UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
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 AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Alaska 92-0009235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7079
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
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 500 common shares, par value $1.00, outstanding at
June 30, 1996.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Airlines, Inc. (the Company or Alaska)
unaudited financial statements: (i) balance sheets as of June 30, 1996 and
December 31, 1995; (ii) statements of income for the quarters and six
months ended June 30, 1996 and 1995; (iii) statement of shareholder's
equity for the six months ended June 30, 1996; and, (iv) statements of cash
flows for the six months ended June 30, 1996 and 1995. Also attached are
the accompanying notes to the Company's financial statements that have
changed significantly during the six months ended June 30, 1996. These
statements, which should be read in conjunction with the financial
statements in the Company's annual report on Form 10-K for the year ended
December 31, 1995, include all adjustments that are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods. The adjustments made were of a normal recurring nature.
The Company is a wholly owned subsidiary of Alaska Air Group, Inc. (Air
Group) whose principal subsidiaries are Alaska Airlines, Inc. and Horizon
Air Industries, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Second Quarter 1996 Compared with Second Quarter 1995 The net income for
the second quarter of 1996 was $19.0 million compared with a net income of
$8.6 million in 1995. Operating income for the second quarter of 1996 was
$37.4 million compared to $23.5 million for 1995. The larger operating
income reflects higher passenger load factors and yields. Airline
financial and statistical data is shown following the financial statements.
A discussion of this data follows.
Operating revenues increased 16.6% to $341.6 million. Passenger revenues,
which accounted for 89% of total operating revenues, increased 19.1% on a
16.8% rise in passenger traffic. Capacity increased 8.9%, primarily due to
more flying in the Alaska, Nevada and Mexico markets. Selective reductions
in capacity in the Pacific Northwest to the Bay Area and to Southern
California markets helped boost load factors by over 10 percentage points
in those markets, while the system load factor increased 4.4 points from
61.3% in 1995 to 65.7% in 1996. Passenger yields, reflecting an improved
balance between supply and demand for air travel on the West Coast,
continued the trend of the first quarter and rose 2.0% to 12.09 cents in
1996.
Freight and mail revenues experienced a relatively modest growth of 1.8%,
reflecting increased competition in the Alaska markets. Other-net revenues
experienced a modest decline due to decreased revenues from providing
services to other airlines.
The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis for Alaska for the first quarters of 1996
and 1995.
Operating Expenses Per ASM (In Cents)
%
1996 1995 Change Change
Wages and benefits 2.49 2.48 .01 -
Aircraft fuel 1.30 1.06 .24 23
Aircraft maintenance .37 .33 .04 12
Aircraft rent .96 .98 (.02) (2)
Commissions .62 .57 .05 9
Depreciation & amortization .36 .42 (.06) (14)
Landing fees and other rentals .33 .34 (.01) (3)
Other 1.56 1.52 .04 3
Total 7.99 7.70 .29 4
Alaska's higher unit costs were primarily due to higher fuel prices and
heavier passenger loads. Significant unit cost changes are discussed
below.
Fuel expense per ASM increased 23%, due to a 21% increase in the price of
fuel. Approximately one third of the fuel price increase was due to a 4.3
cent Federal excise tax on domestic fuel consumption that began October 1,
1995. Pending legislation in Congress to extend the exemption from this
tax has not been acted upon to date.
Maintenance expense per ASM increased 12% primarily due to higher
amortization of major airframe and engine overhaul costs.
Commission expense per ASM increased 9% because passenger revenues, upon
which commissions are paid, increased 19% or approximately 9 percentage
points over the 9% ASM growth.
Depreciation and amortization expense per ASM decreased 14% due to the sale
(and leaseback) of two aircraft at the end of the first quarter and a 6%
increase in aircraft utilization.
Other expense per ASM increased 3% primarily due to higher costs related to
heavier passenger loads, such as booking fees, communications charges and
credit card commissions.
Other Income (Expense) Non-operating expense decreased $4.1 million to $4.3
million due to lower interest rates on variable debt and smaller average
debt balances, and more interest income earned on higher cash balances.
Six Months 1996 Compared with Six Months 1995 The net income for the six
months ended June 30, 1996 was $13.8 million, compared with a net loss of
$4.4 million in 1995. Operating income for the first half of 1996 was
$34.2 million compared to $9.3 million for 1995.
Operating revenues increased 18.3% to $622.0 million, primarily due to a
17.6% rise in passenger traffic. Capacity increased 9.4%, primarily due to
increases in the Alaska, Arizona and Nevada markets. The load factor
increased 4.4 points from 58.9% in 1995 to 63.3% in 1996. Passenger yields
rose 2.6% to 11.83 cents in 1996, reflecting an improved balance between
supply and demand for air travel on the West Coast.
Operating expenses increased 13.8% to $587.8 million on a capacity increase
of 9.4%. Unit costs increased 4.0%, generally for the same reasons as
noted above in the second quarter comparison.
Income Tax Credit Accounting standards require the Company to provide for
income taxes each quarter based on its estimate of the effective tax rate
for the full year. The volatility of air fares and the seasonality of the
Company's business make it very difficult to estimate 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 42.0% tax rate for the first half of 1996,
the Company considered a variety of factors, including the U.S. federal
rate of 35%, estimates of nondeductible expenses and state income taxes,
and the 43.5% tax rate used for full year 1995. This rate is evaluated
each quarter and adjustments are made if necessary.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
June 30, 1996 December 31, 1995 Change
(In millions, except debt-to-equity)
Cash and market securities $ 104.7 $ 134.9 $ (30.2)
Working capital (deficit) (87.0) (91.4) 4.4
Long-term debt and
capital lease obligations 284.1 322.5 (38.4)
Shareholders' equity 325.2 311.4 13.8
Debt-to-equity 47%:53% 51%:49% NA
The Company's cash and marketable securities portfolio decreased by $30
million during the first six months of 1996. Operating activities provided
$143 million of cash during this period. Additional cash was provided by
the sale and leaseback of two B737-400 aircraft ($57 million). Cash was
used for the purchase of two new MD-83 aircraft, one used B737-400
aircraft, one previously leased B737-200C, airframe and engine overhauls
and other capital expenditures ($124 million), repayment of short-term
borrowings ($66 million), and the repayment of debt ($43 million).
PART II. OTHER INFORMATION
ITEM 5. Other Information
The U.S. 10% passenger ticket tax, the 6.25% cargo waybill tax and the $6
per passenger international departure tax expired on December 31, 1995.
Hence, the Company ceased collecting these taxes on January 1, 1996.
Management believes that some form of these taxes will likely be reinstated
in 1996 on a prospective basis and that it is unlikely that any
reinstatement will be retroactive.
ITEM 6. Exhibits and Reports on Form 8-K
(a)Exhibit 27 - Financial data schedule.
(b)No reports on Form 8-K were filed during the second quarter of 1996.
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 AIRLINES, INC.
Registrant
Date: July 29, 1996
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Finance
(Principal Financial Officer)
BALANCE SHEET
Alaska Airlines, Inc.
ASSETS
June 30, Dec. 31,
(In Millions) 1996 1995
Current Assets
Cash and cash equivalents $52.5 $25.6
Marketable securities 52.1 109.3
Receivables from related companies 116.5 118.6
Receivables - net 85.5 55.5
Inventories and supplies 28.3 29.0
Prepaid expenses and other assets 80.0 65.9
Total Current Assets 414.9 403.9
Property and Equipment
Flight equipment 813.6 785.3
Other property and equipment 192.9 187.9
Deposits for future flight equipment 17.5 33.1
1,024.0 1,006.3
Less accumulated depreciation and amortization 293.3 271.6
730.7 734.7
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 24.4 23.4
20.0 21.0
Total Property and Equipment - Net 750.7 755.7
Intangible Assets - Subsidiaries 15.2 15.5
Other Assets 82.8 91.4
Total Assets $1,263.6 $1,266.5
See accompanying notes to financial statements.
BALANCE SHEET
Alaska Airlines, Inc.
LIABILITIES AND SHAREHOLDER'S EQUITY
June 30, Dec. 31,
(In Millions) 1996 1995
Current Liabilities
Accounts payable $71.9 $81.4
Accrued aircraft rent 40.8 32.9
Accrued wages, vacation and payroll taxes 57.7 55.2
Other accrued liabilities 37.2 36.6
Short-term borrowings
(Interest rate: 1995 - 6.2%) - 65.9
Air traffic liability 199.6 123.7
Note payable to related company 64.8 64.8
Current portion of long-term debt and
capital lease obligations 29.9 34.8
Total Current Liabilities 501.9 495.3
Long-Term Debt and Capital Lease Obligations 284.1 322.5
Other Liabilities and Credits
Deferred income taxes 67.5 57.4
Deferred income 12.0 12.6
Other liabilities 72.9 67.3
152.4 137.3
Shareholder's Equity
Common stock, $1 par value
Authorized: 1,000 shares
Issued: 1996 and 1995 - 500 shares - -
Capital in excess of par value 225.8 225.8
Retained earnings 99.4 85.6
325.2 311.4
Total Liabilities and Shareholder's Equity $1,263.6 $1,266.5
See accompanying notes to financial statements.
STATEMENT OF INCOME
Alaska Airlines, Inc.
Three Months Ended June 30
(In Millions except Per share Amounts) 1996 1995
Operating Revenues
Passenger $302.7 $254.1
Freight and mail 22.1 21.7
Other - net 16.8 17.1
Total Operating Revenues 341.6 292.9
Operating Expenses
Wages and benefits 94.8 86.9
Aircraft fuel 49.5 37.2
Aircraft maintenance 14.3 11.4
Aircraft rent 36.6 34.4
Commissions 23.7 20.0
Depreciation and amortization 13.8 14.6
Landing fees and other rentals 12.5 11.8
Other 59.0 53.1
Total Operating Expenses 304.2 269.4
Operating Income 37.4 23.5
Other Income (Expense)
Interest income 3.0 2.1
Interest expense (7.6) (10.2)
Loss on disposition of assets (0.1) (0.7)
Other - net 0.4 0.4
(4.3) (8.4)
Income before income tax 33.1 15.1
Income tax expense 14.1 6.5
Net Income $19.0 $8.6
See accompanying notes to financial statements.
STATEMENT OF INCOME
Alaska Airlines, Inc.
Six Months Ended June 30
(In Millions) 1996 1995
Operating Revenues
Passenger $547.8 $454.1
Freight and mail 40.8 40.3
Other - net 33.4 31.2
Total Operating Revenues 622.0 525.6
Operating Expenses
Wages and benefits 186.3 166.0
Aircraft fuel 92.3 70.3
Aircraft maintenance 27.9 23.3
Aircraft rent 72.1 67.6
Commissions 43.3 35.8
Depreciation and amortization 28.0 29.3
Landing fees and other rentals 24.4 22.7
Other 113.5 101.3
Total Operating Expenses 587.8 516.3
Operating Income 34.2 9.3
Other Income (Expense)
Interest income 5.7 3.6
Interest expense (16.5) (20.7)
Loss on disposition of assets (0.2) (0.7)
Other - net 0.6 0.8
(10.4) (17.0)
Income (loss) before income tax 23.8 (7.7)
Income tax expense (credit) 10.0 (3.3)
Net Income (Loss) $13.8 $(4.4)
See accompanying notes to financial statements.
STATEMENT OF SHAREHOLDER'S EQUITY
Alaska Airlines, Inc.
Common Stock
Capital in
$1 Par Excess of Retained
(In Millions) Value Par Value Earnings Total
Balances at December 31, 1995 $ - $225.8 $85.6 $311.4
Net income for the six months
ended June 30, 1996 13.8 13.8
Balances at June 30, 1996 $ - $225.8 $99.4 $325.2
See accompanying notes to financial statements.
STATEMENT OF CASH FLOWS
Alaska Airlines, Inc.
Six Months Ended June 30 (In Millions) 1996 1995
Cash and cash equivalents at beginning of period $25.6 $11.3
Cash flows from operating activities:
Net income (loss) 13.8 (4.4)
Adjustments to reconcile net income (loss) to cash:
Depreciation and amortization 28.0 29.3
Amortization of airframe and engine overhauls 13.7 10.4
Loss on disposition of assets 0.2 0.7
Increase (decrease) in deferred income taxes 10.0 (3.4)
Decrease (increase) in accounts receivable 8.1 (35.1)
Decrease (increase) in other current assets (13.3) 2.0
Increase in air traffic liability 76.1 51.8
Increase in other current liabilities 1.3 8.1
Other-net 5.4 -
Net cash provided by operating activities 143.3 59.4
Cash flows from investing activities:
Proceeds from disposition of assets 0.6 1.4
Purchases of marketable securities (13.4) (42.5)
Sales and maturities of marketable securities 70.6 33.8
Restricted deposits 1.5 (2.4)
Flight equipment deposits returned - 8.9
Additions to property and equipment (123.8) (28.3)
Loans to related companies - (1.8)
Net cash used in investing activities (64.5) (30.9)
Cash flows from financing activities:
Proceeds from short-term borrowings - 4.0
Repayment of short-term borrowings (65.9) (29.0)
Proceeds from sale and leaseback transactions 57.4 -
Long-term debt and capital lease payments (43.4) (15.2)
Advance from Alaska Air Group - 128.6
Net cash provided by (used in) financing activities (51.9) 88.4
Net increase in cash and cash equivalents 26.9 116.9
Cash and cash equivalents at end of period $52.5 $128.2
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $27.0 $116.9
Income taxes - -
Noncash investing and financing activities None None
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY DURING THE
SIX MONTHS ENDED JUNE 30, 1996
Alaska Airlines, Inc.
Note 1. Commitments (See Note 6 to Financial Statements at December 31,
1995)
During the first quarter of 1996, Alaska's lease commitments increased
approximately $96 million due to the sale and leaseback of two B737-400
aircraft under 18-1/2-year operating leases.
<TABLE>
Alaska Airlines Financial and Statistical Data
<CAPTION>
Quarter Ended Six Months Ended
% %
Financial Data (in millions): 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $302.7 $254.1 19.1 $547.8 $454.1 20.6
Freight and mail 22.1 21.7 1.8 40.8 40.3 1.2
Other - net 16.8 17.1 (1.8) 33.4 31.2 7.1
Total Operating Revenues 341.6 292.9 16.6 622.0 525.6 18.3
Operating Expenses:
Wages and benefits 94.8 86.9 9.1 186.3 166.0 12.2
Aircraft fuel 49.5 37.2 33.1 92.3 70.3 31.3
Aircraft maintenance 14.3 11.4 25.4 27.9 23.3 19.7
Aircraft rent 36.6 34.4 6.4 72.1 67.6 6.7
Commissions 23.7 20.0 18.5 43.3 35.8 20.9
Depreciation and amortization 13.8 14.6 (5.5) 28.0 29.3 (4.4)
Landing fees and other rentals 12.5 11.8 5.9 24.4 22.7 7.5
Other 59.0 53.1 11.1 113.5 101.3 12.0
Total Operating Expenses 304.2 269.4 12.9 587.8 516.3 13.8
Operating Income 37.4 23.5 59.1 34.2 9.3 267.7
Interest income 3.0 2.1 5.7 3.6
Interest expense (7.6) (10.2) (16.5) (20.7)
Other - net 0.3 (0.3) 0.4 0.1
(4.3) (8.4) (10.4) (17.0)
Income (Loss) Before Income Tax $33.1 $15.1 $23.8 $(7.7)
Operating Statistics:
Revenue passengers (000) 3,005 2,499 20.3 5,581 4,595 21.5
RPM's (000,000) 2,504 2,143 16.8 4,630 3,937 17.6
ASM's (000,000) 3,809 3,498 8.9 7,309 6,680 9.4
Passenger load factor 65.7% 61.3% 4.4 pts 63.3% 58.9% 4.4 pts
Breakeven load factor 58.2% 57.4% 0.8 pts 60.9% 60.5% 0.4 pts
Yield per passenger mile 12.09c 11.85c 2.0 11.83c 11.53c 2.6
Operating revenue per ASM 8.97c 8.37c 7.1 8.51c 7.87c 8.1
Operating expenses per ASM 7.99c 7.70c 3.7 8.04c 7.73c 4.0
Fuel cost per gallon 73.7c 60.9c 21.0 71.2c 60.5c 17.7
Average number of employees 7,511 6,907 8.7 7,404 6,794 9.0
Aircraft utilization (block hours) 11.5 10.8 6.3 11.2 10.6 5.6
Operating fleet at period-end 76 74 2.7 76 72 5.6
c = cents
</TABLE>
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES INC SECOND QUARTER 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-END> JUN-30-1996
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