplemental Cash Flow Information
Supplemental cash flow information related to leases was as follows (in millions):
|
| | | |
| Nine Months Ended September 30, 2019 |
Cash paid for capitalized operating leases | $ | 259 |
|
Operating lease assets obtained in exchange for lease obligations | $ | 47 |
|
Lease Term and Discount Rate
As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at September 30, 2019:
|
| | | | |
| Weighted Average IBR | | Weighted Average Remaining Lease Term |
Aircraft | 4.1 | % | | 6.7 |
CPA aircraft | 4.3 | % | | 9.5 |
Airports and terminal facilities | 4.1 | % | | 10.2 |
Corporate real estate and other | 4.3 | % | | 36.4 |
Maturities of Lease Liabilities
Future minimum lease payments under non-cancellable leases as of September 30, 2019 (in millions): |
| | | | | | | | | | | | | | | |
| Aircraft | | CPA Aircraft | | Airport and Terminal Facilities | | Corporate Real Estate & Other |
Remainder of 2019 | $ | 63 |
| | $ | 20 |
| | 1 |
| | $ | 2 |
|
2020 | 234 |
| | 79 |
| | 3 |
| | 7 |
|
2021 | 196 |
| | 79 |
| | 3 |
| | 6 |
|
2022 | 171 |
| | 79 |
| | 2 |
| | 4 |
|
2023 | 116 |
| | 79 |
| | 2 |
| | 4 |
|
Thereafter | 330 |
| | 408 |
| | 12 |
| | 77 |
|
Total lease payments | $ | 1,110 |
| | $ | 744 |
| | $ | 23 |
| | $ | 100 |
|
Less: Imputed interest | (140 | ) | | (135 | ) | | (4 | ) | | (54 | ) |
Total operating lease liabilities | $ | 970 |
| | $ | 609 |
| | $ | 19 |
| | $ | 46 |
|
All future lease contracts have remaining non-cancelable lease terms ranging from 2019 to 2031.
NOTE 6. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs for qualified defined-benefit plans include the following (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Service cost | $ | 11 |
| | $ | 12 |
| | $ | 32 |
| | $ | 36 |
|
Pension expense included in Wages and benefits | 11 |
| | 12 |
| | 32 |
| | 36 |
|
| | | | | | | |
Interest cost | 23 |
| | 20 |
| | 67 |
| | 59 |
|
Expected return on assets | (24 | ) | | (27 | ) | | (71 | ) | | (80 | ) |
Amortization of prior service cost (credit) | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
Recognized actuarial loss | 9 |
| | 9 |
| | 27 |
| | 25 |
|
Pension expense included in Nonoperating Income (Expense) | $ | 7 |
| | $ | 1 |
| | $ | 22 |
| | $ | 3 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Service cost | $ | 12 |
| | $ | 10 |
| | $ | 36 |
| | $ | 30 |
|
Pension expense included in Wages and benefits | 12 |
| | 10 |
| | 36 |
| | 30 |
|
| | | | | | | |
Interest cost | 20 |
| | 19 |
| | 59 |
| | 55 |
|
Expected return on assets | (27 | ) | | (27 | ) | | (80 | ) | | (80 | ) |
Amortization of prior service cost (credit) | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
Recognized actuarial loss (gain) | 9 |
| | 7 |
| | 25 |
| | 20 |
|
Pension expense (benefit) included in Nonoperating Income (Expense) | $ | 1 |
| | $ | (2 | ) | | $ | 3 |
| | $ | (6 | ) |
The Company made a voluntary contribution of $65 million to three defined-benefit pension plans during the three months ended September 30, 2019.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments, excluding operating leases, as of September 30, 20182019 (in millions):
|
| | | | | | | | | | | |
| Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | | Aircraft Maintenance Deposits |
Remainder of 2019 | $ | 111 |
| | $ | 34 |
| | $ | 16 |
|
2020 | 504 |
| | 145 |
| | 73 |
|
2021 | 475 |
| | 166 |
| | 63 |
|
2022 | 333 |
| | 174 |
| | 54 |
|
2023 | 194 |
| | 179 |
| | 29 |
|
Thereafter | 36 |
| | 1,065 |
| | 10 |
|
Total | $ | 1,653 |
| | $ | 1,763 |
| | $ | 245 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Aircraft Leases | | Facility Leases | | Aircraft Commitments(a) | | Capacity Purchase Agreements (b) | | Aircraft Maintenance Deposits |
Remainder of 2018 | $ | 88 |
| | $ | 18 |
| | $ | 378 |
| | $ | 33 |
| | $ | 16 |
|
2019 | 349 |
| | 64 |
| | 514 |
| | 138 |
| | 65 |
|
2020 | 324 |
| | 56 |
| | 525 |
| | 145 |
| | 68 |
|
2021 | 282 |
| | 50 |
| | 558 |
| | 166 |
| | 64 |
|
2022 | 265 |
| | 35 |
| | 302 |
| | 174 |
| | 52 |
|
Thereafter | 1,070 |
| | 149 |
| | 140 |
| | 1,205 |
| | 38 |
|
Total | $ | 2,378 |
| | $ | 372 |
| | $ | 2,417 |
| | $ | 1,861 |
| | $ | 303 |
|
| |
(a) | Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management. |
| |
(b) | Includes all non-aircraft lease costs associated with capacity purchase agreements. |
Lease Commitments
Aircraft lease commitments include future obligations for all of the Company's operating aircraft, as well as aircraft leases operated by third-parties. At September 30, 2018, the Company had lease contracts for 10 Boeing 737 (B737) aircraft, 61 Airbus aircraft, 9 Bombardier Q400 aircraft, and 32 Embraer 175 (E175) aircraft with SkyWest Airlines, Inc. (SkyWest). The Company has an additional two scheduled lease deliveries of A321neo aircraft through 2019, as well as three scheduled lease deliveries of E175 aircraft in 2021 to be operated by SkyWest. The Company does not intend to operate the three E175 aircraft currently scheduled for delivery in 2021, and is working to remove those aircraft from the capacity purchase agreement. All lease contracts have remaining non-cancelable lease terms ranging from 2018 to 2033. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with deliveries from 2021 to 2022. Options to lease are not reflected in the commitments table above.
Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $165 million and $145 million for the three months ended September 30, 2018 and 2017, and $455 million and $406 million for the nine months ended September 30, 2018 and 2017.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 20182019, the Company had commitments to purchase 38 B737 aircraft (6 B737 NextGen aircraft and 32 B737 MAX aircraft),MAX9 aircraft, with deliveries in the remainder of 20182019 through 2023. InFuture minimum contractual payments for these aircraft have been updated to reflect the first quarter of 2018 the Company entered into a supplemental agreement with Boeing to defer certainmost current anticipated delivery timing for B737 deliveries and to convert 15 MAX8 aircraft orders to MAX9 aircraft, orders.which has been delayed as a result of the grounding order mandated by the FAA on March 13, 2019. The Company also has commitments to purchase 173 E175 aircraft with deliveries in the remainder of 2018 through 20212023 and has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 20222023 through 2024.2025. In addition, the Company has options to purchase 37 B737 MAX aircraft from 2021 through 2024 and 30 E175 aircraft from 2021 through 2023. The Company also has the option to increase capacity flown by SkyWest with 8 additional E175 aircraft with deliveries after 2021. The cancelable purchase commitments and option payments are not reflected in the table above.
Contingencies
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Two thousandThe court certified a class of approximately 1,800 flight attendants were certified as a class in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. Plaintiffs value these damages and penalties at $85 million, and as of November 1, 2018, movedOn February 4, 2019, the Court to enterentered final judgment against Virgin America and Alaska Airlines in that amount. Plaintiffs dothe amount of approximately $78 million. It did not seek monetary or behavioralaward injunctive relief fromagainst Alaska Airlines.
The Court will render its final judgment in March 2019. The Company will then seekis seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law.law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case.case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
NOTE 8. SHAREHOLDERS' EQUITY
Dividends
During the three months ended September 30, 2018, the Company declared and paid cash dividends of $0.32 per share, or $39 million. During the nine months ended September 30, 2018, the Company declared and paid cash dividends of $0.96 per share, or $118 million.
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of September 30, 2018,2019, the Company has repurchased 5.76.7 million shares for $426$491 million under this program.
Share repurchase activity (in millions, except share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
2015 Repurchase Program—$1 billion | 193,203 |
| | $ | 12 |
| | 355,415 |
| | $ | 28 |
| | 582,942 |
| | $ | 37 |
| | 612,095 |
| | $ | 50 |
|
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss, net of tax (in millions): |
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Related to marketable securities | $ | 10 |
| | $ | (11 | ) |
Related to employee benefit plans | (422 | ) | | (440 | ) |
Related to interest rate derivatives | (9 | ) | | 3 |
|
Total | $ | (421 | ) | | $ | (448 | ) |
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Related to marketable securities | $ | (17 | ) | | $ | (5 | ) |
Related to employee benefit plans | (420 | ) | | (376 | ) |
Related to interest rate derivatives | 9 |
| | 1 |
|
Total | $ | (428 | ) | | $ | (380 | ) |
The Company elected to early adopt ASU 2018-02 in the first quarter of 2018. As a result, the Company reclassified approximately $62 million of tax effects in AOCI recorded in prior periods at previously enacted tax rates thus increasing Retained earnings.
Earnings Per Share (EPS)
Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, 20182019 and 20172018, anti-dilutive shares excluded from the calculation of EPS were not material.
NOTE 9. OPERATING SEGMENT INFORMATION
Alaska Air Group has two operating airlines—Alaska (including Virgin America after the single operating certificate was received in January 2018) and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues.
Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three3 reportable operating segments:
| |
• | Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica. |
| |
• | Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations. |
| |
• | Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs. |
Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.
Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company'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, 2018 | Three Months Ended September 30, 2019 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Passenger revenues | $ | 1,727 |
| | $ | 316 |
| | $ | — |
| | $ | — |
| | $ | 2,043 |
| | $ | — |
| | $ | 2,043 |
| $ | 1,850 |
| | $ | 361 |
| | $ | — |
| | $ | — |
| | $ | 2,211 |
| | $ | — |
| | $ | 2,211 |
|
CPA revenues | — |
| | — |
| | 128 |
| | (128 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | 112 |
| | (112 | ) | | — |
| | — |
| | — |
|
Mileage Plan other revenue | 104 |
| | 10 |
| | — |
| | — |
| | 114 |
| | — |
| | 114 |
| 107 |
| | 11 |
| | — |
| | — |
| | 118 |
| | — |
| | 118 |
|
Cargo and other | 53 |
| | — |
| | 2 |
| | — |
| | 55 |
| | — |
| | 55 |
| 58 |
| | 1 |
| | — |
| | 1 |
| | 60 |
| | — |
| | 60 |
|
Total operating revenues | 1,884 |
| | 326 |
| | 130 |
| | (128 | ) | | 2,212 |
| | — |
| | 2,212 |
| 2,015 |
| | 373 |
| | 112 |
| | (111 | ) | | 2,389 |
| | — |
| | 2,389 |
|
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,126 |
| | 267 |
| | 118 |
| | (131 | ) | | 1,380 |
| | 22 |
| | 1,402 |
| 1,226 |
| | 275 |
| | 94 |
| | (119 | ) | | 1,476 |
| | 5 |
| | 1,481 |
|
Economic fuel | 438 |
| | 70 |
| | — |
| | — |
| | 508 |
| | 5 |
| | 513 |
| 411 |
| | 75 |
| | — |
| | — |
| | 486 |
| | — |
| | 486 |
|
Total operating expenses | 1,564 |
| | 337 |
| | 118 |
| | (131 | ) | | 1,888 |
| | 27 |
| | 1,915 |
| 1,637 |
| | 350 |
| | 94 |
| | (119 | ) | | 1,962 |
| | 5 |
| | 1,967 |
|
Nonoperating income (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | 15 |
| | — |
| | — |
| | (4 | ) | | 11 |
| | — |
| | 11 |
| 17 |
| | — |
| | — |
| | (6 | ) | | 11 |
| | — |
| | 11 |
|
Interest expense | (20 | ) | | — |
| | (6 | ) | | 4 |
| | (22 | ) | | — |
| | (22 | ) | (18 | ) | | — |
| | (7 | ) | | 7 |
| | (18 | ) | | — |
| | (18 | ) |
Interest capitalized | 4 |
| | — |
| | 1 |
| | — |
| | 5 |
| | — |
| | 5 |
| 4 |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Other—net | (5 | ) | | (2 | ) | | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) | |
Total Nonoperating income (expense) | (6 | ) | | (2 | ) | | (5 | ) | | — |
| | (13 | ) | | — |
| | (13 | ) | |
Other - net | | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
Total nonoperating income (expense) | | — |
| | — |
| | (7 | ) | | 1 |
| | (6 | ) | | — |
| | (6 | ) |
Income (loss) before income tax | $ | 314 |
| | $ | (13 | ) | | $ | 7 |
| | $ | 3 |
| | $ | 311 |
| | $ | (27 | ) | | $ | 284 |
| $ | 378 |
| | $ | 23 |
| | $ | 11 |
| | $ | 9 |
| | $ | 421 |
| | $ | (5 | ) | | $ | 416 |
|
| | | Three Months Ended September 30, 2017(d) | Three Months Ended September 30, 2018 |
| Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Passenger revenues | $ | 1,677 |
| | $ | 281 |
| | $ | — |
| | $ | — |
| | $ | 1,958 |
| | $ | — |
| | $ | 1,958 |
| $ | 1,727 |
| | $ | 316 |
| | $ | — |
| | $ | — |
| | $ | 2,043 |
| | $ | — |
| | $ | 2,043 |
|
CPA revenues | — |
| | — |
| | 112 |
| | (112 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | 128 |
| | (128 | ) | | — |
| | — |
| | — |
|
Mileage Plan other revenue | 97 |
| | 8 |
| | — |
| | — |
| | 105 |
| | — |
| | 105 |
| 104 |
| | 10 |
| | — |
| | — |
| | 114 |
| | — |
| | 114 |
|
Cargo and other | 46 |
| | — |
| | 1 |
| | — |
| | 47 |
| | — |
| | 47 |
| 53 |
| | — |
| | 2 |
| | — |
| | 55 |
| | — |
| | 55 |
|
Total operating revenues | 1,820 |
| | 289 |
| | 113 |
| | (112 | ) | | 2,110 |
| | — |
| | 2,110 |
| 1,884 |
| | 326 |
| | 130 |
| | (128 | ) | | 2,212 |
| | — |
| | 2,212 |
|
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 1,081 |
| | 219 |
| | 104 |
| | (112 | ) | | 1,292 |
| | 23 |
| | 1,315 |
| 1,126 |
| | 267 |
| | 118 |
| | (131 | ) | | 1,380 |
| | 22 |
| | 1,402 |
|
Economic fuel | 328 |
| | 45 |
| | — |
| | — |
| | 373 |
| | (5 | ) | | 368 |
| 438 |
| | 70 |
| | — |
| | — |
| | 508 |
| | 5 |
| | 513 |
|
Total operating expenses | 1,409 |
| | 264 |
| | 104 |
| | (112 | ) | | 1,665 |
| | 18 |
| | 1,683 |
| 1,564 |
| | 337 |
| | 118 |
| | (131 | ) | | 1,888 |
| | 27 |
| | 1,915 |
|
Nonoperating income (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | 12 |
| | — |
| | — |
| | (3 | ) | | 9 |
| | — |
| | 9 |
| 15 |
| | — |
| | — |
| | (4 | ) | | 11 |
| | — |
| | 11 |
|
Interest expense | (25 | ) | | — |
| | (4 | ) | | 3 |
| | (26 | ) | | — |
| | (26 | ) | (20 | ) | | — |
| | (6 | ) | | 4 |
| | (22 | ) | | — |
| | (22 | ) |
Interest capitalized | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| 4 |
| | — |
| | 1 |
| | — |
| | 5 |
| | — |
| | 5 |
|
Other—net | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
| |
Total Nonoperating income (expense) | (6 | ) | | — |
| | (4 | ) | | — |
| | (10 | ) | | — |
| | (10 | ) | |
Other - net | | (5 | ) | | (2 | ) | | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) |
Total nonoperating income (expense) | | (6 | ) | | (2 | ) | | (5 | ) | | — |
| | (13 | ) | | — |
| | (13 | ) |
Income (loss) before income tax | $ | 405 |
| | $ | 25 |
| | $ | 5 |
| | $ | — |
| | $ | 435 |
| | $ | (18 | ) | | $ | 417 |
| $ | 314 |
| | $ | (13 | ) | | $ | 7 |
| | $ | 3 |
| | $ | 311 |
| | $ | (27 | ) | | $ | 284 |
|
| | | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 |
(in millions) | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated | |
| | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Passenger revenues | $ | 4,880 |
| | $ | 845 |
| | $ | — |
| | $ | — |
| | $ | 5,725 |
| | $ | — |
| | $ | 5,725 |
| $ | 5,039 |
| | $ | 999 |
| | $ | — |
| | $ | — |
| | $ | 6,038 |
| | $ | — |
| | $ | 6,038 |
|
CPA revenues | — |
| | — |
| | 375 |
| | (375 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | 340 |
| | (340 | ) | | — |
| | — |
| | — |
|
Mileage Plan other revenue | 301 |
| | 28 |
| | — |
| | — |
| | 329 |
| | — |
| | 329 |
| 312 |
| | 34 |
| | — |
| | — |
| | 346 |
| | — |
| | 346 |
|
Cargo and other | 141 |
| | 1 |
| | 4 |
| | — |
| | 146 |
| | — |
| | 146 |
| 163 |
| | 2 |
| | 1 |
| | 3 |
| | 169 |
| | — |
| | 169 |
|
Total operating revenues | 5,322 |
| | 874 |
| | 379 |
| | (375 | ) | | 6,200 |
| | — |
| | 6,200 |
| 5,514 |
| | 1,035 |
| | 341 |
| | (337 | ) | | 6,553 |
| | — |
| | 6,553 |
|
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 3,392 |
| | 755 |
| | 345 |
| | (378 | ) | | 4,114 |
| | 92 |
| | 4,206 |
| 3,545 |
| | 817 |
| | 286 |
| | (353 | ) | | 4,295 |
| | 39 |
| | 4,334 |
|
Economic fuel | 1,237 |
| | 190 |
| | — |
| | — |
| | 1,427 |
| | (30 | ) | | 1,397 |
| 1,191 |
| | 218 |
| | — |
| | — |
| | 1,409 |
| | (1 | ) | | 1,408 |
|
Total operating expenses | 4,629 |
| | 945 |
| | 345 |
| | (378 | ) | | 5,541 |
| | 62 |
| | 5,603 |
| 4,736 |
| | 1,035 |
| | 286 |
| | (353 | ) | | 5,704 |
| | 38 |
| | 5,742 |
|
Nonoperating income (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | 39 |
| | — |
| | — |
| | (10 | ) | | 29 |
| | — |
| | 29 |
| 50 |
| | — |
| | — |
| | (19 | ) | | 31 |
| | — |
| | 31 |
|
Interest expense | (64 | ) | | — |
| | (16 | ) | | 9 |
| | (71 | ) | | — |
| | (71 | ) | (58 | ) | | — |
| | (22 | ) | | 20 |
| | (60 | ) | | — |
| | (60 | ) |
Interest capitalized | 12 |
| | — |
| | 2 |
| | — |
| | 14 |
| | — |
| | 14 |
| 11 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Other | (9 | ) | | (11 | ) | | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) | |
Total Nonoperating income (expense) | (22 | ) | | (11 | ) | | (14 | ) | | (1 | ) | | (48 | ) | | — |
| | (48 | ) | |
Other - net | | (20 | ) | | — |
| | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) |
Total nonoperating income (expense) | | (17 | ) | | — |
| | (22 | ) | | 1 |
| | (38 | ) | | — |
| | (38 | ) |
Income (loss) before income tax | $ | 671 |
| | $ | (82 | ) | | $ | 20 |
| | $ | 2 |
| | $ | 611 |
| | $ | (62 | ) | | $ | 549 |
| $ | 761 |
| | $ | — |
| | $ | 33 |
| | $ | 17 |
| | $ | 811 |
| | $ | (38 | ) | | $ | 773 |
|
| | | Nine Months Ended September 30, 2017(d) | Nine Months Ended September 30, 2018 |
(in millions) | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated | |
| | Mainline | | Regional | | Horizon | | Consolidating & Other(a) | | Air Group Adjusted(b) | | Special Items(c) | | Consolidated |
Operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | |
Passenger revenues | $ | 4,729 |
| | $ | 776 |
| | $ | — |
| | $ | — |
| | $ | 5,505 |
| | $ | — |
| | $ | 5,505 |
| $ | 4,879 |
| | $ | 845 |
| | $ | — |
| | $ | — |
| | $ | 5,724 |
| | $ | — |
| | $ | 5,724 |
|
CPA revenues | — |
| | — |
| | 317 |
| | (317 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | 375 |
| | (375 | ) | | — |
| | — |
| | — |
|
Mileage Plan other revenue | 291 |
| | 23 |
| | — |
| | — |
| | 314 |
| | — |
| | 314 |
| 301 |
| | 28 |
| | — |
| | — |
| | 329 |
| | — |
| | 329 |
|
Cargo and other | 127 |
| | 3 |
| | 3 |
| | — |
| | 133 |
| | — |
| | 133 |
| 142 |
| | 1 |
| | 4 |
| | — |
| | 147 |
| | — |
| | 147 |
|
Total operating revenues | 5,147 |
| | 802 |
| | 320 |
| | (317 | ) | | 5,952 |
| | — |
| | 5,952 |
| 5,322 |
| | 874 |
| | 379 |
| | (375 | ) | | 6,200 |
| | — |
| | 6,200 |
|
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 3,111 |
| | 625 |
| | 323 |
| | (315 | ) | | 3,744 |
| | 86 |
| | 3,830 |
| 3,392 |
| | 755 |
| | 345 |
| | (378 | ) | | 4,114 |
| | 92 |
| | 4,206 |
|
Economic fuel | 924 |
| | 120 |
| | — |
| | — |
| | 1,044 |
| | 7 |
| | 1,051 |
| 1,237 |
| | 190 |
| | — |
| | — |
| | 1,427 |
| | (30 | ) | | 1,397 |
|
Total operating expenses | 4,035 |
| | 745 |
| | 323 |
| | (315 | ) | | 4,788 |
| | 93 |
| | 4,881 |
| 4,629 |
| | 945 |
| | 345 |
| | (378 | ) | | 5,541 |
| | 62 |
| | 5,603 |
|
Nonoperating income (expense) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | 29 |
| | — |
| | — |
| | (4 | ) | | 25 |
| | — |
| | 25 |
| 39 |
| | — |
| | — |
| | (10 | ) | | 29 |
| | — |
| | 29 |
|
Interest expense | (72 | ) | | — |
| | (9 | ) | | 4 |
| | (77 | ) | | — |
| | (77 | ) | (64 | ) | | — |
| | (16 | ) | | 9 |
| | (71 | ) | | — |
| | (71 | ) |
Interest capitalized | 12 |
| | — |
| | 1 |
| | — |
| | 13 |
| | — |
| | 13 |
| 12 |
| | — |
| | 2 |
| | — |
| | 14 |
| | — |
| | 14 |
|
Other | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
Total Nonoperating income (expense) | (30 | ) | | — |
| | (8 | ) | | — |
| | (38 | ) | | — |
| | (38 | ) | |
Other - net | | (9 | ) | | (11 | ) | | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) |
Total nonoperating income (expense) | | (22 | ) | | (11 | ) | | (14 | ) | | (1 | ) | | (48 | ) | | — |
| | (48 | ) |
Income (loss) before income tax | $ | 1,082 |
| | $ | 57 |
| | $ | (11 | ) | | $ | (2 | ) | | $ | 1,126 |
| | $ | (93 | ) | | $ | 1,033 |
| $ | 671 |
| | $ | (82 | ) | | $ | 20 |
| | $ | 2 |
| | $ | 611 |
| | $ | (62 | ) | | $ | 549 |
|
| |
(a) | Includes consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units. |
| |
(b) | The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not includeexcludes certain income and charges. |
| |
(c) | Includes merger-related costs, mark-to-market fuel-hedge accounting charges,adjustments, and other special items. |
| |
(d) | Certain historical information has been adjusted to reflect the adoption of new accounting standards. |
Total assets were as follows (in millions):
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Mainline | $ | 19,129 |
| | $ | 16,853 |
|
Horizon | 1,231 |
| | 1,229 |
|
Consolidating & Other | (7,377 | ) | | (7,170 | ) |
Consolidated | $ | 12,983 |
| | $ | 10,912 |
|
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Mainline | $ | 14,725 |
| | $ | 16,663 |
|
Horizon | 1,037 |
| | 929 |
|
Consolidating & Other | (4,869 | ) | | (6,846 | ) |
Consolidated | $ | 10,893 |
| | $ | 10,746 |
|
|
|
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) 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, 20172018. This overview summarizes the MD&A, which includes the following sections:
Third Quarter Review—highlights from the third quarter of 2018 outlining some of the major events that happened during the period and how they affected our financial performance.
| |
• | Third Quarter Review—highlights from the third quarter of 2019 outlining some of the major events that happened during the period and how they affected our financial performance. |
| |
• | Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2019. 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. This section includes forward-looking statements regarding our view of the remainder of 2019. |
| |
• | Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments. |
Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three and nine months ended September 30, 2018. 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. This section includes forward-looking statements regarding our view of the remainder of 2018.
Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRD QUARTER REVIEW
Our consolidated pretax income was $284$416 million during the third quarter of 2018,2019, compared to $417$284 million in the third quarter of 2017.2018. The decreaseincrease in pretax income of $133 millionprofit was driven largelyprimarily by an increase in operating revenues of $177 million and a decrease in fuel expense of $145$27 million, andoffset by an increase in non-fuel operating expenses of $87 million, partially offset by an increase in operating revenues of $102$79 million.
See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.
Operations Performance
During the third quarter of 2018, our on-time performance was 80.9% for our Mainline operations and 81.2% for our Regional operations. These on-time results are in-line with our historical high standard of running an excellent operation.
New Markets
We launched two new routes and announced three new routes during the third quarter of 2018. Approximately 88% of our growth in 2018 is from additional flight frequency within our core markets and annualization of new markets announced in 2017. The remaining growth is attributable to adding moreroutes connecting guests along the West Coast to high demand markets in the lower 48 states and Hawaii.
Shareholder Return
During the third quarter of 20182019, we paid cash dividends of $39$43 million and repurchased 193,203465,354 shares for $12$28 million.
Recent Events
On August 10, 2018, one of our Q400 aircraft was taken without authorization by an employee from Sea-Tac International Airport. The aircraft crashed in a remote area south of the airport, resulting in the loss of life of the individual flying the aircraft. There were no other fatalities, and no ground structures were involved at the crash site. The loss of the aircraft is a fully insured event with no deductibles. Air Group's aviation insurance program is secured with a number of highly rated insurers on quota share programs. Presenting a claim to all insurers on the programs commenced only after the aircraft wreckage was released from governmental authorities in late September 2018. Air Group expects to finalize the claim process after the FBI ends its current investigation.
Labor Update
In June 2019, we reached a tentative agreement with the Aircraft Mechanics Fraternal Association (AMFA) to integrate Airbus technicians into the collective bargaining agreement with Boeing technicians, as well as extend the term by two years. This tentative agreement was subsequently ratified by our technicians in July 2018, Alaska dispatchers, represented by2019. Also in June 2019, we reached a tentative agreement with the Transport Workers Union (TWU),International Association of Machinists (IAM) for new five-year contracts for clerical, office, passenger service, ramp service and stores agents employees, which was subsequently ratified a merger transition agreement. Inin September 2019. Both the IAM and AMFA agreements included signing bonuses and wage rate increases that were implemented in the third quarter. The annual impact of these contracts thereafter is expected to be approximately $50 million. During the third quarter, we also finalizedrecognized $24 million in one-time costs for both the integrated seniority list for the Alaska pilot group. As a result, all Mainline groups except for aircraft technicians are now under a single contractAMFA and have an integrated seniority list.IAM agreements.
Outlook
Income Taxes
In 2018 and beyond,September 2019, the Internal Revenue Service clarified certain tax laws relating to bonus depreciation. The result of this clarification was a $10 million one-time decrease to our income tax expense in the third quarter.
Outlook
With the integration largely behind us, we are focused on successfully completingimproving our returns with the integrationlong-term goal of Virgin America.achieving 13% to 15% pretax margins over the business cycle. Current year revenue initiatives, including our Saver Fare product, are providing meaningful revenue growth. We continue to benefit from the full synergies expected as a result of the merger, with the full run rate expected by 2021. Through cross-fleeting we have completedmoved larger gauge, lower unit cost aircraft into markets with high demand, which we anticipate will continue to benefit our results into 2020. This flexibility with our fleet allows us to evaluate all existing and potential new routes, including aircraft type, so that we can maximize our margins and provide the best network utility for our guests.
As we move through 2019, we continue to work on a number of significant integration milestones to date and continue to make progress on our integration. In January 2018, Alaska and Virgin America received a Single Operating Certificate (SOC) from the FAA, which recognizes Alaska and Virgin America as one airline. In April,notable guest experience projects. By year-end, we transitioned to a single Passenger Service System (PSS), which allows us to provide one reservation system, one website and one inventory of flights to our guests. Our transition to a single PSS allows us to unlock many of the revenue synergies expected from the acquisition, as well as provide consistent branding to our guests at all airports gates, ticketing, and check-in areas.
Additionally, in June, we received FAA approval for our Airbus emergency procedures. This allowed us to move forward with transition training for flight attendants so they can work on both Boeing and Airbus aircraft, which will begin to occur in early 2019. We also integrated to a single weight and balance system in June. This allowed us to take cargo on Airbus aircraft, which provides an important revenue synergy beginning in the third quarter of 2018 and beyond.
With the completionexpect that more than half of our most recent milestones, our integration is now approximately 90 percent complete. One major milestone remaining to complete isMainline fleet will be equipped with high-speed satellite Wi-Fi, and that more than half of our Airbus fleet reconfiguration. Between nowwill be retrofitted with updated cabin interiors. These important projects will provide our guests with a more cohesive and connected Alaska experience. In July, we opened our new flagship lounge in the endNorth Satellite of 2019, we will complete painting all of our Airbus aircraftSea-Tac Airport, and are working closely with the Alaska livery and will continue reconfiguring Airbus aircraft to align with the Boeing aircraft to achieve one consistent cabin experience for our guests. We will also be integrating our crew management systems in early 2019.
We continue to make investments to enhance our onboard guest experience. We began our fleet-wide installationPort of high-speed satellite Wi-Fi, we completed the updates and expansion of our airport lounges in the JFK and Seattle airports, and we continue to make headway in our investment in our Seattle hub airport to open a state-of-the-art 20-gate North Terminal facility. Throughout 2018Satellite Concourse by Summer 2021. During the third quarter, we have also introducedbegan work on our new food and beverage menus, which include more fresh, local, and healthy offerings with a distinct West Coast vibe including salads, protein plates, and fresh snacks. All Boeing and Airbus flights introduced new beverage offerings, including craft beers, new juices and, coming later this fall, an updated wine selection.
In April, we entered into an agreement to lease 12 airport slotslounge at LaGuardiaSan Francisco International Airport, (LGA) and eight airport slots at Regan National Airport (DCA) to another carrier. The lease began in October 2018 and continues through 2028. This agreement enables us to monetize these valuable slots, and reallocate flying from Dallas Love Field (DAL) to more strategic and profitable opportunities on the West Coast. We maintain the right to resume flying using these slots, should we choose to do so, in 2028 when the agreement expires, or if perimeter restrictions change.
We have also announced new revenue initiatives that are incremental to merger synergies. This fall, we will introduce a new option for our guests called the "Saver Fare," a low-priced product which we believe will result in incremental annual revenue of approximately $100 million. In addition, we have implemented a series of other revenue initiatives, such as offering exit rows for sale, introducing demand-based pricing for our premium class seats, leveraging new technology to better manage revenue post-sale, and eliminating fee waivers for changes made outside of 60 days. Furthermore, we recently announced an
increase in our checked bag fees which is expected to add approximately $50 millionopen in early 2020. These projects, along with our ongoing rotation of incremental revenue. We believe these changes provideon-board menu offerings, refreshed aircraft interiors, and expanded and updated airport lounges, demonstrates our commitment to providing our guests with more options and reflect the significant increasevalue. Combined, we expect our revenue initiatives and synergies will contribute $330 million of revenue in the value of our expanded network and product, as well as unlocking the substantial synergies from the merger.2019.
Currently, weWe expect to grow our combined network capacity by approximately 5%2.1% in 20182019, and approximately 2%3% - 4% in 2019.2020. Current schedules indicate competitive capacity will increase by approximately 4%2% in the fourth quarter of 2018,2019, and increase approximately 6%4% in the first quarter of 2019.2020. We believe that our product, our operation, our engaged employees, our award-winning service, and our competitive Mileage Plan™ program, combined with our strong balance sheet and focus on low costs, give us a competitive advantage in our markets.
Our current expectationsOther events
On November 6, 2019, the Board of Directors of Horizon Air elected Joseph A. Sprague to serve as President of Horizon Air, effective immediately. Mr. Sprague previously retired from Alaska Airlines after serving at the company for capacity17 years in a variety of key leadership positions, including senior vice president of external relations, vice president of marketing and CASM excluding fuelvice president of Alaska Air Cargo. Mr. Sprague will succeed Gary L. Beck who has been elected by the Board of Directors of Alaska Airlines to serve as Executive Vice President and special items forChief Operating Officer of Alaska, effective immediately. Prior to his time at Horizon Air, Mr. Beck was vice president of Alaska’s flight operations division from 2008 to 2015. Mr. Beck will report to Ben Minicucci, who will continue to serve as Alaska’s President. Both Mr. Sprague and Mr. Beck will serve on the fourth quarter and full year 2018 are summarized below:Company’s Executive Committee.
|
| | | | | |
| Forecast
Q4 2018 | | Q4 2017 | | % Change |
Capacity (ASMs in millions) | 16,120 - 16,170 | | 15,901 | | ~ 1.4% |
Cost per ASM excluding fuel and special items (cents)(a)
| 8.97¢ - 9.01¢ | | 8.68¢ | | ~ 3.6% |
|
| | | | | |
| Forecast
Full Year 2018 | | Full Year 2017 | | % Change |
Capacity (ASMs in millions) | 65,375 - 65,425 | | 62,072 | | ~ 5.3% |
Cost per ASM excluding fuel and special items (cents)(a)
| 8.50¢ - 8.52¢ | | 8.25¢ | | ~ 3.2% |
| |
(a) | 2017 CASMex reflects the impacts of the updated accounting standards, effective for the Company January 1, 2018. |
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 individual special revenues or expenses is useful information to investors because:
By excluding fuel expense and certain special items (including merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost 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) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.
Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee annual cash incentive plan, which covers the majority of employees within the Air Group organization.
CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.
Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs, and mark-to-market hedging adjustments, 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 unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.
OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change | 2019 | | 2018 | | Change | | 2019 | | 2018 | | Change |
Consolidated Operating Statistics:(a) | | |
Revenue passengers (000) | 12,128 | | 11,639 | | 4.2% | | 34,685 | | 33,038 | | 5.0% | 12,574 | | 12,128 | | 3.7% | | 35,018 | | 34,685 | | 1.0% |
RPMs (000,000) "traffic" | 14,386 | | 13,811 | | 4.2% | | 41,272 | | 39,072 | | 5.6% | 15,026 | | 14,386 | | 4.4% | | 42,113 | | 41,272 | | 2.0% |
ASMs (000,000) "capacity" | 16,943 | | 16,164 | | 4.8% | | 49,256 | | 46,169 | | 6.7% | 17,519 | | 16,943 | | 3.4% | | 50,006 | | 49,256 | | 1.5% |
Load factor | 84.9% | | 85.4% | | (0.5) pts | | 83.8% | | 84.6% | | (0.8) pts | 85.8% | | 84.9% | | 0.9 pts | | 84.2% | | 83.8% | | 0.4 pts |
Yield(d) | 14.20¢ | | 14.18¢ | | 0.1% | | 13.87¢ | | 14.10¢ | | (1.6)% | |
RASM(d) | 13.05¢ | | 13.06¢ | | (0.1)% | | 12.59¢ | | 12.89¢ | | (2.3)% | |
CASM excluding fuel and special items(b)(d) | 8.15¢ | | 8.00¢ | | 1.9% | | 8.35¢ | | 8.11¢ | | 3.0% | |
Yield | | 14.71¢ | | 14.20¢ | | 3.6% | | 14.34¢ | | 13.87¢ | | 3.4% |
RASM | | 13.64¢ | | 13.05¢ | | 4.5% | | 13.10¢ | | 12.59¢ | | 4.1% |
CASM excluding fuel and special items(b) | | 8.43¢ | | 8.15¢ | | 3.4% | | 8.59¢ | | 8.35¢ | | 2.9% |
Economic fuel cost per gallon(b) | $2.33 | | $1.80 | | 29.4% | | $2.26 | | $1.76 | | 28.4% | $2.13 | | $2.33 | | (8.6)% | | $2.18 | | $2.26 | | (3.5)% |
Fuel gallons (000,000) | 218 | | 207 | | 5.3% | | 631 | | 592 | | 6.6% | 227 | | 218 | | 4.1% | | 646 | | 631 | | 2.4% |
ASMs per fuel gallon | 77.7 | | 78.1 | | (0.5)% | | 78.1 | | 78.0 | | 0.1% | 77.2 | | 77.7 | | (0.6)% | | 77.4 | | 78.1 | | (0.9)% |
Average full-time equivalent employees (FTEs) | 21,804 | | 20,743 | | 5.1% | | 21,575 | | 19,723 | | 9.4% | 22,247 | | 21,804 | | 2.0% | | 22,000 | | 21,575 | | 2.0% |
Mainline Operating Statistics: | | |
Revenue passengers (000) | 9,435 | | 9,136 | | 3.3% | | 27,107 | | 25,850 | | 4.9% | 9,655 | | 9,435 | | 2.3% | | 26,725 | | 27,107 | | (1.4)% |
RPMs (000,000) "traffic" | 13,096 | | 12,694 | | 3.2% | | 37,677 | | 36,045 | | 4.5% | 13,538 | | 13,096 | | 3.4% | | 37,917 | | 37,677 | | 0.6% |
ASMs (000,000) "capacity" | 15,343 | | 14,796 | | 3.7% | | 44,730 | | 42,397 | | 5.5% | 15,702 | | 15,343 | | 2.3% | | 44,816 | | 44,730 | | 0.2% |
Load factor | 85.4% | | 85.8% | | (0.4) pts | | 84.2% | | 85.0% | | (0.8) pts | 86.2% | | 85.4% | | 0.8 pts | | 84.6% | | 84.2% | | 0.4 pts |
Yield(d) | 13.18¢ | | 13.23¢ | | (0.4)% | | 12.95¢ | | 13.13¢ | | (1.4)% | |
RASM(d) | 12.28¢ | | 12.35¢ | | (0.6)% | | 11.90¢ | | 12.19¢ | | (2.4)% | |
CASM excluding fuel and special items(b)(d) | 7.34¢ | | 7.30¢ | | 0.5% | | 7.58¢ | | 7.34¢ | | 3.3% | |
Yield | | 13.66¢ | | 13.18¢ | | 3.6% | | 13.29¢ | | 12.95¢ | | 2.6% |
RASM | | 12.83¢ | | 12.28¢ | | 4.5% | | 12.30¢ | | 11.90¢ | | 3.4% |
CASM excluding fuel and special items(b) | | 7.81¢ | | 7.34¢ | | 6.4% | | 7.91¢ | | 7.58¢ | | 4.4% |
Economic fuel cost per gallon(b) | $2.32 | | $1.79 | | 29.6% | | $2.25 | | $1.76 | | 27.8% | $2.13 | | $2.32 | | (8.2)% | | $2.17 | | $2.25 | | (3.6)% |
Fuel gallons (000,000) | 189 | | 183 | | 3.3% | | 549 | | 526 | | 4.4% | 193 | | 189 | | 2.1% | | 549 | | 549 | | —% |
ASMs per fuel gallon | 81.2 | | 80.9 | | 0.4% | | 81.5 | | 80.6 | | 1.1% | 81.4 | | 81.2 | | 0.2% | | 81.6 | | 81.5 | | 0.1% |
Average FTEs | 16,499 | | 15,862 | | 4.0% | | 16,330 | | 15,439 | | 5.8% | 16,789 | | 16,499 | | 1.8% | | 16,599 | | 16,330 | | 1.6% |
Aircraft utilization | 11.4 | | 11.4 | | —% | | 11.4 | | 11.1 | | 2.7% | 11.3 | | 11.4 | | (0.9)% | | 10.9 | | 11.4 | | (4.4)% |
Average aircraft stage length | 1,291 | | 1,300 | | (0.7)% | | 1,293 | | 1,296 | | (0.2)% | 1,281 | | 1,291 | | (0.8)% | | 1,298 | | 1,293 | | 0.4% |
Operating fleet | 231 | | 218 | | 13 a/c | | 231 | | 218 | | 13 a/c | 238 | | 231 | | 7 a/c | | 238 | | 231 | | 7 a/c |
Regional Operating Statistics:(c) | | |
Revenue passengers (000) | 2,693 | | 2,503 | | 7.6% | | 7,578 | | 7,188 | | 5.4% | 2,919 | | 2,693 | | 8.4% | | 8,293 | | 7,578 | | 9.4% |
RPMs (000,000) "traffic" | 1,290 | | 1,117 | | 15.5% | | 3,595 | | 3,027 | | 18.8% | 1,488 | | 1,290 | | 15.3% | | 4,196 | | 3,595 | | 16.7% |
ASMs (000,000) "capacity" | 1,600 | | 1,368 | | 17.0% | | 4,526 | | 3,772 | | 20.0% | 1,817 | | 1,600 | | 13.6% | | 5,190 | | 4,526 | | 14.7% |
Load factor | 80.6% | | 81.7% | | (1.1 pts) | | 79.4% | | 80.2% | | (0.8 pts) | 81.9% | | 80.6% | | 1.3 pts | | 80.8% | | 79.4% | | 1.4 pts |
Yield(d) | 24.50¢ | | 25.15¢ | | (2.6)% | | 23.49¢ | | 25.65¢ | | (8.4)% | 24.23¢ | | 24.50¢ | | (1.1)% | | 23.81¢ | | 23.49¢ | | 1.4% |
RASM(d) | 20.41¢ | | 20.61¢ | | (1.0)% | | 19.32¢ | | 20.67¢ | | (6.5)% | 20.51¢ | | 20.41¢ | | 0.5% | | 19.93¢ | | 19.32¢ | | 3.2% |
Operating fleet | 89 | | 83 | | 6 a/c | | 89 | | 83 | | 6 a/c | 94 | | 89 | | 5 a/c | | 94 | | 89 | | 5 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) | Certain historical information has been adjusted to reflect the adoption of new accounting standards. |
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 20182019 TO THREE MONTHS ENDED SEPTEMBER 30, 20172018
Our consolidated net income for the three months ended September 30, 20182019 was $217$322 million, or $1.75$2.60 per diluted share, compared to net income of $259$217 million, or $2.09$1.75 per diluted share, for the three months ended September 30, 2017.2018.
Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of 20182019 was $237$326 million, or $1.91$2.63 per diluted share, compared to an adjusted net income of $270$237 million, or $2.18$1.91 per diluted share, in the third quarter of 2017. Historical information has been adjusted to reflect the adoption of new accounting standards effective for the Company January 1, 2018. The following tables reconcile our adjusted net income and adjusted earnings per diluted share (EPS) to amounts as reported in accordance with GAAP:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
GAAP net income and diluted EPS | $ | 217 |
| | $ | 1.75 |
| | $ | 259 |
| | $ | 2.09 |
| $ | 322 |
| | $ | 2.60 |
| | $ | 217 |
| | $ | 1.75 |
|
Mark-to-market fuel hedge adjustments | 5 |
| | 0.04 |
| | (5 | ) | | (0.04 | ) | — |
| | — |
| | 5 |
| | 0.04 |
|
Special items—merger-related costs | 22 |
| | 0.18 |
| | 23 |
| | 0.19 |
| |
Special items - merger-related costs | | 5 |
| | 0.04 |
| | 22 |
| | 0.18 |
|
Income tax effect of reconciling items above | (7 | ) | | (0.06 | ) | | (7 | ) | | (0.06 | ) | (1 | ) | | (0.01 | ) | | (7 | ) | | (0.06 | ) |
Non-GAAP adjusted net income and diluted EPS | $ | 237 |
| | $ | 1.91 |
| | $ | 270 |
| | $ | 2.18 |
| $ | 326 |
| | $ | 2.63 |
| | $ | 237 |
| | $ | 1.91 |
|
CASM reconciliation is summarized below:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
(in cents) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Consolidated: | | | | | | | | | | |
CASM |
| 11.30 | ¢ | |
| 10.41 | ¢ | | 9 | % |
| 11.23 | ¢ | |
| 11.30 | ¢ | | (1 | )% |
Less the following components: | | | |
| | | | | |
| | |
Aircraft fuel, including hedging gains and losses | 3.02 |
| | 2.27 |
| | 33 | % | 2.77 |
| | 3.02 |
| | (8 | )% |
Special items—merger-related costs and other | 0.13 |
| | 0.14 |
| | (7 | )% | |
Special items - merger-related costs | | 0.03 |
| | 0.13 |
| | (77 | )% |
CASM excluding fuel and special items |
| 8.15 | ¢ | |
| 8.00 | ¢ | | 2 | % |
| 8.43 | ¢ | |
| 8.15 | ¢ | | 3 | % |
| | | | | | | | | | |
Mainline: | | | | | | | | | | |
CASM |
| 10.37 | ¢ | |
| 9.64 | ¢ | | 8 | % |
| 10.46 | ¢ | |
| 10.37 | ¢ | | 1 | % |
Less the following components: | | | |
| | | | | |
| | |
Aircraft fuel, including hedging gains and losses | 2.89 |
| | 2.18 |
| | 33 | % | 2.62 |
| | 2.89 |
| | (9 | )% |
Special items—merger-related costs and other | 0.14 |
| | 0.16 |
| | (13 | )% | |
Special items - merger-related costs | | 0.03 |
| | 0.14 |
| | (79 | )% |
CASM excluding fuel and special items |
| 7.34 | ¢ | |
| 7.30 | ¢ | | 1 | % |
| 7.81 | ¢ | |
| 7.34 | ¢ | | 6 | % |
OPERATING REVENUES
Total operating revenues increased $102 $177 million, or 5%8%, during the third quarter of 20182019 compared to the same period in 2017.2018. The changes are summarized in the following table:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Passenger revenue | $ | 2,043 |
| | $ | 1,958 |
| | 4 | % | $ | 2,211 |
| | $ | 2,043 |
| | 8 | % |
Mileage Plan other revenue | 114 |
| | 105 |
| | 9 | % | 118 |
| | 114 |
| | 4 | % |
Cargo and other | 55 |
| | 47 |
| | 17 | % | 60 |
| | 55 |
| | 9 | % |
Total operating revenues | $ | 2,212 |
| | $ | 2,110 |
| | 5 | % | $ | 2,389 |
| | $ | 2,212 |
| | 8 | % |
Passenger Revenue
On a consolidated basis, Passenger revenue for the third quarter of 20182019 increased by $85$168 million, or 4%8%, on a 5%3.6% increase in capacity, partially offset byyield and a 0.5 pt decrease3.4% increase in load factor.traffic. The increase in capacityyield is primarily a result of current year revenue initiatives, implemented as a broader plan to drive revenue growth, realized synergies from our acquisition of Virgin America, and a 16% increase in premium seat revenue, including First and Premium class product offerings. Increased traffic was driven by our continued network expansionnew routes and aircraft added to our fleet since the third quarter of 2017. As discussed above, we are working on a number of revenue initiatives to help improve our revenue performance.2018.
OPERATING EXPENSES
Total operating expenses increased $232$52 million, or 14%3%, compared to the third quarter of 2017.2018. 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, | Three Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Fuel expense | $ | 513 |
| | $ | 368 |
| | 39 | % | $ | 486 |
| | $ | 513 |
| | (5 | )% |
Non-fuel operating expenses, excluding special items | 1,380 |
| | 1,292 |
| | 7 | % | 1,476 |
| | 1,380 |
| | 7 | % |
Special items—merger-related costs | 22 |
| | 23 |
| | (4 | )% | |
Special items - merger-related costs | | 5 |
| | 22 |
| | (77 | )% |
Total operating expenses | $ | 1,915 |
| | $ | 1,683 |
| | 14 | % | $ | 1,967 |
| | $ | 1,915 |
| | 3 | % |
Fuel Expense
Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio 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 $145decreased $27 million, or 39%5%, compared to the third quarter of 2017.2018. The elements of the change are illustrated in the following table:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 520 |
| | $ | 2.38 |
| | $ | 368 |
| | $ | 1.78 |
| $ | 481 |
| | $ | 2.11 |
| | $ | 520 |
| | $ | 2.38 |
|
(Gains) losses on settled hedges | (12 | ) | | (0.05 | ) | | 5 |
| | 0.02 |
| 5 |
| | 0.02 |
| | (12 | ) | | (0.05 | ) |
Consolidated economic fuel expense | 508 |
| | 2.33 |
| | $ | 373 |
| | $ | 1.80 |
| 486 |
| | 2.13 |
| | $ | 508 |
| | $ | 2.33 |
|
Mark-to-market fuel hedge adjustments | 5 |
| | 0.02 |
| | (5 | ) | | (0.02 | ) | — |
| | — |
| | 5 |
| | 0.02 |
|
GAAP fuel expense | $ | 513 |
| | $ | 2.35 |
| | $ | 368 |
| | $ | 1.78 |
| $ | 486 |
| | $ | 2.13 |
| | $ | 513 |
| | $ | 2.35 |
|
Fuel gallons | 218 |
| | | | 207 |
| | | 227 |
| | | | 218 |
| | |
Raw fuel expense per gallon for the three months ended September 30, 2018 increased2019 decreased by approximately 34%11% due to higherlower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. The increasedecrease in raw fuel price per gallon during the third quarter of 20182019 was primarily driven by a 43% increase19% decrease in crude oil prices, andpartially offset by a 6%4% increase in refining margins, when compared to the prior year. Fuel gallons consumed increased by 119 million gallons, or 5%4%, in line with the increase inprimarily due to increased 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 economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as 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.
GainsLosses recognized for hedges that settled during the third quarter were $12$5 million in 2018,2019, compared to lossesgains of $5$12 million in the same period in 2017.2018. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.
Non-fuel Expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel and special items. Significant operating expense variances from 20172018 are more fully described below. | | | Three Months Ended September 30, | Three Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Wages and benefits | $ | 549 |
| | $ | 477 |
| | 15 | % | $ | 608 |
| | $ | 549 |
| | 11 | % |
Variable incentive pay | 27 |
| | 40 |
| | (33 | )% | 46 |
| | 27 |
| | 70 | % |
Aircraft maintenance | 107 |
| | 88 |
| | 22 | % | 106 |
| | 107 |
| | (1 | )% |
Aircraft rent | 82 |
| | 70 |
| | 17 | % | 82 |
| | 82 |
| | — | % |
Landing fees and other rentals | 135 |
| | 124 |
| | 9 | % | 143 |
| | 135 |
| | 6 | % |
Contracted services | 70 |
| | 76 |
| | (8 | )% | 72 |
| | 70 |
| | 3 | % |
Selling expenses | 79 |
| | 92 |
| | (14 | )% | 77 |
| | 79 |
| | (3 | )% |
Depreciation and amortization | 99 |
| | 95 |
| | 4 | % | 106 |
| | 99 |
| | 7 | % |
Food and beverage service | 53 |
| | 50 |
| | 6 | % | 57 |
| | 53 |
| | 8 | % |
Third-party regional carrier expense | 38 |
| | 30 |
| | 27 | % | 42 |
| | 38 |
| | 11 | % |
Other | 141 |
| | 150 |
| | (6 | )% | 137 |
| | 141 |
| | (3 | )% |
Total non-fuel operating expenses, excluding special items | $ | 1,380 |
| | $ | 1,292 |
| | 7 | % | $ | 1,476 |
| | $ | 1,380 |
| | 7 | % |
Wages and Benefits
Wages and benefits increased during the third quarter of 20182019 by $72$59 million, or 15%.11%, compared to 2018. The primary components of Wages and benefits are shown in the following table:
| | | Three Months Ended September 30, | Three Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Wages | $ | 412 |
| | $ | 359 |
| | 15 | % | $ | 460 |
| | $ | 412 |
| | 12 | % |
Pension—Defined benefit plans service cost | 12 |
| | 10 |
| | 20 | % | 10 |
| | 12 |
| | (17 | )% |
Defined contribution plans | 30 |
| | 25 |
| | 20 | % | 34 |
| | 30 |
| | 13 | % |
Medical and other benefits | 65 |
| | 58 |
| | 12 | % | 71 |
| | 65 |
| | 9 | % |
Payroll taxes | 30 |
| | 25 |
| | 20 | % | 33 |
| | 30 |
| | 10 | % |
Total wages and benefits | $ | 549 |
| | $ | 477 |
| | 15 | % | $ | 608 |
| | $ | 549 |
| | 11 | % |
Wages increased 15%$48 million, or 12%, on a 5% increase2% growth in FTEs. The increase in FTEs is primarily attributabledue to the growthrecognition of approximately $24 million during the quarter in McGee Air Services, which has assumed certain airport group service functions that were previously provided by third-party vendorsone-time costs following the ratification of the AMFA and reflected in Contracted Services expense. To a lesser extent, we have experienced FTE growth in other areasIAM contracts, as well as the business has grown. Additionally, the increase in wages is driven byimpact of increased wage rates in many work groups, including on average a 24% increase for our Mainline pilotslabor groups as compared to the prior year period.
Medical and a 10%other benefits expense increased $6 million, or 9%, primarily due to increased volume of high-dollar value medical claims as compared to the prior-year period, and an overall cost increase for our Mainline flight attendants, whose new contract rates became effective in the fourth quarter of 2017medical services and first quarter of 2018, respectively.products.
Variable Incentive Pay
Variable incentive pay expense decreased by $13increased $19 million, or 33%70%, during the third quarter of 20182019 compared to the same period in 2017. This decrease was2018. The increase is primarily due tothe result of adjustments taken in the third quarter of 2018 to revise ourthe estimate of full year performance-based pay based on our tracking in relation to the current year's2018 goals.
Aircraft MaintenanceLanding fees and other rentals
Aircraft maintenanceLanding fees and other rental expense increased by $19$8 million, or 22%6%, during the third quarter of 20182019 compared to the same period in 2017. Maintenance costs increased2018. The increase is primarily due to a power-by-the-hour engine maintenance arrangement on our B737-800 aircraft which was entered into, and became effective,an increase in the fourth quartercapacity of 2017. Although the agreement results in increased expense earlier in the engine life cycle of B737-800 aircraft, it allows for much more predictable expense patterns over the fleet life. The remaining increase was due to a higher volume of scheduled airframe maintenance events3.4% as compared to the prior period.year period, as well as rate increases at many of our West Coast airports, including our hub airports.
Aircraft RentDepreciation and Amortization
Aircraft rent expenseDepreciation and amortization increased by $12$7 million, or 17%7%, during the third quarter of 20182019 compared to the same period in 2017,2018, primarily due to the addition of 14 owned E175s and six A321neosowned B737-900ERs to our Mainline fleet and 11 E175s to our regional fleet since September 30, 2017, partially offset by the return of two Q400 aircraft.
Landing Fees and Other Rentals
Landing fees and other rental expenses increased by $11 million, or 9%, during the third quarter of 2018 compared to the same period2018.
Special Items - Merger-related Costs
We recorded special items of $5 million in 2017. This increase was primarily driven by our 5% increase in capacity and rate increases at many of our hub airports.
Selling Expenses
Selling expenses decreased $13 million, or 14%, during the third quarter of 20182019 for merger-related costs associated with our acquisition of Virgin America, compared to $22 million in the same period of 2018. Costs incurred in 2017. This decrease wasthe third quarter of 2019 are primarily due to lower credit card commissions and decreased promotional and advertising activities, notably those related to Virgin America.a result of certain technology integration costs.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of the consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline recorded pretax profit of $378 million in the third quarter of 2019, compared to $314 million in the third quarter of 2018, compared to $4052018. The $64 million in the third quarter of 2017. The $91 million decreaseincrease in pretax profit was primarily driven by a $110$123 million increase in Passenger revenues and a $27 million decrease in economic fuel cost, andpartially offset by a $45$100 million increase in non-fuel operating expenses, partially offset by a $50 million increase in passenger revenues and a $7 million increase in Mileage Plan™ other revenue.expenses.
The increase in Mainline passenger revenue for the third quarter of 20182019 was primarily driven by capacity growth,the impact of our revenue initiatives and synergies, as well as continued improvement in our trans-con markets as compared to the prior year.
Lower raw fuel prices, partially offset by lower average fares.
Higher raw fuel prices and ana slight increase in gallons consumed, to support additional flying drove the increasedecrease in Mainline fuel expense. Non-fuel operating expenses increased due to higher wages to support our growth,and benefits as a result of new wage rates and signing bonuses following the ratification of the AMFA and IAM contracts, increased variable pay expense as described further above, and higher operating expensesaircraft ownership costs as described above.we continue to add to our Mainline fleet.
Regional
Our Regional operations incurredgenerated a pretax profit of $23 million in the third quarter of 2019, compared to a pretax loss of $13 million in the third quarter of 2018, compared2018. The shift to a pretax profit of $25 million in the third quarter of 2017. The pretax loss was attributable to a $25$47 million increase in operating revenues, partially offset by a $5 million increase in fuel costs and a $48an $8 million increase in non-fuel operating expenses, partially offset by a $37 million increase in operating revenues.expenses.
Regional passenger revenue increased 12%14% compared to the third quarter of 2017,2018, primarily driven by a 17%14% increase in capacity, partially offset by 3% lower ticket yields and a decrease in load factor of 1.1 pts.capacity. The increase in capacity is due to an increase in departures from new E175 deliveries, and an increase in average aircraft stage length, and the annualization of new routes introduced over the past 12 months. Lower yields are a result of competitive pricing pressure we are experiencing, specifically on the West Coast.length.
The increase in non-fuel operating expenses is primarily due to higher ownership costs associated with 11 E175 aircraft operated by SkyWest that were added to the regional fleet over the past twelve months, as well as higher CPA rates on a 17%14% increase in capacity.
Horizon
Horizon achieved a pretax profit of $11 million in the third quarter of 2019, compared to a pretax profit of $7 million in the third quarter of 2018, compared2018. Increased profit is primarily due to a pretax profit of $5 million in the third quarter of 2017. The change was primarily driven by a $17 million increasereduction in operating revenue, attributable tocosts on higher productivity, combined with increased flying over the additional 6 E175 aircraft added to Horizon's fleet since the third quarter of 2017 and better operating performance in 2018.prior year.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2019 TO NINE MONTHS ENDED SEPTEMBER 30, 2018 TO NINE MONTHS ENDED SEPTEMBER 30, 2017
Our consolidated net income for the nine months ended September 30, 20182019 was $414$588 million, or $3.34$4.74 per diluted share, compared to net income of $645$414 million, or $5.19$3.34 per diluted share, for the nine months ended September 30, 2017.2018.
Excluding the impact of merger-related costs, mark-to-market fuel hedge adjustments, and a special employee tax reform bonus in connection with the passing of the Tax Cuts and Jobs Act (TCJA), ourOur adjusted net income for the nine months ended September 30, 20182019 was $461$617 million, or $3.72$4.97 per diluted share, compared to an adjusted net income of $703$461 million, or $5.66$3.72 per diluted share, in the nine months ended September 30, 2017. Historical information has been adjusted to reflect the adoption of new accounting standards effective for the Company as of January 1, 2018. The following tables reconcile our adjusted net income and adjusted earnings per diluted share (EPS)EPS to amounts as reported in accordance with GAAP:
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
Reported GAAP net income and diluted EPS | $ | 414 |
| | $ | 3.34 |
| | $ | 645 |
| | $ | 5.19 |
| $ | 588 |
| | $ | 4.74 |
| | $ | 414 |
| | $ | 3.34 |
|
Mark-to-market fuel hedge adjustments | (30 | ) | | (0.24 | ) | | 7 |
| | 0.06 |
| (1 | ) | | (0.01 | ) | | (30 | ) | | (0.24 | ) |
Special items—employee tax reform bonus | 25 |
| | 0.20 |
| | — |
| | — |
| |
Special items—merger-related costs | 67 |
| | 0.54 |
| | 86 |
| | 0.69 |
| |
Income tax effect on special items and fuel hedge adjustments | (15 | ) | | (0.12 | ) | | (35 | ) | | (0.28 | ) | |
Special items - merger-related costs | | 39 |
| | 0.31 |
| | 67 |
| | 0.54 |
|
Special items - other(a) | | — |
| | — |
| | 25 |
| | 0.20 |
|
Income tax effect of reconciling items above | | (9 | ) | | (0.07 | ) | | (15 | ) | | (0.12 | ) |
Non-GAAP adjusted net income and diluted EPS | $ | 461 |
| | $ | 3.72 |
| | $ | 703 |
| | $ | 5.66 |
| $ | 617 |
| | $ | 4.97 |
| | $ | 461 |
| | $ | 3.72 |
|
Our operating costs per ASM are summarized below:
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
(in cents) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Consolidated: | | | | | | | | | | |
CASM |
| 11.38 | ¢ | |
| 10.57 | ¢ | | 8 | % |
| 11.48 | ¢ | |
| 11.38 | ¢ | | 1 | % |
Less the following components: | | | | | | | | | | |
Aircraft fuel, including hedging gains and losses | 2.84 |
| | 2.27 |
| | 25 | % | 2.82 |
| | 2.84 |
| | (1 | )% |
Special items—merger-related costs | 0.19 |
| | 0.19 |
| | — | % | |
Special items - merger-related costs | | 0.07 |
| | 0.14 |
| | (49 | )% |
Special items - other(a) | | — |
| | 0.05 |
| | (100 | )% |
CASM excluding fuel and special items |
| 8.35 | ¢ | |
| 8.11 | ¢ | | 3 | % |
| 8.59 | ¢ | |
| 8.35 | ¢ | | 3 | % |
| | | | | | | | | | |
Mainline: | | | | | | | | | | |
CASM |
| 10.49 | ¢ | |
| 9.74 | ¢ | | 8 | % |
| 10.65 | ¢ | |
| 10.49 | ¢ | | 2 | % |
Less the following components: | | | | | | | | | | |
Aircraft fuel, including hedging gains and losses | 2.70 |
| | 2.20 |
| | 23 | % | 2.65 |
| | 2.70 |
| | (2 | )% |
Special items—merger-related costs | 0.21 |
| | 0.20 |
| | 5 | % | |
Special items - merger-related costs | | 0.09 |
| | 0.15 |
| | (40 | )% |
Special items - other(a) | | — |
| | 0.06 |
| | (100 | )% |
CASM excluding fuel and special items |
| 7.58 | ¢ | |
| 7.34 | ¢ | | 3 | % |
| 7.91 | ¢ | |
| 7.58 | ¢ | | 4 | % |
| |
(a) | Special items - other is the employee tax reform bonus awarded in January 2018. |
OPERATING REVENUES
Total operating revenues increased$248353 million, or 4%6%, during the first nine months of 20182019 compared to the same period in 20172018. The changes are summarized in the following table:
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Passenger revenue | $ | 5,725 |
| | $ | 5,505 |
| | 4 | % | $ | 6,038 |
| | $ | 5,724 |
| | 5 | % |
Mileage Plan other revenue | 329 |
| | 314 |
| | 5 | % | 346 |
| | 329 |
| | 5 | % |
Cargo and other | 146 |
| | 133 |
| | 10 | % | 169 |
| | 147 |
| | 15 | % |
Total operating revenues | $ | 6,200 |
| | $ | 5,952 |
| | 4 | % | $ | 6,553 |
| | $ | 6,200 |
| | 6 | % |
Passenger Revenue
On a consolidated basis, Passenger revenue for the first nine months of 20182019 increased by $220$314 million, or 4%5%, on a 7%2% increase in capacity, partially offset by 1.6% lower3% higher ticket yields and a 0.8 pt decreaseslight increase in load factor. The increase in capacity was driven by our continued network expansion and aircraft added to our fleet since September 30, 2017. Lowergrowth. Increased yields are alargely the result of competitive pricing pressure we are experiencing, specifically oncurrent year revenue initiatives implemented as a broader plan to drive revenue growth and the West Coast, while lower load factor isrealization of synergies from our acquisition of Virgin America.
Mileage Plan other revenue
On a resultconsolidated basis, Mileage Plan other revenue increased $17 million, or 5%, in the first nine months of significant capacity2019 compared to the first nine months of 2018, due largely to increased commissions received from our affinity card partner from growth in our markets by us and our competitors. We began executing on a number of initiatives to help improve our revenue performance, including changing our bag fees, reconfiguring our Airbus cabins, and we will be introducing our "Saver Fare" in the fourth quarter of 2018.overall cardholders.
Cargo and Other Revenueother
On a consolidated basis, Cargo and other revenue increased $13$22 million, or 10%15%, in the first nine months of 20182019 compared to the first nine months of 2017.2018. The increase is primarily attributable to increased freight and mail capacity fromvolumes on our three freighters and utilizing our Airbus fleet to transport cargo. The remainder of the increase was due to increased lounge revenue as a result of new contracts entered into in late 2018 and revenue from our new loungessubleased slots at JFKLaGuardia and SeaTac Airport.Reagan National airports.
OPERATING EXPENSES
Total operating expenses increased $722$139 million, or 15%2%, compared to the first nine months of 20172018. 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, | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Fuel expense | $ | 1,397 |
| | $ | 1,051 |
| | 33 | % | $ | 1,408 |
| | $ | 1,397 |
| | 1 | % |
Non-fuel operating expenses, excluding special items | 4,114 |
| | 3,744 |
| | 10 | % | 4,295 |
| | 4,114 |
| | 4 | % |
Special items—merger-related costs | 67 |
| | 86 |
| | (22 | )% | |
Special items—employee tax reform bonus | 25 |
| | — |
| | NM |
| |
Special items - merger-related costs | | 39 |
| | 67 |
| | (42 | )% |
Special items - other | | — |
| | 25 |
| | NM |
|
Total operating expenses | $ | 5,603 |
| | $ | 4,881 |
| | 15 | % | $ | 5,742 |
| | $ | 5,603 |
| | 2 | % |
Fuel Expense
Aircraft fuel expense increased $346$11 million, or 33%1%, compared to the nine months ended September 30, 2017.2018. The elements of the change are illustrated in the following table:
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
| 2018 | | 2017 | 2019 | | 2018 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 1,450 |
| | $ | 2.30 |
| | $ | 1,030 |
| | $ | 1.74 |
| $ | 1,397 |
| | $ | 2.16 |
| | $ | 1,450 |
| | $ | 2.30 |
|
(Gains) losses on settled hedges | (23 | ) | | (0.04 | ) | | 14 |
| | 0.02 |
| 12 |
| | 0.02 |
| | (23 | ) | | (0.04 | ) |
Consolidated economic fuel expense | 1,427 |
| | 2.26 |
| | $ | 1,044 |
| | $ | 1.76 |
| 1,409 |
| | 2.18 |
| | $ | 1,427 |
| | $ | 2.26 |
|
Mark-to-market fuel hedge adjustments | (30 | ) | | (0.05 | ) | | 7 |
| | 0.01 |
| (1 | ) | | — |
| | (30 | ) | | (0.05 | ) |
GAAP fuel expense | $ | 1,397 |
| | $ | 2.21 |
| | $ | 1,051 |
| | $ | 1.77 |
| $ | 1,408 |
| | $ | 2.18 |
| | $ | 1,397 |
| | $ | 2.21 |
|
Fuel gallons | 631 |
| | | | 592 |
| | | 646 |
| | | | 631 |
| | |
The raw fuel price per gallon increased 32%decreased 6% due to higherlower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The increasedecrease in raw fuel price per gallon during the first nine months of 20182019 was driven by a 35% increase15% decrease in crude oil prices, andpartially offset by a 30%15% increase in refining margins.
GainsLosses recognized for hedges that settled in the first nine months of 20182019 were $23$12 million, compared to lossesgains of $14$23 million in the same period in 2017.2018. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.
We currently expect our economic fuel price per gallon to be approximately 18.5% higher8% lower in the fourth quarter of 20182019 compared to the fourth quarter of 20172018 due to our current estimate of higherlower crude prices, and higherpartially offset by increased refining margins.
Non-fuel Expense and Non- special items
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Wages and benefits | $ | 1,629 |
| | $ | 1,397 |
| | 17 | % | $ | 1,732 |
| | $ | 1,629 |
| | 6 | % |
Variable incentive pay | 104 |
| | 98 |
| | 6 | % | 125 |
| | 104 |
| | 20 | % |
Aircraft maintenance | 320 |
| | 271 |
| | 18 | % | 341 |
| | 320 |
| | 7 | % |
Aircraft rent | 233 |
| | 204 |
| | 14 | % | 247 |
| | 233 |
| | 6 | % |
Landing fees and other rentals | 371 |
| | 338 |
| | 10 | % | 388 |
| | 371 |
| | 5 | % |
Contracted services | 227 |
| | 234 |
| | (3 | )% | 214 |
| | 227 |
| | (6 | )% |
Selling expenses | 245 |
| | 277 |
| | (12 | )% | 236 |
| | 245 |
| | (4 | )% |
Depreciation and amortization | 290 |
| | 275 |
| | 5 | % | 317 |
| | 290 |
| | 9 | % |
Food and beverage service | 158 |
| | 145 |
| | 9 | % | 159 |
| | 158 |
| | 1 | % |
Third-party regional carrier expense | 114 |
| | 84 |
| | 36 | % | 125 |
| | 114 |
| | 10 | % |
Other | 423 |
| | 421 |
| | — | % | 411 |
| | 423 |
| | (3 | )% |
Total non-fuel operating expenses, excluding special items | $ | 4,114 |
| | $ | 3,744 |
| | 10 | % | $ | 4,295 |
| | $ | 4,114 |
| | 4 | % |
Wages and Benefits
Wages and benefits increased during the first nine months of 20182019 by $232103 million, or 17%, compared to 20176%. The primary components of wages and benefits are shown in the following table:
| | | Nine Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | % Change | 2019 | | 2018 | | % Change |
Wages | $ | 1,230 |
| | $ | 1,055 |
| | 17 | % | $ | 1,305 |
| | $ | 1,230 |
| | 6 | % |
Pension—Defined benefit plans service cost | 36 |
| | 30 |
| | 20 | % | 31 |
| | 36 |
| | (14 | )% |
Defined contribution plans | 88 |
| | 73 |
| | 21 | % | 100 |
| | 88 |
| | 14 | % |
Medical and other benefits | 186 |
| | 162 |
| | 15 | % | 203 |
| | 186 |
| | 9 | % |
Payroll taxes | 89 |
| | 77 |
| | 16 | % | 93 |
| | 89 |
| | 4 | % |
Total wages and benefits | $ | 1,629 |
| | $ | 1,397 |
| | 17 | % | $ | 1,732 |
| | $ | 1,629 |
| | 6 | % |
Wages increased $175$75 million, or 17%6%, on a 9%2% increase in FTEs. The increase in FTEs is primarily attributabledue to the growthrecognition of approximately $24 million during the third quarter in McGee Air Services, which has assumed certain airport ground service functions that were previously provided by third-party vendorsone-time costs following the ratification of the AMFA and reflected in Contracted services expense. Additionally,IAM contracts, as well as the increase in wages is driven by higherimpact of increased wage rates for many workour labor groups including on average a 24% increase for our Mainline pilots and a 10% increase for our Mainline flight attendants whose new contract rates became effective inas compared to the fourth quarter of 2017 and the first quarter of 2018, respectively.prior year period.
Costs associated with our defined contribution plans increased $15$12 million, or 21%14%, primarily due to FTE growth, increased participation throughout all labor groups, and higher contribution ratesa step increase in employer contributions for Mainline pilots and flight attendantsour pilot workgroup, as a result of new contract rates effective inwell an overall increase to the fourth quarter of 2017 and the first quarter of 2018, respectively.eligible wage base.
Medical and other benefits expense increased $24$17 million, or 15%9%, primarily due to increased volume of high-dollar value medical claims as compared to the prior-year period as well as FTE growth and rising medical costs.growth.
For the full year, we expect wages and benefits to increase at a rate greater than capacity growth, due to higher wage rates for certain labor groups and the continued growth of McGee Air Services.higher medical and defined-contribution costs.
Aircraft MaintenanceVariable Incentive Pay
Aircraft maintenanceVariable incentive pay expense increased by $49$21 million, or 18%20%, during the first nine months of 20182019 as compared to the same period in 2017.2018. The increase is primarily the result of a higher wage base and expectation of a higher payout rate for our annual bonus in 2019 as compared to 2018.
Aircraft Maintenance costs
Aircraft maintenance expense increased by $21 million, or 7%, during the first nine months of 2019 compared to the same period in 2018. The increase is primarily due to a power-by-the-hour engineheavier volumes from the timing of maintenance arrangement onevents, specifically from our B737-800Airbus aircraft, that we entered into, and became effective, in the fourth quarter of 2017, as well as a higher volume of scheduled maintenance events as compared to the priorprior-year period.
For the full year, we expect aircraft maintenance expense to be approximately 9-10%2 - 3% higher than in 20172018, for the same reasons mentioned above.
Aircraft Rent
Aircraft rent expense increased by $29$14 million, or 14%6%, during the first nine months of 20182019 compared to the same period in 2017. Aircraft rent increased2018, primarily due to the additionannualization of sixexpense for our leased E175s under our CPA agreement with SkyWest, and leased A321neos to our mainline fleetdelivered in 2018 and 11 E175s to our regional fleet since September 30, 2017, partially offset by the return of six Q400 aircraft.2019.
For the full year, we expect aircraft rent expense to be approximately 15-16%5 - 6% higher than in 2017 due to leased A321neo and E175 aircraft added to our fleet in 2018.2018, for the reasons mentioned above.
Landing Fees and Other RentalsContracted Services
Landing fees and other rental expenses increasedContracted services decreased by $33$13 million, or 10%6%, during the first nine months of 20182019 compared to the same period in 2017.2018. This increase wasdecrease is primarily driven bya result of lower contractor and consulting spend due to the timing of certain project work and an overall reduction in pricing from many of our capacity increase of 7% and rate increases at airports across our network.vendor partners.
For the full year, we expect landing fees and other rentalcontracted services expense to be approximately 9-10% higher6 - 7% lower than in 2017 due to2018, for the same reasons notedmentioned above.
Selling ExpensesDepreciation and Amortization
Selling expenses decreased $32Depreciation and amortization increased $27 million, or 12%9%, during the first nine months of 20182019 compared to the same period in 2017. This decrease was2018, primarily due to decreased commission costs from other airlines for transporting their frequent flyer members, lower credit card commissions,the addition of 14 owned E175s and decreased promotional and advertising activities, notably those relatedsix owned B737-900ERs to Virgin America.our fleet since the third quarter of 2018.
For the full year, we expect selling expensesdepreciation and amortization to be approximately 8-9% lower8 - 9% higher than in 20172018 for the reasons mentioned above.
Third-PartyThird-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest and PenAir under our CPAs, increased $30$11 million, or 36%10%, during the first nine months of 20182019 compared to the same period in 2017.2018. The increase is primarily due to the additional 11 E175 aircraft operateda 6.4% increase in capacity flown by SkyWest inas compared to the currentprior year.
For the full year, we expect third-party regional carrier expense to be higher than in 20172018 due to increased flying by our regional partners.
Special Items—Merger-Related Costs
We recorded special items of $67$39 million in the first nine months of 2019 for merger-related costs associated with our acquisition of Virgin America, in the first nine months of 2018, compared to $86$67 million in the first nine months of 2017.2018. Costs incurred in the first nine months of 2018 consisted2019 are primarily a result of severanceexpenses associated with Airbus flight attendant and retention costs, IT integration costs, and the write off of Virgin America related assets connected with our transitionpilot vacation balances, which were subject to a single PSSone-time true-up in April.accordance with the integrated labor agreements, as well as certain technology integration costs. We expect to incur merger-related costs for the remainder of 2018, and continuing through 2019.2019, although at a lesser rate.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline adjusted pretax profit was $671$761 million in the first nine months of 2018,2019, compared to $1.08 billion$671 million in the same period in 2017.2018. The $411$90 million decreaseincrease in pretax profit was primarily driven by a $281$192 million increase in Mainline operating revenue and a $46 million decrease in Mainline fuel expense. These improvements were primarily offset by a $153 million increase in Mainline non-fuel operating expenses andexpenses.
As compared to the prior year, increased Mainline revenues are primarily attributable to a $313 million3% increase in Mainline fuel expense. These increases were partially offsetyields, driven by a $175 million increaseour revenue initiatives and pricing improvements in Mainline operating revenue.
many of our markets. Non-fuel operating expenses increased on higher wages related to new contract wage rates for pilots and flight attendants, and higher other operating expense categories as described above. Higher raw fuel prices and an increase in gallons consumed drove an increase in Mainline fuel expense. Mainline revenue increased primarily due to increased revenue passengers on lower average fares.aircraft ownership, wages and maintenance costs as compared to the prior year. Lower raw fuel prices drove the decrease in Mainline fuel expense.
Regional
Our Regional operations incurredbroke even in the first nine months of 2019, compared to a pretax loss of $82 million in the first nine months of 2018, compared to a pretax profit of $57 million in the first nine months of 2017.2018. The pretax lossimprovement was attributable to a $70$161 million increase in operating revenues, partially offset by a $28 million increase in fuel costs and a $130$62 million increase in non-fuel operating expenses, partially offset by a $72 million increase in operating revenues.expenses. The increase in non-fuel operating expenses is primarily due to higher ownership costs associated with 11 E175 aircraft operated by SkyWest that were added to the regional fleet over the past twelve months, as well as higher CPA rates on a 20%15% increase in capacity.
Horizon
Horizon achieved a pretax profit of $20$33 million in the first nine months of 2018,2019, compared to pretax lossprofit of $11$20 million in the same period in 2017. The change was2018, primarily driven by a $59 million increase in operating revenue, attributable to the addition of six E175 aircraft added to Horizon's fleet over the past twelve months, a $17 million decrease in aircraft maintenance expense due to a lower volume of scheduled maintenance events as compared to the prior period,improved cost management through better productivity and a significantly improved operation in 2018 compared to 2017.operational performance.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
Our existing cash and marketable securities balance of $1.4$1.6 billion, and our expected cash from operations;
Our 98123 unencumbered aircraft that could be financed, if necessary;
Our combined bank line-of-credit facilities, with no outstanding borrowings, of $400 million. Information about these facilities can be found in Note 5 to the condensed consolidated financial statements.
During the nine months ended September 30, 2018,2019, we took free and clear delivery of sixfour B737-900ER aircraft and sixfour E175 aircraft. We made net debt payments totaling $544$396 million, including the prepayment of $231certain loans, offset by new borrowings, undertaken as part of our broader plan of reducing balance sheet leverage and lowering interest expense. We also continued to return capital to our shareholders by paying dividends totaling $129 million and repurchasing $53 million of debt, and paid dividends totaling $118 million.our common stock.
The table below presents the major indicators of financial condition and liquidity:
| | (in millions) | September 30, 2018 | | December 31, 2017 | | Change | September 30, 2019 | | December 31, 2018 | | Change |
Cash and marketable securities | $ | 1,397 |
| | $ | 1,621 |
| | (14) % | $ | 1,619 |
| | $ | 1,236 |
| | 31 % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months' revenue | 22 | % | | 26 | % | | (4) pts | 23 | % | | 20 | % | | 3 pts |
Long-term debt, net of current portion | $ | 1,684 |
| | $ | 2,262 |
| | (26)% | $ | 1,444 |
| | $ | 1,617 |
| | (11)% |
Shareholders’ equity | $ | 3,791 |
| | $ | 3,460 |
| | 10% | $ | 4,252 |
| | $ | 3,751 |
| | 13% |
|
| | | | | | | | | |
Debt-to-capitalization, adjusted for aircraft operating leases | | | | | |
(in millions) | September 30, 2018 | | December 31, 2017 | | Change |
Long-term debt | $ | 1,684 |
| | $ | 2,262 |
| | (26)% |
Capitalization of aircraft operating leases(a) | 1,887 |
| | 1,671 |
| | 13% |
Adjusted debt | $ | 3,571 |
| | $ | 3,933 |
| | (9)% |
Shareholders' equity | 3,791 |
| | 3,460 |
| | 10% |
Total Capital | $ | 7,362 |
| | $ | 7,393 |
| | —% |
| | | | | |
Debt-to-capitalization, adjusted for aircraft operating leases | 49 | % | | 53 | % | | (4) pts |
|
| | | | | | | | | |
Debt-to-capitalization, adjusted for operating leases | | | | | |
(in millions) | September 30, 2019 | | December 31, 2018 | | Change |
Long-term debt, net of current portion | $ | 1,444 |
| | $ | 1,617 |
| | (11)% |
Capitalized operating leases(a) | 1,644 |
| | 1,768 |
| | (a) |
Adjusted debt | $ | 3,088 |
| | $ | 3,385 |
| | (9)% |
Shareholders' equity | 4,252 |
| | 3,751 |
| | 13% |
Total invested capital | $ | 7,340 |
| | $ | 7,136 |
| | 3% |
| | | | | |
Debt-to-capitalization, including operating leases | 42 | % | | 47 | % | | (5) pts |
| |
(a) | Calculated usingFollowing the adoption of the new lease accounting standard on January 1, 2019, this represents the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of remaining aircraft lease payments for aircraft in our operating fleet as ofpayments. This change had no meaningful impact to the balance sheet date.ratio. |
We expect our debt-to-capitalization ratio to be approximately 41% by December.
|
| | | |
Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent |
(in millions) | September 30, 2019 |
Adjusted debt | $ | 3,088 |
|
Current portion of long-term debt | 265 |
|
Total adjusted debt | 3,353 |
|
Less: Cash and marketable securities | (1,619 | ) |
Net adjusted debt | $ | 1,734 |
|
| |
(in millions) | Last Twelve Months Ended September 30, 2019 |
GAAP Operating Income(a) | $ | 857 |
|
Adjusted for: |
|
|
Special items | 79 |
|
Mark-to-market fuel hedge adjustments | 51 |
|
Depreciation and amortization | 425 |
|
Aircraft rent | 329 |
|
EBITDAR | $ | 1,741 |
|
| |
Net adjusted debt to EBITDAR | 1.0x |
|
| |
(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 2018,2019, net cash provided by operating activities was $986 million,$1.4 billion, compared to $1.4 billion$986 million during the same period in 2017.2018. The $371$395 million decreaseincrease in our operating cash flows is primarily attributable to a decrease$174 million increase in net income, driven by rising fuel prices,as well as a greater increase in our air traffic liability and higher non-fuel operating costs, significant new market development,depreciation and continuing competitive pressures. Cash collected for future travel is down relativeamortization expense in 2019 as compared to the prior year primarily assame period in 2018. These increases were offset by a result$65 million voluntary pension contribution made in the third quarter of lower yields driven by competitive pricing pressure on the West Coast.2019.
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 $333$708 million during the first nine months of 2018,2019, compared to $1.1 billion$333 million during the same period of 2017.2018. Our capital expenditures were $554$527 million in the first nine months of 2018,2019, a decrease of $287$27 million compared to the nine months ended September 30, 2017.2018. This is primarily driven by fewerlower cash outlays for deliveries of and advance deposits on aircraft deliveriesin 2019 as compared to the same period of 2017.2018. Our net salespurchases of marketable securities were 185$218 million in the first nine months of 2018,2019, compared to net purchasessales of 339$185 million in the nine months ended September 30, 2017.2018. The shift to net salespurchases is primarily duedriven by stronger operating cash flows as compared to funds being utilized to prepay certain debt.2018. Internally, we analyze and manage our cash and marketable securities balance in the aggregate.
The table below reflects our full-year expectation for capital expenditures based on our current intentions. It does not reflect our actual contractual obligations at this time, nor does it reflect the capital expenditures that would be incurred if we exercised options or cancellablecancelable purchase commitments that are available to us. We have options to acquire 37 B737 aircraft with deliveries from 2021 through 2024, and options to acquire 30 E175 aircraft with deliveries in 2021 to 2023. Options will be exercised only if we believe return on invested capital targets can be met. The table below excludes any associated capitalized interest.
| | (in millions) | 2018 | | 2019 | | 2020 | 2019 | | 2020 |
Targeted capital expenditures | $ | 1,000 |
| | $ | 750 |
| | $ | 750 |
| |
Expected capital expenditures | | $ | 700 |
| | $ | 775 |
|
Cash Used in Financing Activities
Cash used in financing activities was $666$538 million during the first nine months of 20182019 compared to $399$666 million during the same period in 2017.2018. During the first nine months of 20182019, we made debt payments of $544$752 million, including the prepayment of $231$532 million of debt, dividend payments totaling $118$129 million, and had $37$53 million in common stock repurchases. These payments were partially offset by the receipt of funds from new secured debt financing of $356 million in the first nine months of 2019.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Commitments
As of September 30, 2018,2019, we have firm orders to purchase or lease 6036 aircraft. We also have cancelable purchase commitments for 30 Airbus A320neo with deliveries from 20222023 through 2024.2025. 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 2021 through 2024 and 30 E175 aircraft with deliveries from 2021 through 2023. In addition to the 32 E175 aircraft currently operated by SkyWest in our regional fleet, we have options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft.
The following table summarizes expected fleet activity by year as of September 30, 2018:2019, and are subject to change:
| | | Actual Fleet | | Expected Fleet Activity(a) | Actual Fleet | | Expected Fleet Activity |
Aircraft | September 30, 2018 | | 2018 Additions | | 2018 Removals | | December 31, 2018 | | 2019 Changes | | December 31, 2019 | September 30, 2019 | | 2019 Additions | | 2019 Removals | | December 31, 2019 | | 2020 Changes | | December 31, 2020 |
B737 Freighters | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
B737 Passenger Aircraft(c)(a) | 157 |
| | 2 |
| | — |
| | 159 |
| | 7 |
| | 166 |
| 163 |
| | 1 |
| | — |
| | 164 |
| | 9 |
| | 173 |
|
Airbus Passenger Aircraft | 71 |
| | — |
| | — |
| | 71 |
| | 1 |
| | 72 |
| 72 |
| | 1 |
| | (2 | ) | | 71 |
| | (1 | ) | | 70 |
|
Total Mainline Fleet | 231 |
| | 2 |
| | — |
| | 233 |
| | 8 |
| | 241 |
| 238 |
| | 2 |
| | (2 | ) | | 238 |
| | 8 |
| | 246 |
|
Q400 operated by Horizon(b) | 41 |
| | — |
| | (4 | ) | | 37 |
| | (7 | ) | | 30 |
| 32 |
| | 2 |
| | (1 | ) | | 33 |
| | (1 | ) | | 32 |
|
E175 operated by Horizon(b) | 16 |
| | 10 |
| | — |
| | 26 |
| | 4 |
| | 30 |
| 30 |
| | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
E175 operated by third party(b) | 32 |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
| 32 |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
Total Regional Fleet | 89 |
| | 10 |
| | (4 | ) | | 95 |
| | (3 | ) | | 92 |
| 94 |
| | 2 |
| | (1 | ) | | 95 |
| | (1 | ) | | 94 |
|
Total | 320 |
| | 12 |
| | (4 | ) | | 328 |
| | 5 |
| | 333 |
| 332 |
| | 4 |
| | (3 | ) | | 333 |
| | 7 |
| | 340 |
|
| |
(a) | TheTwo of the three B737 MAX9 aircraft that were originally scheduled for delivery in 2019 have been shifted to 2020 in light of the MAX grounding, based on our current estimate of the expected fleet counts at December 31, 2018 and 2019 are subject to change. delivery dates. |
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(b) | Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party. |
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(c) | Aircraft deliveries reflect the supplemental agreement entered with BoeingTwo Q400 aircraft that were previously removed from our operating fleet will be returning to revenue service. We expect these additions to occur in the first quarter of 2018 which deferred certain B737 deliveries. Our first MAX9 delivery is scheduled forlate 2019. |
For future firm orders and option exercises, we may finance the aircraft through cash flow from operations, long-term debt, or lease arrangements.
Fuel Hedge Positions
All of our future 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 are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. Our crude oil positions are as follows:
|
| | | | | | | | | | |
| Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
Remainder 2018 | 51 | % | | $ | 68 |
| | $ | 1 |
|
First Quarter 2019 | 50 | % | | 72 |
| | 1 |
|
Second Quarter 2019 | 40 | % | | 73 |
| | 2 |
|
Third Quarter 2019 | 30 | % | | 75 |
| | 2 |
|
Fourth Quarter 2019 | 20 | % | | 77 |
| | 2 |
|
Full Year 2019 | 35 | % | | $ | 74 |
| | $ | 2 |
|
First Quarter 2020 | 10 | % | | 76 |
| | 3 |
|
Full Year 2020 | 2 | % | | $ | 76 |
| | $ | 3 |
|
|
| | | | | | | | | | |
| Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
Remainder 2019 | 50 | % | | $ | 74 |
| | $ | 2 |
|
First Quarter 2020 | 50 | % | | 70 |
| | 2 |
|
Second Quarter 2020 | 40 | % | | 68 |
| | 2 |
|
Third Quarter 2020 | 30 | % | | 68 |
| | 2 |
|
Fourth Quarter 2020 | 20 | % | | 66 |
| | 2 |
|
Full Year 2020 | 35 | % | | $ | 68 |
| | $ | 2 |
|
First Quarter 2021 | 10 | % | | 63 |
| | 2 |
|
Full Year 2021 | 2 | % | | $ | 63 |
| | $ | 2 |
|
Contractual Obligations
The following table provides a summary of our obligations as of September 30, 20182019. For agreements with variable terms, amounts included reflect our minimum obligations.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Beyond 2022 | | Total |
Current and long-term debt obligations | $ | 123 |
| | $ | 267 |
| | $ | 381 |
| | $ | 363 |
| | $ | 179 |
| | $ | 725 |
| | $ | 2,038 |
|
Operating lease commitments (a) | 106 |
| | 413 |
| | 380 |
| | 332 |
| | 300 |
| | 1,219 |
| | 2,750 |
|
Aircraft maintenance deposits (b) | 16 |
| | 65 |
| | 68 |
| | 64 |
| | 52 |
| | 38 |
| | 303 |
|
Aircraft commitments (c) | 378 |
| | 514 |
| | 525 |
| | 558 |
| | 302 |
| | 140 |
| | 2,417 |
|
Interest obligations (d) | 16 |
| | 73 |
| | 63 |
| | 46 |
| | 33 |
| | 69 |
| | 300 |
|
Other obligations | 35 |
| | 145 |
| | 152 |
| | 173 |
| | 181 |
| | 1,225 |
| | 1,911 |
|
Total | $ | 674 |
| | $ | 1,477 |
| | $ | 1,569 |
| | $ | 1,536 |
| | $ | 1,047 |
| | $ | 3,416 |
| | $ | 9,719 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Remainder of 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Beyond 2023 | | Total |
Current and long-term debt obligations | $ | 63 |
| | $ | 268 |
| | $ | 313 |
| | $ | 274 |
| | $ | 234 |
| | $ | 565 |
| | $ | 1,717 |
|
Aircraft lease commitments | 83 |
| | 313 |
| | 275 |
| | 250 |
| | 195 |
| | 738 |
| | 1,854 |
|
Facility lease commitments | 3 |
| | 10 |
| | 9 |
| | 6 |
| | 6 |
| | 89 |
| | 123 |
|
Aircraft maintenance deposits | 16 |
| | 73 |
| | 63 |
| | 54 |
| | 29 |
| | 10 |
| | 245 |
|
Aircraft purchase commitments | 111 |
| | 504 |
| | 475 |
| | 333 |
| | 194 |
| | 36 |
| | 1,653 |
|
Interest obligations (a) | 14 |
| | 48 |
| | 39 |
| | 29 |
| | 23 |
| | 38 |
| | 191 |
|
Other obligations (b) | 34 |
| | 152 |
| | 173 |
| | 181 |
| | 186 |
| | 1,079 |
| | 1,805 |
|
Total | $ | 324 |
| | $ | 1,368 |
| | $ | 1,347 |
| | $ | 1,127 |
| | $ | 867 |
| | $ | 2,555 |
| | $ | 7,588 |
|
| |
(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 operated by SkyWest under a capacity purchase agreement. |
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(b) | Aircraft maintenance deposits relate to leased Airbus aircraft. |
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(c) | Represents non-cancelable contractual payment commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management. |
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(d) | For variable-rate debt, future obligations are shown above using forecasted interest rates as of September 30, 2018.2019. |
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(b) | Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements. |
Credit Card Agreements
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.
Deferred Income Taxes
For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis will reverse, potentially resulting in an increase in income taxes paid.
While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income 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), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that are beyond our control. We believe that we will have the liquidity available to make our future tax payments.
CRITICAL ACCOUNTING ESTIMATES
With the exception of the items noted below, thereThere have been no material changes to our critical accounting estimates forduring the ninethree months ended September 30, 2018.2019. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Frequent Flyer Programs
Alaska's Mileage PlanTM loyalty program awards mileage credits to members who fly on our airlines and our airline partners, referred to as flown miles. We also sell services, including miles for transportation, Companion FareTM certificates, bag fee waivers, and access to our brand and customer lists to a major bank that offers Alaska affinity credit cards. To a lesser extent, miles for transportation are also sold to other non-airline partners, such as hotels and car rental agencies. The outstanding miles may be redeemed for travel on our airlines or any of our airline partners. As long as Mileage PlanTM is in existence, we have an obligation to provide this future travel.
Mileage credits and the various other services we sell under our loyalty program represent performance obligations that are part of a multiple deliverable revenue arrangement. Accounting guidance requires that we use a relative standalone selling price allocation to allocate consideration received to the material performance obligations in these contracts. Our relative standalone selling price allocation models are refreshed when contracts originate or are materially modified.
At September 30, 2018 we had approximately 236 billion miles outstanding, resulting in an aggregate deferred revenue balance of $1.8 billion. The deferred revenue resulting from our relative selling price allocations requires significant management judgment. There are uncertainties inherent in these estimates. Therefore, different assumptions could affect the amount and/or timing of revenue recognition. The most significant assumptions are described below.
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1. | The rate at which we defer sales proceeds related to services sold: |
We estimate the standalone selling price for each performance obligation, including mileage credits, by considering multiple inputs and methods, including but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value published selling prices, number of miles awarded and the number of miles redeemed. We estimate the selling prices and volumes over the terms of the agreements in order to determine the allocation of proceeds to each of the multiple deliverables.
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2. | The number of miles that will not be redeemed for travel (breakage): |
We estimate how many miles will be used per award. For example, our members may redeem mileage credits for award travel to various locations or choose between a highly restricted award and an unrestricted award. Our estimates are based on the current requirements in our Mileage PlanTM program and historical award redemption patterns.
We regularly review significant Mileage PlanTM assumptions and change our assumptions if facts and circumstances indicate that a change is necessary. Any such change in assumptions could have a significant effect on our financial position and results of operations.
GLOSSARY OF AIRLINE TERMS
Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit
Aircraft Stage Length - represents the average miles flown per aircraft departure
ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown
CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items
CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control
Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of futurecapitalized operating lease payments)leases) divided by total equity plus adjusted debt
Diluted Earnings per Share - represents earnings per share (EPS) using fully diluted shares outstanding
Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised
Economic Fuel - best estimate of the cash cost of fuel, net of the impact of settled fuel-hedging contracts in the period
Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures
Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers
Mainline - represents flying Boeing 737, and Airbus 320 family and Airbus 321neo jets and all associated revenues and costs
Net adjusted debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
Net adjusted debt to EBITDAR - represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)
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. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchase arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, 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, 20172018.
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ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of September 30, 20182019, 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, 20182019.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 20182019, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
PART II
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|
ITEM 1. LEGAL PROCEEDINGS |
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Two thousandThe court certified a class of approximately 1,800 flight attendants were certified as a class in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. Plaintiffs value these damages and penalties at $85 million, and as of November 1, 2018, movedOn February 4, 2019, the Court to enterentered final judgment against Virgin America and Alaska Airlines in that amount. Plaintiffs dothe amount of approximately $78 million. It did not seek monetary or behavioralaward injunctive relief fromagainst Alaska Airlines.
The Court will render its final judgment in March 2019. The Company will then seekis seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law.law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case.case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018.
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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 2018.2019. |
| | | | | | | | | | |
| 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, 2018 - July 31, 2018 | 67,915 |
| | $ | 61.83 |
| | |
August 1, 2018 - August 31, 2018 | 69,777 |
| | 64.51 |
| | |
September 1, 2018 - September 30, 2018 | 55,511 |
| | 68.44 |
| | |
Total | 193,203 |
| | $ | 64.70 |
| | $ | 574 |
|
|
| | | | | | | | | | |
| 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, 2019 - July 31, 2019 | 68,509 |
| | $ | 64.05 |
| | |
August 1, 2019 - August 31, 2019 | 279,370 |
| | 58.99 |
| | |
September 1, 2019 - September 30, 2019 | 117,475 |
| | 64.26 |
| | |
Total | 465,354 |
| | $ | 61.06 |
| | $ | 509 |
|
The shares were purchased pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015.
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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.
The following documents are filed as part of this report:
| |
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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/s/ CHRISTOPHER M. BERRY | |
Christopher M. Berry | |
Vice President Finance and Controller | |
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November 2, 20187, 2019 | |
EXHIBIT INDEX
|
| | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
10.1* | | 10-K | February 15, 2018 | 10.25 |
10.2* | | 10-K | February 15, 2018 | 10.26 |
31.1† | | 10-Q | | |
31.2† | | 10-Q | | |
32.1† | | 10-Q | | |
32.2† | | 10-Q | | |
101.INS† | XBRL Instance Document | | | |
101.SCH† | XBRL Taxonomy Extension Schema Document | | | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | | | |
| | | | |
† | Filed herewith |
* | Indicates management contract or compensatory plan arrangement |
|
| | | | |
Exhibit Number | Exhibit Description | Form | Date of First Filing | Exhibit Number |
3.1 | | 10-Q | August 3, 2017 | 3.1 |
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 | | | |
| | | | |
† | Filed herewith |
* | Indicates management contract or compensatory plan arrangement |