UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x
| (X) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ( ) | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
o 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.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of | ||
incorporation or organization) | 91-1292054 (I.R.S. Employer Identification No.) |
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
(206) 431-7040(Registrant’s telephone number, including area code)code: (206) 431-7040
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. YesxX Noo
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The registrant has 26,528,36826,546,130 common shares, par value $1.00, outstanding at September 30, 2001.March 31, 2002.
1
PART I. FINANCIAL STATEMENTS
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (unaudited)
| PART I. FINANCIAL STATEMENTS ITEM 1. Financial Statements CONSOLIDATED BALANCE SHEET (unaudited) Alaska Air Group, Inc. | ||||||
| ASSETS | ||||||
| December 31, | September 30, | |||||
| (In Millions) | 2000 | 2001 | ||||
| Current Assets | ||||||
| Cash and cash equivalents | $101.1 | $30.7 | ||||
| Marketable securities | 360.6 | 636.6 | ||||
| Receivables - net | 82.1 | 88.2 | ||||
| Inventories and supplies - net | 63.7 | 76.7 | ||||
| Prepaid expenses and other assets | 198.2 | 174.3 | ||||
| Total Current Assets | 805.7 | 1,006.5 | ||||
| Property and Equipment | ||||||
| Flight equipment | 1,638.3 | 1,953.4 | ||||
| Other property and equipment | 362.9 | 395.6 | ||||
| Deposits for future flight equipment | 281.8 | 142.1 | ||||
| 2,283.0 | 2,491.1 | |||||
| Less accumulated depreciation and amortization | 563.4 | 633.9 | ||||
| 1,719.6 | 1,857.2 | |||||
| Capital leases: | ||||||
| Flight and other equipment | 44.4 | 44.4 | ||||
| Less accumulated amortization | 33.8 | 35.4 | ||||
| 10.6 | 9.0 | |||||
| Total Property and Equipment - Net | 1,730.2 | 1,866.2 | ||||
| Intangible Assets - Subsidiaries | 53.4 | 51.9 | ||||
| Other Assets | 40.7 | 58.1 | ||||
| Total Assets | $2,630.0 | $2,982.7 | ||||
ASSETS
| December 31, | March 31, | |||||||
| 2001 | 2002 | |||||||
| (In Millions) | ||||||||
Current Assets | ||||||||
| Cash and cash equivalents | $ | 490.3 | $ | 353.9 | ||||
| Marketable securities | 170.4 | 265.8 | ||||||
| Receivables — net | 83.5 | 104.3 | ||||||
| Inventories and supplies — net | 71.5 | 69.9 | ||||||
| Prepaid expenses and other assets | 84.7 | 126.5 | ||||||
Total Current Assets | 900.4 | 920.4 | ||||||
Property and Equipment | ||||||||
| Flight equipment | 2,014.5 | 2,008.6 | ||||||
| Other property and equipment | 377.4 | 394.9 | ||||||
| Deposits for future flight equipment | 127.8 | 112.5 | ||||||
| 2,519.7 | 2,516.0 | |||||||
| Less accumulated depreciation and amortization | 694.7 | 723.9 | ||||||
Total Property and Equipment — Net | 1,825.0 | 1,792.1 | ||||||
Intangible Assets | 51.4 | 51.4 | ||||||
Other Assets | 157.0 | 160.0 | ||||||
Total Assets | $ | 2,933.8 | $ | 2,923.9 | ||||
See accompanying notes to consolidated financial statements.
2
| CONSOLIDATED BALANCE SHEET (unaudited) Alaska Air Group, Inc. | ||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | | |||||||
| (In Millions Except Share Amounts) | December 31, | September 30, | ||||||
| 2000 | 2001 | |||||||
| Current Liabilities | ||||||||
| Accounts payable | $140.9 | $129.8 | ||||||
| Accrued aircraft rent | 85.7 | 82.0 | ||||||
| Accrued wages, vacation and payroll taxes | 67.0 | 78.4 | ||||||
| Other accrued liabilities | 137.4 | 181.8 | ||||||
| Air traffic liability | 213.1 | 239.0 | ||||||
| Current portion of long-term debt and capital lease obligations | 66.7 | 37.8 | ||||||
| Total Current Liabilities | 710.8 | 748.8 | ||||||
| Long-Term Debt and Capital Lease Obligations | 609.2 | 869.4 | ||||||
| Other Liabilities and Credits | ||||||||
| Deferred income taxes | 155.6 | 170.7 | ||||||
| Deferred revenue | 135.8 | 157.4 | ||||||
| Other liabilities | 156.3 | 175.9 | ||||||
| 447.7 | 504.0 | |||||||
| Shareholders’ Equity | ||||||||
| Common stock, $1 par value | ||||||||
| Authorized: 100,000,000 shares | ||||||||
| Issued: 2000 - 29,201,169 shares | ||||||||
| 2001 - 29,269,119 shares | 29.2 | 29.3 | ||||||
| Capital in excess of par value | 481.2 | 482.4 | ||||||
| Treasury stock, at cost: | ||||||||
| 2000 - 2,743,774 shares | ||||||||
| 2001 - 2,740,751 shares | (62.6 | ) | (62.6 | ) | ||||
| Retained earnings | 414.5 | 411.4 | ||||||
| 862.3 | 860.5 | |||||||
| Total Liabilities and Shareholders’ Equity | $2,630.0 | $2,982.7 | ||||||
| See accompanying notes to consolidated financial statements. | ||||||||
CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS’ EQUITY
| December 31, | March 31, | ||||||||
| 2001 | 2002 | ||||||||
| (In Millions Except Share Amounts) | |||||||||
Current Liabilities | |||||||||
| Accounts payable | $ | 122.0 | $ | 132.2 | |||||
| Accrued aircraft rent | 90.1 | 70.6 | |||||||
| Accrued wages, vacation and payroll taxes | 76.0 | 79.0 | |||||||
| Other accrued liabilities | 204.5 | 164.3 | |||||||
| Air traffic liability | 220.4 | 269.5 | |||||||
| Current portion of long-term debt and capital lease obligations | 43.2 | 43.7 | |||||||
Total Current Liabilities | 756.2 | 759.3 | |||||||
Long-Term Debt and Capital Lease Obligations | 863.3 | 862.5 | |||||||
Other Liabilities and Credits | |||||||||
| Deferred income taxes | 138.4 | 130.8 | |||||||
| Deferred revenue | 176.6 | 176.4 | |||||||
| Other liabilities | 179.0 | 197.6 | |||||||
| 494.0 | 504.8 | ||||||||
Shareholders’ Equity | |||||||||
| Common stock, $1 par value | |||||||||
| Authorized: 100,000,000 shares | |||||||||
| Issued: 2001 - 29,268,869 shares | |||||||||
| 2002 - 29,285,569 shares | 29.3 | 29.3 | |||||||
| Capital in excess of par value | 482.5 | 482.9 | |||||||
| Treasury stock, at cost: 2001 - 2,740,501 shares 2002 - 2,739,439 shares | (62.6 | ) | (62.5 | ) | |||||
| Accumulated other comprehensive income (loss) | (3.9 | ) | 7.0 | ||||||
| Retained earnings | 375.0 | 340.6 | |||||||
| 820.3 | 797.3 | ||||||||
Total Liabilities and Shareholders’ Equity | $ | 2,933.8 | $ | 2,923.9 | |||||
See accompanying notes to consolidated financial statements.
3
| CONSOLIDATED STATEMENTS OF INCOME (unaudited) Alaska Air Group, Inc. | | ||||||
| Three Months Ended September 30 (In Millions except Per Share Amounts) | 2000 | 2001 | |||||
| Operating Revenues | |||||||
| Passenger | $565.7 | $536.8 | |||||
| Freight and mail | 22.7 | 22.6 | |||||
| Other - net | 13.9 | 24.0 | |||||
| Total Operating Revenues | 602.3 | 583.4 | |||||
| Operating Expenses | |||||||
| Wages and benefits | 185.6 | 205.0 | |||||
| Contracted services | 19.3 | 19.2 | |||||
| Aircraft fuel | 100.5 | 85.6 | |||||
| Aircraft maintenance | 52.0 | 42.7 | |||||
| Aircraft rent | 46.0 | 46.0 | |||||
| Food and beverage service | 14.3 | 15.2 | |||||
| Commissions | 17.8 | 16.0 | |||||
| Other selling expenses | 32.9 | 31.8 | |||||
| Depreciation and amortization | 27.9 | 33.7 | |||||
| Loss (gain) on sale of assets | (0.1 | ) | 0.3 | ||||
| Landing fees and other rentals | 27.0 | 33.8 | |||||
| Other | 41.9 | 41.3 | |||||
| Total Operating Expenses | 565.1 | 570.6 | |||||
| Operating Income | 37.2 | 12.8 | |||||
| Nonoperating Income (Expense) | |||||||
| Interest income | 6.0 | 7.1 | |||||
| Interest expense | (9.3 | ) | (11.8 | ) | |||
| Interest capitalized | 4.1 | 1.6 | |||||
| U.S. Government compensation | - | 29.1 | |||||
| Other - net | 0.6 | (0.5 | ) | ||||
| 1.4 | 25.5 | ||||||
| Income before income tax | 38.6 | 38.3 | |||||
| Income tax expense | 22.7 | 13.0 | |||||
| Net Income | $15.9 | $25.3 | |||||
| Basic Earnings Per Share | $0.60 | $0.95 | |||||
| Diluted Earnings Per Share | $0.60 | $0.95 | |||||
| Shares used for computation: | |||||||
| Basic | 26.444 | 26.514 | |||||
| Diluted | 26.490 | 26.559 | |||||
| See accompanying notes to consolidated financial statements. | |||||||
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Alaska Air Group, Inc.
| Three Months Ended March 31 | |||||||||
| 2001 | 2002 | ||||||||
| (In Millions Except Per Share Amounts) | |||||||||
Operating Revenues | |||||||||
| Passenger | $ | 479.8 | $ | 456.1 | |||||
| Freight and mail | 20.6 | 17.1 | |||||||
| Other — net | 15.6 | 23.7 | |||||||
Total Operating Revenues | 516.0 | 496.9 | |||||||
Operating Expenses | |||||||||
| Wages and benefits | 192.0 | 204.6 | |||||||
| Contracted services | 20.9 | 22.8 | |||||||
| Aircraft fuel | 89.7 | 64.7 | |||||||
| Aircraft maintenance | 50.1 | 43.1 | |||||||
| Aircraft rent | 46.2 | 46.5 | |||||||
| Food and beverage service | 14.0 | 14.3 | |||||||
| Commissions | 15.4 | 12.4 | |||||||
| Other selling expenses | 31.8 | 30.2 | |||||||
| Depreciation and amortization | 29.9 | 31.7 | |||||||
| Loss (gain) on sale of assets | 0.8 | (0.6 | ) | ||||||
| Landing fees and other rentals | 28.3 | 30.1 | |||||||
| Other | 46.4 | 48.5 | |||||||
Total Operating Expenses | 565.5 | 548.3 | |||||||
Operating Loss | (49.5 | ) | (51.4 | ) | |||||
Nonoperating Income (Expense) | |||||||||
| Interest income | 8.1 | 4.4 | |||||||
| Interest expense | (12.1 | ) | (11.9 | ) | |||||
| Interest capitalized | 3.6 | 0.2 | |||||||
| Other — net | (1.4 | ) | 5.3 | ||||||
| (1.8 | ) | (2.0 | ) | ||||||
| Loss before income tax | (51.3 | ) | (53.4 | ) | |||||
| Income tax credit | (18.2 | ) | (19.0 | ) | |||||
Net Loss | $ | (33.1 | ) | $ | (34.4 | ) | |||
Basic Loss Per Share: | $ | (1.25 | ) | $ | (1.30 | ) | |||
Diluted Loss Per Share: | $ | (1.25 | ) | $ | (1.30 | ) | |||
| Shares used for computation: | |||||||||
| Basic | 26.471 | 26.532 | |||||||
| Diluted | 26.471 | 26.532 | |||||||
See accompanying notes to consolidated financial statements.
4
| CONSOLIDATED STATEMENTS OF INCOME (unaudited) Alaska Air Group, Inc. | ||||||||
| Nine Months Ended September 30 (In Millions Except Per Share Amounts) | 2000 | 2001 | ||||||
| Operating Revenues | ||||||||
| Passenger | $1,535.8 | $1,550.9 | ||||||
| Freight and mail | 66.2 | 67.3 | ||||||
| Other - net | 42.8 | 60.5 | ||||||
| Total Operating Revenues | 1,644.8 | 1,678.7 | ||||||
| Operating Expenses | ||||||||
| Wages and benefits | 532.4 | 591.1 | ||||||
| Contracted services | 54.9 | 61.0 | ||||||
| Aircraft fuel | 273.7 | 265.1 | ||||||
| Aircraft maintenance | 137.6 | 138.0 | ||||||
| Aircraft rent | 139.1 | 138.5 | ||||||
| Food and beverage service | 40.4 | 44.6 | ||||||
| Commissions | 51.5 | 47.8 | ||||||
| Other selling expenses | 88.1 | 96.4 | ||||||
| Depreciation and amortization | 75.3 | 95.2 | ||||||
| Loss (gain) on sale of assets | (0.6 | ) | 1.5 | |||||
| Landing fees and other rentals | 73.3 | 92.8 | ||||||
| Other | 121.4 | 132.1 | ||||||
| Special charge - Mileage Plan | 24.0 | - | ||||||
| Total Operating Expenses | 1,611.1 | 1,704.1 | ||||||
| Operating Income (Loss) | 33.7 | (25.4 | ) | |||||
| Nonoperating Income (Expense) | ||||||||
| Interest income | 16.4 | 20.9 | ||||||
| Interest expense | (25.1 | ) | (34.6 | ) | ||||
| Interest capitalized | 11.3 | 7.5 | ||||||
| U.S. government compensation | - | 29.1 | ||||||
| Other - net | 1.7 | (2.3 | ) | |||||
| 4.3 | 20.6 | |||||||
| Income (loss) before income tax and accounting change | 38.0 | (4.8 | ) | |||||
| Income tax expense (credit) | 22.5 | (1.7 | ) | |||||
| Income (loss before accounting change | 15.5 | (3.1 | ) | |||||
| Cumulative effect of accounting change, net of income taxes of $35.6 million | (56.9 | ) | - | |||||
| Net Loss | $(41.4 | ) | $(3.1 | ) | ||||
| Basic Earnings (Loss) Per Share: | ||||||||
| Income (loss) before accounting change | $0.59 | $(0.12 | ) | |||||
| Cumulative effect of accounting change | (2.15 | ) | - | |||||
| Net Loss | $(1.56 | ) | $(0.12 | ) | ||||
| Diluted Earnings (Loss) Per Share: | ||||||||
| Income (loss) before accounting change | $0.59 | $(0.12 | ) | |||||
| Cumulative effect of accounting change | (2.15 | ) | - | |||||
| Net Loss | $(1.56 | ) | $(0.12 | ) | ||||
| Shares used for computation: | ||||||||
| Basic | 26.438 | 26.489 | ||||||
| Diluted | 26.495 | 26.489 | ||||||
| See accompanying notes to consolidated financial statements. | ||||||||
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (unaudited)
Alaska Air Group, Inc.
| Accumulated | |||||||||||||||||||||||||||||
| Common | Capital in | Treasury | Other | ||||||||||||||||||||||||||
| Shares | Common | Excess of | Stock, | Comprehensive | Retained | ||||||||||||||||||||||||
| Outstanding | Stock | Par Value | at Cost | Income (Loss) | Earnings | Total | |||||||||||||||||||||||
| (In Millions) | |||||||||||||||||||||||||||||
| Balances at December 31, 2001 | 26.528 | $ | 29.3 | $ | 482.5 | $ | (62.6 | ) | $ | (3.9 | ) | $ | 375.0 | $ | 820.3 | ||||||||||||||
| Net loss for the three months ended March 31, 2002 | (34.4 | ) | (34.4 | ) | |||||||||||||||||||||||||
| Other comprehensive income (loss) related to fuel hedges: | |||||||||||||||||||||||||||||
| Change in fair value | 20.5 | ||||||||||||||||||||||||||||
| Reclassification to earnings | (3.1 | ) | |||||||||||||||||||||||||||
| Income tax effect | (6.5 | ) | |||||||||||||||||||||||||||
| 10.9 | 10.9 | ||||||||||||||||||||||||||||
| Total comprehensive income (loss) | (23.5 | ) | |||||||||||||||||||||||||||
| Stock issued under stock plans | 0.018 | 0.4 | 0.1 | 0.5 | |||||||||||||||||||||||||
Balances at March 31, 2002 | 26.546 | $ | 29.3 | $ | 482.9 | $ | (62.5 | ) | $ | 7.0 | $ | 340.6 | $ | 797.3 | |||||||||||||||
See accompanying notes to consolidated financial statements.
5
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) Alaska Air Group, Inc. | |||||||||||||||||
| (In Millions) | Common Shares Outstanding | Common Stock | Capital in Excess of Par Value | Treasury Stock, at Cost | Retained Earnings | Total | |||||||||||
| Balances at December 31, 2000 | 26.457 | $29.2 | $481.2 | $(62.6 | ) | $414.5 | $862.3 | ||||||||||
| Net loss for the nine months ended September 30, 2001 | (3.1 | ) | (3.1 | ) | |||||||||||||
| Stock issued under stock plans | 0.071 | 0.1 | 1.2 | 1.3 | |||||||||||||
| Balances at September 30, 2001 | 26.528 | $29.3 | $482.4 | $(62.6 | ) | $411.4 | $860.5 | ||||||||||
| See accompanying notes to consolidated financial statements. | |||||||||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Alaska Air Group, Inc.
| Three Months Ended March 31 | ||||||||||
| 2001 | 2002 | |||||||||
| (In Millions) | ||||||||||
Cash flows from operating activities: | ||||||||||
| Net loss | $ | (33.1 | ) | $ | (34.4 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||
| Depreciation and amortization | 29.9 | 31.7 | ||||||||
| Amortization of airframe and engine overhauls | 20.6 | 15.7 | ||||||||
| Loss (gain) on sale of assets | 0.8 | (0.6 | ) | |||||||
| Decrease in deferred income taxes | (18.2 | ) | (12.7 | ) | ||||||
| Increase in accounts receivable | (19.5 | ) | (20.8 | ) | ||||||
| (Increase) decrease in other current assets | 7.7 | (31.1 | ) | |||||||
| Increase in air traffic liability | 57.7 | 49.2 | ||||||||
| Increase (decrease) in other current liabilities | 5.4 | (43.9 | ) | |||||||
| Increase in deferred revenue and other-net | 3.0 | 17.1 | ||||||||
| Net cash provided by (used in) operating activities | 54.3 | (29.8 | ) | |||||||
Cash flows from investing activities: | ||||||||||
| Proceeds from disposition of assets | — | 1.7 | ||||||||
| Purchases of marketable securities | (79.6 | ) | (117.7 | ) | ||||||
| Sales and maturities of marketable securities | 133.4 | 22.2 | ||||||||
| Property and equipment additions: | ||||||||||
| Flight equipment, including purchase deposits | (40.0 | ) | 14.2 | |||||||
| Capitalized airframe and engine overhauls | (22.0 | ) | (11.9 | ) | ||||||
| Aircraft modifications, rotable parts, and other flight equipment | (18.3 | ) | (7.2 | ) | ||||||
| Other property and equipment | (13.6 | ) | (5.9 | ) | ||||||
| Restricted deposits and other | (0.1 | ) | (2.2 | ) | ||||||
| Net cash used in investing activities | (40.2 | ) | (106.8 | ) | ||||||
Cash flows from financing activities: | ||||||||||
| Proceeds from issuance of long-term debt | 29.5 | 7.4 | ||||||||
| Long-term debt and capital lease payments | (60.2 | ) | (7.6 | ) | ||||||
| Proceeds from issuance of common stock | 0.4 | 0.4 | ||||||||
| Net cash provided by (used in) financing activities | (30.3 | ) | 0.2 | |||||||
| Net change in cash and cash equivalents | (16.2 | ) | (136.4 | ) | ||||||
| Cash and cash equivalents at beginning of period | 101.1 | 490.3 | ||||||||
Cash and cash equivalents at end of period | $ | 84.9 | $ | 353.9 | ||||||
| Supplemental disclosure of cash paid (refunded) during the period for: | ||||||||||
| Interest (net of amount capitalized) | $ | 16.0 | $ | 9.9 | ||||||
| Income taxes | (0.1 | ) | 0.0 | |||||||
| Noncash investing and financing activities | None | None | ||||||||
See accompanying notes to consolidated financial statements.
6
| CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Alaska Air Group, Inc. | ||||||||
| Nine Months Ended September 30 (In Millions) | 2000 | 2001 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $(41.4 | ) | $(3.1 | ) | ||||
| Adjustments to reconcile net loss to cash: | ||||||||
| Cumulative effect of accounting change | 56.9 | - | ||||||
| Special charge - Mileage Plan | 24.0 | - | ||||||
| Depreciation and amortization | 75.3 | 95.2 | ||||||
| Amortization of airframe and engine overhauls | 47.7 | 47.0 | ||||||
| Loss (gain) on sale of assets | (0.6 | ) | 1.5 | |||||
| Increase (decrease) in deferred income taxes | (26.5 | ) | 15.1 | |||||
| Increase in accounts receivable - net | (24.9 | ) | (6.1 | ) | ||||
| Decrease in other current assets | 0.2 | 10.9 | ||||||
| Increase in air traffic liability | 53.3 | 25.9 | ||||||
| Increase in other current liabilities | 79.9 | 41.0 | ||||||
| Increase in deferred revenue and other-net | 7.5 | 42.1 | ||||||
| Net cash provided by operating activities | 251.4 | 269.5 | ||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from disposition of assets | 38.8 | 1.2 | ||||||
| Purchases of marketable securities | (229.6 | ) | (670.5 | ) | ||||
| Sales and maturities of marketable securities | 180.2 | 394.5 | ||||||
| Flight equipment deposits returned | - | 72.5 | ||||||
| Additions to flight equipment deposits | (128.5 | ) | (62.3 | ) | ||||
| Additions to property and equipment | (207.8 | ) | (289.2 | ) | ||||
| Restricted deposits and other | 0.7 | (18.7 | ) | |||||
| Net cash used in investing activities | (346.2 | ) | (572.5 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of long-term debt | 118.7 | 359.5 | ||||||
| Long-term debt and capital lease payments | (19.9 | ) | (128.2 | ) | ||||
| Proceeds from issuance of common stock | 1.0 | 1.3 | ||||||
| Net cash provided by financing activities | 99.8 | 232.6 | ||||||
| Net change in cash and cash equivalents | 5.0 | (70.4 | ) | |||||
| Cash and cash equivalents at beginning of period | 132.5 | 101.1 | ||||||
| Cash and cash equivalents at end of period | $137.5 | $30.7 | ||||||
| Supplemental disclosure of cash paid (refunded) during the period for: | ||||||||
| Interest (net of amount capitalized) | $10.2 | $34.8 | ||||||
| Income taxes | 13.7 | (16.7 | ) | |||||
| Noncash investing and financing activities | None | None | ||||||
| See accompanying notes to consolidated financial statements. | ||||||||
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2001(unaudited)
Alaska Air Group, Inc.
Note 1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Alaska Air Group, Inc. (the Company or Air Group) include the accounts of its principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). These statements should be read in conjunction with the financial statements in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2000.2001. They include all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. Except for the recording of U.S. Government compensation described below, theThe adjustments made were of a normal recurring nature. Certain reclassifications have been made in the prior year’s financial statements to conform to the 2002 presentation.
Effective January 1, 2001,2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 (“SFAS 133”), Accounting for Derivative Instruments142, “Goodwill and Hedging Activities, as amended. SFAS 133 requires companiesOther Intangible Assets”. Under this Statement, the Company’s intangible assets are considered to record derivatives onhave an indefinite life and will no longer be amortized but instead will be subject to periodic impairment testing. Additionally, we will be required to apply a fair market value based assumption test to our goodwill at least annually. The impact of the balance sheet as assets or liabilities, measured at fair value. The Company's operating results can be significantly impacted by changes in the price of aircraft fuel. To manage the risks associated with changes in aircraft fuel prices, the Company uses purchase options for crude oil contracts. These contracts, referred to as “fuel hedge contracts”, have a high correlation to changes in aircraft fuel prices, and therefore qualify as cash flow hedges under SFAS 133. Upon adoption of SFAS 133,No. 142 is expected to increase annual net income by $2.0 million related to the discontinuance of amortization of existing goodwill. We are currently evaluating whether there will be additional impacts from the adoption of SFAS No. 142 on our consolidated financial statements such as an impairment of existing goodwill amounts.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (effective for the Company recordedon January 1, 2003). This Statement addresses financial accounting and reporting for obligations associated with the fair market valueretirement of its fuel hedging contractstangible long-lived assets and the associated asset retirement costs. The Company is in the process of evaluating the financial statement impact of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and APB Opinion No. 30, “Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Adoption of this Statement, in the fiscal year beginning January 1, 2002, did not have a material impact on the Company’s consolidated financial statements.
Note 2. Earnings per Share (See Note 10 to Consolidated Balance Sheet. Each period,Financial Statements at December 31, 2001)
Earnings per share (EPS) calculations for the contracts are adjusted to fair market value. To the extent the change in the value of the fuel contract does not perfectly offset the change in the value of the aircraft fuel purchase being hedged, that portion of the hedge is recognized in earnings. For the ninethree months ended September 30, 2001,March 31 were as follows (in millions except per share amounts). The calculation is the Company recognized $3.1 million of nonoperating expense related to fair market value changes in fuel hedge contracts.
| Note 2. | Earnings per Share (See Note 10 to Consolidated Financial Statements at December 31, 2000) | ||||||||
| Earnings per share (EPS) calculations were as follows (in millions except per share amounts): | |||||||||
| Three Months Ended Sep. 30 | Nine Months Ended Sep. 30 | ||||||||
| 2000 | 2001 | 2000 | 2001 | ||||||
| Basic | |||||||||
| Income before accounting change | $15.9 | $25.3 | $15.5 | $(3.1 | ) | ||||
| Average shares outstanding | 26.444 | 26.514 | 26.438 | 26.489 | |||||
| EPS before accounting change | $0.60 | $0.95 | $(0.59 | ) | $(0.12 | ) | |||
| Diluted | |||||||||
| Income before accounting change | $15.9 | $25.3 | $15.5 | $(3.1 | ) | ||||
| Average shares outstanding | 26.444 | 26.514 | 26.438 | 26.489 | |||||
| Assumed exercise of stock options | .046 | .045 | .057 | -- | |||||
| Diluted EPS shares | 26.490 | 26.559 | 26.495 | 26.489 | |||||
| EPS before accounting change | $0.60 | $0.95 | $0.59 | $(0.12 | ) | ||||
8
same for basic and diluted EPS. Stock options are excluded from the calculation of diluted EPS because they are antidilutive and they represented 1.62.4 million and 2.03.0 million shares, respectively, for the three months ended September 30, 2000 andin 2001 and 1.6 million and 2.3 million shares, respectively, for the nine months ended September 30, 2000 and 2001.2002.
| 2001 | 2002 | |||||||
| Net loss | $ | (33.1 | ) | $ | (34.4 | ) | ||
| Average shares outstanding | 26.471 | 26.532 | ||||||
| Earnings per share | $ | (1.25 | ) | $ | (1.30 | ) | ||
7
Note 3.Prepaid Expenses and Other Current Assets
At December 31, 20002001 and September 30, 2001,March 31, 2002, other current assets included a deferred tax assetprepaid pension cost of $51.4 million.$98.4 million and $97.5 million, respectively.
Note 4.Long-term Debt and Capital Lease Obligations Frequent Flyer Program (See Note 41 to Consolidated Financial Statements at December 31, 2000)During 2001, Alaska issued $209.5 million of debt secured by flight equipment, including $64.5 million with fixed interest rates of approximately 6.8% and a term of 12 years. Interest rates on the other $145.0 million varies with LIBOR and has payment terms of 12 to 16 years. In September 2001, Alaska borrowed $150 million under its credit facility at an interest rate that varies with LIBOR and is payable on or before December 31, 2004.2001)
Note 5. Frequent Flyer Program (See Note 12 to Consolidated Financial Statements at December 31, 2000)Balance Sheet Classification of Frequent Flyer LiabilityAlaska'sAlaska’s Mileage Plan liabilities are included under the following balance sheet captions.
| December 31, 2000 | September 30, 2001 | |||
| (In millions) | ||||
| Current Liabilities: | ||||
| Other accrued liabilities | $59.5 | $70.0 | ||
| Other Liabilities and Credits: | ||||
| Deferred revenue | 94.0 | 110.0 | ||
| Other liabilities | 45.0 | 58.0 | ||
| Total | $198.5 | $238.0 | ||
| December 31, 2001 | March 31, 2002 | |||||||
| (In millions) | ||||||||
| Current Liabilities: | ||||||||
| Other accrued liabilities | $ | 67.3 | $ | 66.8 | ||||
| Other Liabilities and Credits: | ||||||||
| Deferred revenue | 123.0 | 122.0 | ||||||
| Other liabilities | 58.0 | 72.0 | ||||||
| Total | $ | 248.3 | $ | 260.8 | ||||
Note 6.U.S. Government CompensationOn September 11, 2001, the United States was attacked by terrorists using hijacked jets of two other U.S. airlines. Due to the negative impact these attacks had on the airline industry, on September 22, 2001, the U.S. Government passed the Air transportation Safety and System Stabilization Act to provide $5 billion of cash compensation and $10 billion of guaranteed loans to U.S. airlines. The purpose of the Act was to compensate the airlines for direct and incremental losses for the period September 11 through December 31, 2001 as a result of the attacks. Alaska expects to receive $89.3 million and Horizon expects to receive $10.4 million of the $5 billion cash compensation.
As a result of decreased demand for its services, increased security costs and other direct and incremental costs arising from the attacks, Alaska estimates that its terrorist-attack related losses from September 11 thorough December 31 will exceed $89.3 million, therefore, the amount is expected to be fully collected. As of September 30, 2001, the Company has received $45.4 million. In accordance with EITF Issue No. 01-10, the compensation received is being recognized as the losses are incurred. For the period September 11 through September 30, Alaska estimated its terrorist-related losses to be $18.7 million. Hence, $18.7 million of the U.S. government compensation was recognized as nonoperating income in the third quarter of 2001. The remainder of the cash received, $26.7 million, was considered deferred U.S. government compensation and was shown as part of other accrued liabilities at September 30, 2001. The $26.7 million is expected to be recognized as nonoperating income during the fourth quarter of 2001.
9
As a result of decreased demand for its services, increased security costs and other direct and incremental costs arising from the attacks, Horizon estimates that it incurred terrorist-related losses from September 11 to September 30, 2001 in excess of its $10.4 allocation of government compensation. Because the government compensation was limited to the lessor of a carrier's allocation or actual losses, Horizon recorded $10.4 million of U.S. government compensation as non-operating income in the third quarter of 2001. As of September 30, 2001, Horizon has received $5.0 million of this compensation.
Note 7.5. Operating Segment Information (See Note 11 to Consolidated Financial Statements at December 31, 2000)
2001)
Operating segment information for Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon) for the three months ended March 31 was as follows (in millions):
| 2001 | 2002 | ||||||||
| Operating revenues: | |||||||||
| Alaska | $ | 418.1 | $ | 408.9 | |||||
| Horizon | 102.0 | 93.2 | |||||||
| Elimination of intercompany revenues | (4.1 | ) | (5.2 | ) | |||||
| Consolidated | 516.0 | 496.9 | |||||||
| Loss before income tax: | |||||||||
| Alaska | (33.7 | ) | (43.9 | ) | |||||
| Horizon | (17.1 | ) | (9.0 | ) | |||||
| Other | (0.5 | ) | (0.5 | ) | |||||
| Consolidated | (51.3 | ) | (53.4 | ) | |||||
| Total assets at end of period: | |||||||||
| Alaska | 2,401.0 | 2,738.8 | |||||||
| Horizon | 268.4 | 266.6 | |||||||
| Other | 843.0 | 828.7 | |||||||
| Elimination of intercompany accounts | (901.2 | ) | (910.2 | ) | |||||
| Consolidated | 2,611.2 | 2,923.9 | |||||||
| Three Months Ended Sep. 30 | Nine Months Ended Sep. 30 | ||||||||||||||||
| 2000 | 2001 | 2000 | 2001 | ||||||||||||||
| Operating revenues: | |||||||||||||||||
| Alaska | $ | 484.3 | $ | 480.0 | $ | 1,320.0 | $ | 1,369.4 | |||||||||
| Horizon | 121.9 | 107.5 | 336.0 | 323.4 | |||||||||||||
| Elimination of intercompany revenues | (3.9 | ) | (4.1 | ) | (11.2 | ) | (14.1 | ) | |||||||||
| Consolidated | 602.3 | 583.4 | 1,644.8 | 1,678.7 | |||||||||||||
| Income (loss) before income tax and accounting change: | |||||||||||||||||
| Alaska | 35.0 | 31.3 | 31.2 | 5.9 | |||||||||||||
| Horizon | 3.9 | 7.2 | 8.1 | (9.1 | ) | ||||||||||||
| Air Group | (0.3 | ) | (0.2 | ) | (1.3 | ) | (1.6 | ) | |||||||||
| Consolidated | 38.6 | 38.3 | 38.0 | ) | (4.8 | ) | |||||||||||
| Total assets at end of period: | |||||||||||||||||
| Alaska | 2,252.0 | 2,765.6 | 2,252.0 | 2,765.6 | |||||||||||||
| Horizon | 256.5 | 258.3 | 256.5 | 258.3 | |||||||||||||
| Air Group | 910.9 | 877.0 | 910.9 | 877.0 | |||||||||||||
| Elimination of intercompany accounts | (957.6 | ) | (918.2 | ) | (957.6 | ) | (918.2 | ) | |||||||||
| Consolidated | 2,461.8 | 2,982.7 | 2,461.8 | 2,982.7 | |||||||||||||
108
Alaska Airlines Financial and Statistical Data
| Three Months Ended March 31 | ||||||||||||
| 2001 | 2002 | % Change | ||||||||||
Financial Data (in millions): | ||||||||||||
| Operating Revenues: | ||||||||||||
| Passenger | $ | 385.1 | $ | 374.2 | (2.8 | ) | ||||||
| Freight and mail | 18.3 | 15.9 | (13.1 | ) | ||||||||
| Other — net | 14.7 | 18.8 | 27.9 | |||||||||
| Total Operating Revenues | 418.1 | 408.9 | (2.2 | ) | ||||||||
| Operating Expenses: | ||||||||||||
| Wages and benefits | 155.3 | 167.3 | 7.7 | |||||||||
| Contracted services | 17.9 | 19.9 | 11.2 | |||||||||
| Aircraft fuel | 74.0 | 55.2 | (25.4 | ) | ||||||||
| Aircraft maintenance | 31.1 | 36.5 | 17.4 | |||||||||
| Aircraft rent | 35.3 | 31.8 | (9.9 | ) | ||||||||
| Food and beverage service | 13.2 | 13.9 | 5.3 | |||||||||
| Commissions | 15.9 | 14.3 | (10.1 | ) | ||||||||
| Other selling expenses | 26.0 | 24.9 | (4.2 | ) | ||||||||
| Depreciation and amortization | 23.1 | 27.6 | 19.5 | |||||||||
| Loss on sale of assets | 0.9 | 0.1 | NM | |||||||||
| Landing fees and other rentals | 21.5 | 23.7 | 10.2 | |||||||||
| Other | 36.4 | 35.5 | (2.5 | ) | ||||||||
| Total Operating Expenses | 450.6 | 450.7 | 0.0 | |||||||||
| Operating Loss | (32.5 | ) | (41.8 | ) | 28.6 | |||||||
| Interest income | 9.5 | 5.0 | ||||||||||
| Interest expense | (12.1 | ) | (11.9 | ) | ||||||||
| Interest capitalized | 2.6 | 0.1 | ||||||||||
| Other — net | (1.2 | ) | 4.7 | |||||||||
| (1.2 | ) | (2.1 | ) | |||||||||
| Loss Before Income Tax | $ | (33.7 | ) | $ | (43.9 | ) | 30.3 | |||||
Operating Statistics: | ||||||||||||
| Revenue passengers (000) | 3,198 | 3,193 | (0.2 | ) | ||||||||
| RPMs (000,000) | 2,895 | 2,977 | 2.8 | |||||||||
| ASMs (000,000) | 4,428 | 4,467 | 0.9 | |||||||||
| Passenger load factor | 65.4 | % | 66.7 | % | 1.3 pts | |||||||
| Breakeven load factor | 73.4 | % | 76.5 | % | 3.1 pts | |||||||
| Yield per passenger mile | 13.30 | ¢ | 12.57 | ¢ | (5.5 | ) | ||||||
| Operating revenue per ASM | 9.44 | ¢ | 9.16 | ¢ | (3.1 | ) | ||||||
| Operating expenses per ASM | 10.18 | ¢ | 10.09 | ¢ | (0.9 | ) | ||||||
| Expense per ASM excluding fuel | 8.51 | ¢ | 8.86 | ¢ | 4.1 | |||||||
| Fuel cost per gallon | 97.1 | ¢ | 73.6 | ¢ | (24.3 | ) | ||||||
| Fuel gallons (000,000) | 76.2 | 75.0 | (1.6 | ) | ||||||||
| Average number of employees | 10,203 | 9,815 | (3.8 | ) | ||||||||
| Aircraft utilization (blk hrs/day) | 11.0 | 10.1 | (8.2 | ) | ||||||||
| Operating fleet at period-end | 96 | 102 | 6.3 | |||||||||
| NM = Not Meaningful | ||||||||||||
Quarter Ended Sep 30| | Nine Months Ended Sep 30 | | |||||
| % | % | ||||||
| Financial Data (in millions): | 2000 | 2001 | Change| | 2000 | 2001 | Change | |
| Operating Revenues: | |||||||
| Passenger | $451.5 | $441.8 | (2.1) | $1,221.6 | $1,261.6 | 3.3 | |
| Freight and mail | 19.8 | 20.8 | 5.1 | 57.7 | 60.5 | 4.9 | |
| Other - net | 13.0 | 17.4 | 33.8 | 40.7 | 47.3 | 16.2 | |
| Total Operating Revenues | 484.3 | 480.0 | (0.9) | 1,320.0 | 1,369.4 | 3.7 | |
| Operating Expenses: | |||||||
| Wages and benefits | 150.3 | 166.6 | 10.8 | 431.2 | 479.4 | 11.2 | |
| Contracted services | 16.3 | 16.8 | 3.1 | 46.4 | 52.9 | 14.0 | |
| Aircraft fuel | 82.1 | 71.7 | (12.7) | 223.6 | 219.8 | (1.7) | |
| Aircraft maintenance | 32.3 | 32.2 | (0.3) | 90.8 | 95.4 | 5.1 | |
| Aircraft rent | 35.4 | 33.7 | (4.8) | 107.3 | 104.0 | (3.1) | |
| Food and beverage service | 13.5 | 14.5 | 7.4 | 38.0 | 42.4 | 11.6 | |
| Commissions | 17.1 | 16.3 | (4.7) | 49.4 | 50.4 | 2.0 | |
| Other selling expenses | 27.0 | 26.3 | (2.6) | 70.8 | 78.9 | 11.4 | |
| Depreciation and amortization | 22.2 | 26.7 | 20.3 | 60.2 | 74.4 | 23.6 | |
| Loss on sale of assets | 0.4 | 0.6 | NM | 0.8 | 1.8 | NM | |
| Landing fees and other rentals | 19.9 | 25.9 | 30.2 | 54.4 | 70.7 | 30.0 | |
| Other | 34.5 | 32.8 | (4.9) | 96.6 | 104.8 | 8.5 | |
| Special charge - Mileage Plan | 0.0 | 0.0 | 0.0 | 24.0 | 0.0 | NM | |
| Total Operating Expenses | 451.0 | 464.1 | 2.9 | 1,293.5 | 1,374.9 | 6.3 | |
| Operating Income (Loss) | 33.3 | 15.9 | (52.3) | 26.5 | (5.5) | NM | |
| Interest income | 6.9 | 7.9 | 19.3 | 24.2 | |||
| Interest expense | (9.3) | (11.9) | (25.1) | (34.6) | |||
| Interest capitalized | 3.2 | 1.0 | 8.8 | 4.8 | |||
| U.S. government compensation | 0.0 | 18.7 | 0.0 | 18.7 | |||
| Other - net | 0.9 | (0.3) | 1.7 | (1.7) | |||
| 1.7 | 15.4 | 4.7 | 11.4 | ||||
| Income Before Income Tax and Accounting Change | $35.0 | $31.3 | (10.6) | $31.2 | $5.9 | (81.1) | |
| Operating Statistics: | |||||||
| Revenue passengers (000) | 3,655 | 3,747 | 2.5 | 10,255 | 10,643 | 3.8 | |
| RPMs (000,000) | 3,226 | 3,328 | 3.2 | 9,088 | 9,514 | 4.7 | |
| ASMs (000,000) | 4,494 | 4,687 | 4.3 | 12,936 | 13,798 | 6.7 | |
| Passenger load factor | 71.8% | 71.0% | (0.8)pts | 70.3% | 69.0% | (1.3)pts | |
| Breakeven load factor | 66.8% | 70.1% | 3.3 pts | 67.9% | 71.1% | 3.2 pts | |
| Yield per passenger mile | 13.99¢ | 13.27¢ | (5.2) | 13.44¢ | 13.26¢ | (1.4) | |
| Operating revenue per ASM | 10.78¢ | 10.24¢ | (5.0) | 10.20¢ | 9.92¢ | (2.7) | |
| Operating expenses per ASM* | 10.04¢ | 9.90¢ | (1.3) | 9.81¢ | 9.96¢ | 1.5 | |
| Expense per ASM excluding fuel* | 8.21¢ | 8.37¢ | 2.0 | 8.09¢ | 8.37¢ | 3.5 | |
| Fuel cost per gallon | 104.6¢ | 90.1¢ | (13.9) | 98.5¢ | 93.1¢ | (5.4) | |
| Fuel gallons (000,000) | 78.5 | 79.6 | 1.4 | 227.1 | 236.1 | 4.0 | |
| Average number of employees | 9,763 | 10,222 | 4.7 | 9,494 | 10,209 | 7.5 | |
| Aircraft utilization (blk hrs/day) | 10.8 | 10.3 | (4.6) | 10.7 | 10.8 | 0.9 | |
| Operating fleet at period-end | 93 | 102 | 9.7 | 93 | 102 | 9.7 | |
| * Nine months-to-date amount excludes the impact of a special charge in June 2000. | |||||||
| NM = Not Meaningful | |||||||
119
Horizon Air Financial and Statistical Data
| Three Months Ended March 31 | ||||||||||||
| 2001 | 2002 | % Change | ||||||||||
Financial Data (in millions): | ||||||||||||
| Operating Revenues: | ||||||||||||
| Passenger | $ | 98.2 | $ | 86.3 | (12.1 | ) | ||||||
| Freight and mail | 2.3 | 1.2 | (47.8 | ) | ||||||||
| Other — net | 1.5 | 5.7 | 280.0 | |||||||||
| Total Operating Revenues | 102.0 | 93.2 | (8.6 | ) | ||||||||
| Operating Expenses: | ||||||||||||
| Wages and benefits | 36.7 | 37.3 | 1.6 | |||||||||
| Contracted services | 3.7 | 3.9 | 5.4 | |||||||||
| Aircraft fuel | 15.7 | 9.5 | (39.5 | ) | ||||||||
| Aircraft maintenance | 19.0 | 6.6 | (65.3 | ) | ||||||||
| Aircraft rent | 11.0 | 14.8 | 34.5 | |||||||||
| Food and beverage service | 0.8 | 0.4 | (50.0 | ) | ||||||||
| Commissions | 2.9 | 2.3 | (20.7 | ) | ||||||||
| Other selling expenses | 5.8 | 5.3 | (8.6 | ) | ||||||||
| Depreciation and amortization | 6.4 | 3.9 | (39.1 | ) | ||||||||
| Gain on sale of assets | (0.1 | ) | (0.6 | ) | NM | |||||||
| Landing fees and other rentals | 6.9 | 6.4 | (7.2 | ) | ||||||||
| Other | 9.9 | 12.7 | 28.3 | |||||||||
| Total Operating Expenses | 118.7 | 102.5 | (13.6 | ) | ||||||||
| Operating Loss | (16.7 | ) | (9.3 | ) | (44.3 | ) | ||||||
| Interest expense | (1.1 | ) | (0.5 | ) | ||||||||
| Interest capitalized | 1.1 | 0.2 | ||||||||||
| Other — net | (0.4 | ) | 0.6 | |||||||||
| (0.4 | ) | 0.3 | ||||||||||
| Loss Before Income Tax | $ | (17.1 | ) | $ | (9.0 | ) | (47.4 | ) | ||||
Operating Statistics: | ||||||||||||
| Revenue passengers (000) | 1,177 | 1,095 | (7.0 | ) | ||||||||
| RPMs (000,000) | 336 | 329 | (2.0 | ) | ||||||||
| ASMs (000,000) | 543 | 531 | (2.2 | ) | ||||||||
| Passenger load factor | 61.8 | % | 62.0 | % | 0.2 pts | |||||||
| Breakeven load factor | 73.3 | % | 69.5 | % | (3.8)pts | |||||||
| Yield per passenger mile | 29.24 | ¢ | 26.20 | ¢ | (10.4 | ) | ||||||
| Operating revenue per ASM | 18.78 | ¢ | 17.56 | ¢ | (6.5 | ) | ||||||
| Operating expenses per ASM | 21.85 | ¢ | 19.31 | ¢ | (11.6 | ) | ||||||
| Expense per ASM excluding fuel | 18.96 | ¢ | 17.52 | ¢ | (7.6 | ) | ||||||
| Fuel cost per gallon | 100.1 | ¢ | 77.2 | ¢ | (22.9 | ) | ||||||
| Fuel gallons (000,000) | 15.6 | 12.3 | (21.2 | ) | ||||||||
| Average number of employees | 3,923 | 3,452 | (12.0 | ) | ||||||||
| Aircraft utilization (blk hrs/day) | 8.1 | 7.1 | (12.3 | ) | ||||||||
| Operating fleet at period-end | 63 | 62 | (1.6 | ) | ||||||||
Quarter Ended Sep 30| | Nine Months Ended Sep 30 | | |||||
| % | % | ||||||
| Financial Data (in millions): | 2000 | 2001 | Change| | 2000 | 2001 | Change | |
| Operating Revenues: | |||||||
| Passenger | $117.4 | $98.4 | (16.2) | $322.9 | $301.0 | (6.8) | |
| Freight and mail | 2.8 | 1.9 | (32.1) | 8.4 | 6.8 | (19.0) | |
| Other - net | 1.7 | 7.2 | 323.5 | 4.7 | 15.6 | 231.9 | |
| Total Operating Revenues | 121.9 | 107.5 | (11.8) | 336.0 | 323.4 | (3.8) | |
| Operating Expenses: | |||||||
| Wages and benefits | 35.3 | 38.4 | 8.8 | 101.2 | 111.7 | 10.4 | |
| Contracted services | 3.6 | 3.3 | (8.3) | 10.4 | 10.4 | 0.0 | |
| Aircraft fuel | 18.3 | 13.8 | (24.6) | 50.0 | 45.2 | (9.6) | |
| Aircraft maintenance | 19.7 | 10.5 | (46.7) | 46.8 | 42.6 | (9.0) | |
| Aircraft rent | 10.6 | 12.3 | 16.0 | 31.9 | 34.6 | 8.5 | |
| Food and beverage service | 0.8 | 0.8 | 0.0 | 2.4 | 2.3 | (4.2) | |
| Commissions | 3.8 | 3.0 | (21.1) | 10.8 | 9.0 | (16.7) | |
| Other selling expenses | 5.8 | 5.5 | (5.2) | 17.2 | 17.6 | 2.3 | |
| Depreciation and amortization | 5.4 | 6.7 | 24.1 | 14.4 | 19.8 | 37.5 | |
| Gain on sale of assets | (0.5) | (0.3) | NM | (1.4) | (0.3) | NM | |
| Landing fees and other rentals | 7.0 | 7.9 | 12.9 | 18.9 | 22.1 | 16.9 | |
| Other | 8.2 | 8.7 | 6.1 | 25.4 | 27.3 | 7.5 | |
| Total Operating Expenses | 118.0 | 110.6 | (6.3) | 328.0 | 432.3 | 4.4 | |
| Operating Income (Loss) | 3.9 | (3.1) | 8.0 | (18.9) | |||
| Interest expense | (0.8) | (0.7) | (2.5) | (2.8) | |||
| Interest capitalized | 0.8 | 0.6 | 2.5 | 2.7 | |||
| U.S. government compensation | 0.0 | 10.4 | 0.0 | 10.4 | |||
| Other - net | 0.0 | 0.0 | 0.1 | (0.5) | |||
| 0.0 | 10.3 | 0.1 | 9.8 | ||||
| Income (Loss) Before Income Tax | $3.9 | $7.2 | $8.1 | $(9.1) | |||
| Operating Statistics: | |||||||
| Revenue passengers (000) | 1,356 | 1,207 | (10.9) | 3,813 | 3,635 | (4.7) | |
| RPMs (000,000) | 390 | 357 | (8.6) | 1,072 | 1,050 | (2.1) | |
| ASMs (000,000) | 606 | 555 | (8.5) | 1,734 | 1,674 | (3.5) | |
| Passenger load factor | 64.4% | 64.3% | (0.1)pts | 61.8% | 62.7% | 0.9 pts | |
| Breakeven load factor | 62.4% | 66.7% | 4.3 pts | 60.5% | 67.2% | 6.7 pts | |
| Yield per passenger mile | 30.07¢ | 27.59¢ | (8.2) | 30.11¢ | 28.66¢ | (4.8) | |
| Operating revenue per ASM | 20.10¢ | 19.36¢ | (3.7) | 19.38¢ | 19,32¢ | (0.3) | |
| Operating expenses per ASM | 19.47¢ | 19.92¢ | 2.3 | 18.91¢ | 20.45¢ | 8.1 | |
| Expense per ASM excluding fuel | 16.44¢ | 17.44¢ | 6.1 | 16.03¢ | 17.75¢ | 10.7 | |
| Fuel cost per gallon | 105.6¢ | 94.0¢ | (11.0) | 100.4¢ | 97.6¢ | (2.8) | |
| Fuel gallons (000,000) | 17.4 | 14.7 | (15.5) | 49.8 | 46.4 | (6.8) | |
| Average number of employees | 3,921 | 3,811 | (2.8) | 3,724 | 3,840 | 3.1 | |
| Aircraft utilization (blk hrs/day) | 8.7 | 7.6 | (12.6) | 8.3 | 7.9 | (4.8) | |
| Operating fleet at period-end | 62 | 65 | 4.8 | 62 | 65 | 4.8 | |
| NM = Not Meaningful | |||||||
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ITEM 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Financial Condition
Forward-Looking Information
This report may contain forward-looking statements that are based on the best information currently available to management. These forward-looking statements are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are indicated by phrases such as “will”, “should”, “the Company believes”, “we expect” or any other language indicating a prediction of future events. There can be no assurance that actual developments will be those anticipated by the Company. Actual results could differ materially from those projected as a result of a number of factors, some of which the Company cannot predict or control. For a discussion of these factors, please see Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.2001.
Industry ConditionsOn September 11, 2001, the United States was attacked by terrorists using hijacked jets of two other U.S. airlines. The Federal Aviation Administration (FAA) shut down all commercial airline flight operations for September 11 and 12. Airlines resumed flight operations at reduced levels on September 13. For the month of September 2001 as compared to September 2000, the nine major U.S. airlines have reported passenger traffic decreases ranging from 19% to 34%. Due to anticipated decreased demand for travel, many of these airlines have reported capacity reductions of about 20%, work force reductions and other cost-saving measures.
As a result of the terrorist attacks, credit rating agencies have downgraded the long-term credit ratings of most U.S. airlines and their related entities, including Alaska Air Group, Inc. Due to the negative impact these attacks had on the airline industry, on September 22, 2001, the U.S. Government passed the Air Transportation Safety and System Stabilization Act (“Act”) to provide $5 billion of cash compensation and $10 billion of guaranteed loans to U.S. airlines. Alaska expects to receive $89.3 million and Horizon expects to receive $10.4 million of the $5 billion cash compensation.
Results of OperationsThirdFirst Quarter 20012002 Compared with ThirdFirst Quarter 2000
2001
The consolidated net incomeloss for the thirdfirst quarter of 20012002 was $25.3$34.4 million, or $0.95$1.30 per share, (diluted), compared with $15.9a loss of $33.1 million, or $0.60$1.25 per share, (diluted), in 2000. The 2001 results include $29.1 million ($18.0 million after tax or $0.68 per share) of U.S. government compensation.2001. The consolidated operating incomeloss for the thirdfirst quarter of 20012002 was $12.8$51.4 million compared with $37.2an operating loss of $49.5 million for 2000.2001. Financial and statistical data for Alaska and Horizon is shown on pages 119 and 12.10, respectively. A discussion of this data follows.
Alaska Airlines
RevenuesRevenues
Capacity was down 4.9% in January but increased by 4.3% primarily3.1% in February and 4.5% in March. For the quarter, capacity increased 0.9% due to additional flightsour service to new markets (Seattle to Washington D.C., Los Angeles to Cancun and Los Angeles to Calgary), partially offset by reduced service in existing markets, especially the ArizonaPacific Northwest to Southern California and Alaska-to-U.S. mainland markets.Northern California. Traffic grew by 3.2%2.8%, and our passenger load factor decreased 0.8increased 1.3 percentage points. Capacity, trafficThe Canada and Mexico markets experienced the largest increases in load factors in all markets were adversly impacted by the September 11th terrorist attacks. For the month of September 2001 as compared to September 2000, traffic decreased 18.6% and load factor decreased 2.0 percentage points. For third quarter, passengerfactor. Passenger yields were down 5.2%, largely5.5% due to a reductioncombination of fewer business passengers, a drop off in business passengers.demand due to the September 11, 2001 terrorist attacks, and fare sales offered to stimulate demand. Yields were down in virtually all major markets, with Mexico and Canada showing the largest decreases. The lower yield combined result ofwith the 3.2%higher load factor resulted in a 3.1% decrease in revenue per available seat mile (ASM). The higher traffic increase andcombined with the 5.2%lower yield decrease wasresulted in a 2.1%2.8% decrease in passenger revenue.
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Freight and mail revenues which were also adversely impacted by the September 11th terrorist attacks, increased 5.1%, primarilydecreased 13.1% due to higherlower freight and mail rates.volumes as a result of decreased business activity and increased security restrictions. Other-net revenues increased 33.8%27.9%, largely due to increased revenue from the sale of miles in Alaska”sAlaska’s frequent flyer program.
Alaska Airlines ExpensesOperating
For the quarter, total operating expenses grewwere flat compared to 2001. Fuel expense decreased by 2.9% as a result of a 4.3% increase$18.8 million, which was offset by increases in capacityother expense categories, primarily wages and a 1.3% decrease in costbenefits. Cost per available seat mile (ASM)ASM decreased by 0.9%. Cost per ASM excluding fuel increased 2.0%. Unit costs were adversely impacted by the capacity reductions that resulted from the September 11th terrorist attacks.4.1%. Explanations of significant year-over-year changes in the components of operating expenses are as follows:
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| • | Wages and benefits increased 7.7% due to a 12.0% increase in average wages and benefits per employee combined with a 3.8% decrease in the number of employees. Average wages and benefits per employee increased due to a pilot pay increase that was effective in June 2001, longevity increases for union employees, annual merit raises for management employees, and higher pension and health insurance costs for all employees. | ||
| • | Contracted services increased 11.2% primarily due to increased airport security screening costs. | ||
| • | Fuel expense decreased 25.4% due to a 24.3% decrease in the cost per gallon of fuel and a 1.6% decrease in gallons consumed. The fuel consumption rate decreased 0.7% due to the use of more fuel-efficient B737-700 and B737-900 aircraft. The lower fuel prices saved $17.7 million. | ||
| • | Maintenance expense increased 17.4%, largely due to increased airframe overhaul expenses. A total of 11 “C” checks (annual airframe inspections) were performed at outside contractors in 2002 compared to three in 2001. Higher amortization of airframe and engine overhauls that were capitalized in prior years also contributed to the growth in maintenance expense. | ||
| • | Commission expense decreased 10.1%, exceeding the 2.8% decrease in passenger revenue, due to a commission cap we instituted in November 2001 and the continuing shift to direct sales channels. In 2002, 58.5% of Air Group ticket sales were made through travel agents, versus 61.6% in 2001. In 2002, 18.8% of the ticket sales were made through Alaska’s Internet web site versus 14.9% in 2001. | ||
| • | Depreciation and amortization increased 19.5%, primarily because we owned seven more aircraft in 2002. | ||
| • | Landing fees and other rentals increased 10.2%, primarily due to higher rates. The 2002 results include a $2.2 million credit from adjusting a December 2001 accrual due to a year-end airport assessment coming in lower than expected. Absent this credit, landing fees and other rentals increased 20.5%. The higher rates are attributable to airport construction projects and the effects of increased security and other costs resulting from the events of September 11. | ||
| • | Other expense decreased 2.5%, as lower supplies, property tax, passenger remuneration, personnel and legal costs offset higher expenditures for insurance. |
Horizon Air Revenues
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fare sales offered to the operating fleet (a 9.7% increase). The 2000 results include a $2.9 million charge for a flight attendant early retirement program. The 2001 results include approximately $6.1 million of added expense for a pilot pay increase that was retroactive to June 2001. Excluding these unusual items, average wages and benefits per employee increased 4.0%, due to longevity increases for union employees and annual merit raises for management employees.
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Horizon AirRevenuesCapacity decreased by 8.5%. Traffic decreased by 8.6% and passenger load factor decreased 0.1 percentage points. Capacity, traffic, load factors and yields in all markets were adversly impacted by the September 11th terrorist attacks. For the month of September 2001 as compared to September 2000, traffic decreased 31.7% and load factor decreased 4.3 percentage points. For the third quarter, passenger yields were down 8.2%, largely due to a reduction in business passengers.stimulate demand. The lower traffic combined with the lower yield resulted in a 16.2%12.1% decrease in passenger revenues.revenue.
Freight and mail revenues which were also adversely impacted by the September 11th terrorist attacks, decreased 32.1% primarily due to Horizon”s decision, which was effective in47.8%. In June to cease2001, Horizon ceased carrying general freight andin order to focus on carrying higher-yield small packages instead.packages. This change, along with the impact of the September 11 terrorist attacks, led to the decline in revenues. Other-net revenues increased $5.5$4.2 million, primarily due to manufacturer support received as compensation for delays in delivery of CRJ 700 aircraft. Additional support is expected during the fourth quarter of 2001.
Horizon Air Expenses
Operating expenses decreased by 6.3% as$16.2 million, or 13.6%, primarily due to a result of an 8.5% decrease in capacitymaintenance and a 2.3% increasefuel expenses. Horizon’s transition to its new fleet, as well as decreases in costfuel prices, contributed to the decrease in these expenses. Cost per ASM.ASM decreased by 11.6%. Cost per ASM excluding fuel increased 6.1%. Unit costs were adversely impacteddecreased by the capacity reductions that resulted from the September 11th terrorist attacks. Additionally, Horizon”s expenses have been adversely impacted by delivery of the CRJ 700 aircraft, which was delayed by the manufacturer from January 2001 to July 2001. The Company hired and trained pilots, flight attendants and mechanics, and purchased spare parts in anticipation of the new fleet. These preparations have increased costs, but the total expected benefits of the new and more efficient aircraft have not yet occurred.7.6%. Explanations of significant year-over-year changes in the components of operating expenses are as follows:
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| • | Wages and benefits increased 1.6% due to a 15.5% increase in average wages and benefits per employee, offset by a 12.0% reduction in the number of employees. Employee reductions were in line with a 14.1% reduction in block hours. Average wages and benefits per employee increased due to a pilot pay increase that was effective in September 2001, longevity increases for union employees, annual merit raises for management employees, and higher health insurance costs for all employees. | ||
| • | Fuel expense decreased 39.5% due to a 22.9% decrease in the cost per gallon of fuel and a 21.2% decrease in gallons consumed. The fuel consumption rate decreased 8.3% due to the use of more fuel-efficient Dash 8-400 and CRJ 700 aircraft. The Company shifted flying to larger aircraft in 2002 which also contributed to this decrease. Fuel cost per ASM was 1.8¢ in 2002, compared to 2.9¢ in 2001. | ||
| • | Aircraft maintenance expense decreased 65.3% due to a 14.1% decrease in aircraft block hours, the greater use of new aircraft in 2002, and higher expenses in 2001 related to the phasing out of the Fokker F-28 jet aircraft. | ||
| • | Aircraft rent increased 34.5% due to higher rental rates incurred on new Dash 8-400 and CRJ 700 aircraft commencing in mid-2001 through early 2002. | ||
| • | Depreciation and amortization expense decreased 39.1%, primarily due to higher expenses in 2001 related to the phasing out of the Fokker F-28 jet aircraft. | ||
| • | Landing fees and other rentals decreased 7.2%, as higher rates (resulting primarily from new security directives) were offset by a 13.5% reduction in landings. The 2002 results include a $0.9 million credit from adjusting a December 2001 accrual due to a year-end airport assessment coming in lower than expected. Absent this credit, landing fees and other rentals increased 5.8%. |
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Consolidated Nonoperating Income (Expense))
Net nonoperating income was $25.5items were $2.0 million expense in 20012002 compared to $1.4$1.8 million expense in 2000. The $24.12001. Interest income decreased $3.7 million increase was primarily due to recording $18.7 million for Alaska and $10.4 million for Horizon of U.S government compensation under the Act described above under Industry Conditions. Interestlower interest rates, while interest expense net(net of capitalized interest, increased $5.0interest) was up $3.2 million due to new debt incurred duringin the past twelve months. Effective January 1, 2001,year and much lower levels of capitalization. Other-net included a $3.1 million gain due to the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Consequently, a $0.5 million charge was recordedincrease in the third quarter of 2001 to recognize the reduction in fair value of fuel hedging contracts in accordance2002 (compared with the new standard.
Nine Months 2001 Compared with Nine Months 2000The consolidated net loss for the nine months ended September 30, 2001 was $3.1 million, or $(0.12) per share compared with an income before accounting change (and excluding a special charge in 2000) of $30.3 million, or $1.15 per share (diluted) in 2000. The consolidated operating loss for the first nine months of 2001 was $25.4 million compared with an operating income (excluding a special charge) of $57.7 million for 2000. A discussion of operating results for the two airlines follows.
Alaska Airlines Operating income (excluding a special charge in 2000) decreased from $50.5 million income in 2000 to a $5.5$1.7 million loss on such contracts in 2001. The main reason for the operating income reduction was that revenues did not grow as fast as expenses. A 6.7% capacity increase combined with2001), a 2.7% decrease in revenue per ASM resulted in a 3.7% increase in operating revenues. The lower revenue per ASM was due to a 1.4% decrease in yield$1.4 million insurance recovery and a 1.3 point drop in load factor. The 6.7% capacity increase combined with a 1.5% increase in expense per ASM resulted in an 8.3% increase in operating expenses (excluding a special charge in 2000)$1.0 million gain on conversion of Equant N.V. shares (a telecommunications network company owned by many airlines). Changes in operating expense items are generally due to the same reasons stated above in the third quarter comparison.
Horizon Air Operating income decreased from $8.0 million income in 2000 to a $18.9 million loss in 2001. Changes in operating revenues and operating expenses are generally due to the same reasons stated above in the third quarter comparison.
Consolidated Nonoperating Income (Expense) Net nonoperating income was $20.6 million in 2001 compared to $4.3 million in 2000. The $16.3 million change was due to recording $29.1 million of U.S government compensation, offset by higher interest expense and a $3.1 million reduction in fair value of fuel hedging contracts.
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Consolidated Income Tax CreditAccounting standards require the Companyus to provide for income taxes each quarter based on itsour estimate of the effective tax rate for the full year. The volatility of air fares and fuel prices and the seasonality of the Company”sour business make it difficult to accurately forecast full-year pretax results. In addition, a relatively small change in pretax results can cause a significant change in the effective tax rate due to the magnitude of nondeductible expenses, such as goodwill amortization and employee per diem costs. In estimating the 35.4%35.6% tax rate for the first nine monthsquarter of 2001, the Company2002, we considered a variety of factors, including the U.S. federal rate of 35%, estimates of nondeductible expenses and state income taxes, and our forecast of pretax income for the 39.1% and 39.2% tax rates used for full years 1998 and 1999. Thisyear. We evaluate this rate is evaluated each quarter and make adjustments are made if necessary.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and liquidity.
| December 31, 2001 | March 31, 2002 | Change | ||||||||||
| (In millions, except debt-to-capital and per-share amounts) | ||||||||||||
| Cash and marketable securities | $ | 660.7 | $ | 619.7 | $ | (41.0 | ) | |||||
| Working capital | 144.2 | 161.1 | 16.9 | |||||||||
| Long-term debt and capital lease obligations | 863.3 | 862.5 | (0.8 | ) | ||||||||
| Shareholders’ equity | 820.3 | 797.3 | (23.0 | ) | ||||||||
| Book value per common share | $ | 30.92 | $ | 30.03 | $ | (0.89 | ) | |||||
| Debt-to-capital | 51%:49 | % | 52%:48 | % | NA | |||||||
| Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent | 73%:27 | % | 73%:27 | % | NA | |||||||
| December 31, 2000 | September 30, 2001 | Change | |||||||
| (In millions, except debt-to-capital and per-share amounts) | |||||||||
| Cash and marketable securities | $461.7 | $667.3 | $205.6 | ||||||
| Working capital | 94.9 | 257.7 | 162.8 | ||||||
| Unused credit facility | 150.0 | 0.0 | (150.0 | ) | |||||
| Long-term debt and capital lease obligations | 609.2 | 869.4 | 260.2 | ||||||
| Shareholders’ equity | 862.3 | 860.5 | (1.8 | ) | |||||
| Book value per common share | $32.59 | $32.44 | $(0.15 | ) | |||||
| Debt-to-capital | 41%:59 | % | 50%:50 | % | NA | ||||
| Debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent | 69%:31 | % | 71%:29 | % | NA | ||||
The Company’s cash and marketable securities portfolio increased by $205.6decreased $41.0 million during the first ninethree months of 2001. Operating activities provided $269.52002. $49.4 million of cash (including $50.4 millionthe decrease is attributable to payments for transportation taxes related to the fourth quarter of U.S. government cash compensation2001 which we were allowed to defer until this quarter under the Act) during this period. Additional cash was provided byAir Transportation Safety and System Stabilization Act, and $35.5 million is for the issuanceincremental portion of $359.5 million oflease payments on Horizon’s new debt (including $150.0 million borrowed under Alaska”s credit facility) and the return of $72.5 million of flight equipment deposits.aircraft. Cash was also used for $351.6$25.3 million of capital expenditures, including the purchase of eight new and one used Boeing 737 aircraft, flight equipment deposits, spare parts and airframe and engine overhauls, for $128.2overhauls. These decreases were partially offset by $14.5 million of debt repayment and for $18.7 million of restricted deposits.flight equipment deposits that were returned by Horizon’s aircraft manufacturer.
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Shareholders’ equity decreased $1.8$23.0 million primarily due to the net loss of $3.1 million, which was partly offset by stock issued for stock options exercised.$34.4 million.
17Financing Activities- During the first quarter of 2002, Horizon added three Dash 8-400 and two CRJ 700 aircraft to its operating fleet. The aircraft were financed with a combination of U.S. leveraged leases and single investor leases with terms of approximately 16.5 years. The aggregate future minimum lease payments under these five new operating leases will be $117.8 million.
Commitments- At September 30, 2001,March 31, 2002, the Company had firm orders for 3927 aircraft requiring aggregate payments of approximately $863$661 million, as set forth below. In the wake of the terrorists attacks on September 11, Alaska and Horizon are re-evaluating their fleet plans and the fleet additions shown below may change in the near future. In addition, Alaska has options to acquire 2628 more B737s, and Horizon has options to acquire 15 Dash 8-400s and 25 CRJ 700s. Alaska and Horizon expectexpects to finance the new planes with leases, long-term debt or internally generated cash.
| Delivery Period - Firm Orders | ||||||||||||||||||
| Aircraft | 2001 | 2002 | 2003 | 2004 | 2005 | Total | ||||||||||||
| Boeing 737-700 | — | 2 | — | — | — | 2 | ||||||||||||
| Boeing 737-900 | — | 2 | 4 | * | — | — | 6 | |||||||||||
| de Havilland Dash 8-400 | 5 | — | — | — | — | 5 | ||||||||||||
| Canadair RJ 700 | 5 | 6 | 3 | 6 | 6 | 26 | ||||||||||||
| Total | 10 | 10 | 7 | 6 | 6 | 39 | ||||||||||||
| Payments (Millions) | $136 | $221 | $265 | $131 | $110 | $863 | ||||||||||||
* With manufacturer approval, some of these firm orders may be converted Horizon expects to other Next Generation Boeing 737 aircraft.finance its new aircraft with operating leases.
| Delivery Period - Firm Orders | ||||||||||||||||||||
| Aircraft | 2002 | 2003 | 2004 | 2005 | Total | |||||||||||||||
| Boeing 737-700 | — | 2 | — | — | 2 | |||||||||||||||
| Boeing 737-900 | 1 | 2 | 3 | — | 6 | |||||||||||||||
| Bombardier CRJ 700 | 5 | 2 | 6 | 6 | 19 | |||||||||||||||
| Total | 6 | 6 | 9 | 6 | 27 | |||||||||||||||
| Payments (Millions) | $ | 178 | $ | 175 | $ | 199 | $ | 109 | $ | 661 | ||||||||||
New Accounting Standards- In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations” (effective July 1, 2001) and SFAS No. 142, “Goodwill and Other Intangible Assets” (effective for the Company on January 1, 2002). SFAS 141 prohibits pooling-of-interests accounting for acquisitions. SFAS 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company estimates that the adoptionStatement of SFAS 142 will increase annual net income $2.0 million or $0.08 per share. In June 2001, the FASB issued SFASFinancial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations” (effective for the Company on January 1, 2003). This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (effective for the Company on January 1, 2002). This Statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and other related accounting guidance. The Company is in the process of evaluating the financial statement impact of SFAS No. 143 and SFAS No. 144.143.
Outlook for Fourth Quarter 2001 and Early 2002Alaska operated approximately 82% of its previously planned schedule in October, expects to increase to approximately 88% in November and December and return to 100% in February 2002. Alaska’s business is seasonal and pretax losses are common in the fourth quarter. Losses in the fourth quarter of 2001 are expected to be larger than normal due to the slowing economy, the impact of the September 11 terrorist attacks and fare sales. Alaska expects to partly offset its losses with recognition of $70.6 million more U.S. government compensation in the fourth quarter of 2001.
Horizon operated approximately 76% of its previously planned schedule in October, expects to increase to 80% in November, 85% in December and return to 100% in March 2002. Losses are expected in the fourth quarter of 2001 due to the slowing economy, the impact of the September 11 terrorist attacks and fare sales. Horizon used its entire $10.4 million of U.S. government compensation in September 2001 to offset terrorist-related losses. During the fourth quarter of 2001, Horizon will be evaluating its owned F-28 aircraft and related spare parts for potential write-down in value.
PART II. OTHER INFORMATION
ITEM 1. Legal ProceedingsOakland Maintenance InvestigationIn December 1998 the U.S. attorney for the Northern District of California initiated a grand jury investigation concerning certain 1998 maintenance activities at Alaska’s Oakland maintenance base. The investigation has also included the aircraft involved in the loss of Flight 261 in January 2000. Alaska is cooperating with this investigation. To the Company’s knowledge, no charges have been filed. The FAA has separately proposed a civil penalty of $44,000 in connection with this matter. The parties are in settlement discussions over this penalty. These proceedings are described in more detail in the Alaska Air Group, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
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Flight 261 Litigation
Alaska is a defendant in a number of lawsuits relating to the loss of Flight 261 on January 31, 2000. Lawsuits on behalfRepresentatives of all 88 passengers and crew on board have been filed cases against Alaska, Thethe Boeing Company, and others. The suits seek unspecified compensatory and punitive damages. In May 2001, the judge presiding over the majority of the cases ruled that punitive damages are not available against Alaska. Alaska has settled a number of these cases and continues in its efforts to settle the remaining ones. Consistent with industry standards, the Company maintains insurance against aircraft accidents. This litigation is described in more detail in
15
Management believes the Alaska Air Group, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
The Company cannot predict the outcomeultimate disposition of any of the pending civil or potential criminal proceedings described above. However, management believes their ultimate dispositionthis matter is not likely to materially affect the Company’s financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts; it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
The Company is also subjecta party to other ordinary routine litigation incidental to its business and with respect to which no material liability is expected.
ITEM 5. Other Information
Employees InvestigationDuringIn April 2002, in response to requests from shareholders constituting a significant percentage of Alaska Air Group’s stock ownership, the third quarter, Alaska and the Air Line Pilots Association agreed to a two-year contract extension to April 30, 2005. The agreement calls for a pay increase of 11.05% retroactive to June 1, 2001, followed by a 5% increase effective June 1, 2002 and 4% increases effective on June 1, 2003 and 2004.Company eliminated its shareholder rights plan.
In early 1999, a federal mediator was assigned to assist Horizon and the International Brotherhood of teamsters (IBT) in the negotiation of an initial labor contract covering pilots. In July 2001, the parties reached tentative agreement on a five-year contract, which was ratified by the pilots in September 2001.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10 — Employment agreement between Alaska Airlines, Inc. and George D. Bagley
(b) On July 5, 2001, AugustJanuary 4, 2002, February 15, 2002, March 11, 2002, April 3, 2001, September 62002 and September 17, 2001,April 12, 2002 reports on Form 8-K were filed discussing estimated financial results under regulation FD disclosure.
Signatures
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALASKA AIR GROUP, INC. Registrant |
ALASKA AIR GROUP, INC. Registrant
Date: November 8, 2001
| /s/ Bradley D. Tilden | ||
| Bradley D. Tilden | ||
Executive Vice President/Finance and Chief Financial Officer |
| /s/ Terri K. Maupin | ||
| Terri K. Maupin | ||
Staff Vice President/Finance and Controller |
2016