UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from . . . . . . . . to . . . . . . . .
Commission File Number 0-19978
ALASKA AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Alaska 92-0009235
(State or other jurisdiction of incorporation or organization) (I.R.S.
Employer Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (206) 431-7079
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $1.00 Par Value
As of January 31, 1997, common shares outstanding totaled 500.
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 ____
The registrant meets the conditions set forth in General Instructions
(J)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format. Items 4, 6, 10, 11, 12 and 13 have been
omitted in accordance with such Instruction J.
The registrant's parent, Alaska Air Group, Inc. (File No. 1-8957), files
reports with the Commission pursuant to the Securities Exchange Act of
1934, as amended.
Exhibit Index begins on page 26.
PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
Alaska Airlines, Inc. (Alaska or the Company) is a wholly owned subsidiary
of Alaska Air Group, Inc. Alaska Air Group, Inc. is a holding company
which also owns Horizon Air Industries, Inc. (Horizon). Alaska is a major
airline which was organized in 1932 and incorporated in the state of Alaska
in 1937. Alaska became a wholly owned subsidiary of Alaska Air Group, Inc.
in 1985 pursuant to a reorganization of Alaska into a holding company
structure. Alaska Air Group, Inc. is a registrant pursuant to Section
12(b) of the Securities and Exchange Act of 1934 (Commission File No. 1-
8957). Alaska's executive offices are located at 19300 Pacific Highway
South, Seattle, Washington 98188. In 1996, Alaska accounted for 81% of
Alaska Air Group, Inc.'s total operating revenues.
Horizon, a Washington corporation, began service in 1981 and was acquired
by Alaska Air Group, Inc. in 1986. Horizon is a regional airline, which
operates in the Pacific Northwest, Northern California and Western Canada.
Operations
Alaska serves 35 cities in six states (Alaska, Washington, Oregon,
California, Nevada and Arizona), one city in Canada, four cities in Mexico
and four cities in Russia. In each year since 1973, Alaska has carried
more passengers between Alaska and the U.S. mainland than any other
airline. In 1996, Alaska carried 11.8 million passengers. Passenger
traffic within Alaska and between Alaska and the U.S. mainland accounted
for 26% of Alaska's 1996 revenue passenger miles, West Coast traffic
accounted for 66%, the Mexico markets 8% and Russia less than 1%. Based on
passenger enplanements, Alaska's leading airports are Seattle, Portland,
Anchorage and Los Angeles. Based on revenues, its leading nonstop routes
are Seattle-Anchorage, Seattle-Los Angeles and Seattle-San Diego. At
December 31, 1996, Alaska's operating fleet consisted of 74 jet aircraft.
Alaska distinguishes itself from competitors by providing a higher level of
customer service. The airline's excellent service in the form of advance
seat assignments, a first class section, attention to customer needs, high-
quality food and beverage service, well-maintained aircraft and other
amenities has been recognized by independent studies and surveys of air
travelers. Alaska offers competitive fares.
The majority of Alaska flights and certain Northwest flights are dual-
designated in airline computer reservation systems as Alaska Airlines and
Northwest Airlines in order to facilitate feed traffic between the two
airlines. Alaska Airlines also serves three smaller cities in California,
two in Washington, and many small communities in Alaska through code share
marketing agreements with local carriers.
BUSINESS RISKS
The Company's operations and financial results are subject to various
uncertainties such as intense competition, volatile fuel prices, a largely
unionized labor force, the need to finance large capital expenditures,
adverse weather, government regulation and general economic conditions.
Competition
Competition in the air transportation industry is intense. Any domestic
air carrier deemed fit by the DOT is allowed to operate scheduled passenger
service in the United States. Currently, Alaska carries approximately 2.1%
of all U.S. domestic passenger traffic. Alaska's primary competitors in
the West Coast, Arizona and Nevada markets are America West, Delta, Reno
Air, Shuttle by United, Southwest Airlines, United and United Express.
Alaska also competes with America West, Continental, Delta, Reno Air and
United in the Lower 48-to-Alaska market, and with Aeromexico, America West,
Delta and Mexicana in its Mexico markets. Some of these competitors are
substantially larger than Alaska, have greater financial resources and have
more extensive route systems.
Most major U.S. carriers have developed, independently or in partnership
with others, large computerized reservation systems (CRS). Due to
contractual requirements imposed by CRSs, most travel agencies contract
with a single CRS to sell tickets. Airlines, including Alaska, are charged
industry-set fees to have their flight schedules included in the various
CRS displays. These systems are currently the predominant means of
distributing airline tickets. In order to reduce anti-competitive
practices, the DOT regulates the display of all airline schedules and
fares. Alaska is exploring alternatives to existing distribution methods.
Fuel
Fuel costs represented 17% of the Company's total operating expenses in
1996. Fuel prices, which can be volatile and are largely outside of the
Company's control, can have a significant impact on the Company's operating
results. Currently, a one cent change in the fuel price per gallon affects
annual fuel costs by approximately $2.7 million.
Unionized Labor Force
Labor costs represented 32% of the Company's total operating expenses in
1996. Wage rates can have a significant impact on the Company's operating
results. At December 31, 1996, labor unions represented 87% of Alaska's
employees. The air transportation industry is regulated under the Railway
Labor Act, which vests in the National Mediation Board certain regulatory
powers with respect to disputes between airlines and labor unions. The
Company cannot predict the outcome of union contract negotiations nor
control actions (e.g. work stoppage or slowdown) unions might take to try
to influence those negotiations.
Leverage and Future Capital Requirements
The Company, like many airlines, is highly leveraged, which increases the
volatility of its earnings. In addition, the Company has an ongoing need
to finance new aircraft deliveries and there is no assurance that such
financing will be available in sufficient amounts or on acceptable terms.
See Item 7 for management's discussion of liquidity and capital resources.
Weather
Unusually adverse weather, as occurred during December 1996 in the Pacific
Northwest, can significantly reduce flight operations, resulting in lost
revenues and added expenses.
Government Regulation
The Company, like other airlines, is subject to regulation by the Federal
Aviation Administration (FAA) and the United States Department of
Transportation (DOT). The FAA, under its mandate to ensure aviation
safety, has the authority to ground aircraft and to suspend temporarily or
revoke permanently the authority of an air carrier or its licensed
personnel for failure to comply with Federal Aviation Regulations and to
levy civil penalties for such failure. The DOT has the authority to
regulate certain airline economic functions including financial and
statistical reporting, consumer protection, computerized reservations
systems, essential air transportation and international route authority.
OTHER INFORMATION
Frequent Flyer Program
All major airlines have developed frequent flyer programs as a way of
increasing passenger loyalty. Alaska's Mileage Plan allows members to earn
mileage by flying on Alaska, Horizon and other participating airlines, and
by using the services of non-airline partners which include a credit card,
telephone companies, hotels and car rental agencies. Alaska is paid by
non-airline partners for the miles it credits to member accounts. Alaska
has the ability to change the Mileage Plan terms, conditions, partners,
mileage credits and award levels.
Mileage can be redeemed for free or discounted travel and for other travel
industry awards. Upon accumulating the necessary mileage, members notify
Alaska of their award selection. Over 70% of the flight awards selected
are subject to blackout dates and capacity-controlled seating. Prior to
January 1996, miles earned had to be redeemed within three years, otherwise
they expired. Effective in January 1996, all miles will accumulate
indefinitely. As of the year end 1996 and 1995, Alaska estimates that
504,000 and 481,000 round trip flight awards could have been redeemed by
Mileage Plan members who have mileage credits exceeding the 20,000 mile
free round trip domestic ticket award threshold. At December 31, 1996,
fewer than 24% of these flight awards were issued and outstanding. For the
years 1996, 1995 and 1994, approximately 173,000, 242,000 and 226,000 round
trip flight awards were redeemed and flown on Alaska and Horizon. These
awards represent approximately 4% for 1996, 7% for 1995, and 5% for 1994,
of the total passenger miles flown for each period.
Alaska maintains a liability for its Mileage Plan obligation which is based
on its total miles outstanding, less an estimate for miles which will never
be redeemed. The net miles outstanding are allocated between those
credited for travel on Alaska, Horizon or other airline partners and those
credited for using the services of non-airline partners. Miles credited
for travel on Alaska, Horizon or other airline partners are accrued at
Alaska's incremental cost of providing the air travel. The incremental
cost includes the cost of meals, fuel, reservations and insurance. The
incremental cost does not include a contribution to overhead, aircraft cost
or profit. A portion of the proceeds received from non-airline partners is
also deferred. At December 31, 1996 and 1995, the total liability for
miles outstanding was $17.3 million and $17.5 million, respectively.
Employees
Alaska had 8,406 active full-time and part-time employees at December 31,
1996. The following is a summary of Alaska's union contracts as of
December 31, 1996:
Number of
Union Employee Group Employees Contract Status
International Mechanic, Rampservice 1,776 Amendable 9/1/97
Association of and related
Machinists and classifications
Aerospace Workers
Clerical, Office and 2,995 Amendable 5/20/99
Passenger Service
Air Line Pilots Pilots 1,043 Amendable 12/1/97
Association International
Association of Flight Attendants 1,452 Amendable 3/14/99
Flight Attendants
Mexico Workers Mexico Airport 63 Amendable 4/1/97
Association Personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 2/9/02
Union of America
International Routes
International operating authority is subject to bilateral agreements
between the United States and the respective countries. The countries
establish the number of carriers to provide service, approve the carriers
selected to provide such service and the size of aircraft to be used. The
DOT reviews the carriers authorized under bilateral agreements every five
years. Beginning in February 1997, under the U.S.-Canada "open skies"
agreement, all U.S. and Canadian carriers will be able to operate between
U.S. and Canadian cities (except for Toronto), subject to availability of
landing slots. Alaska's authorities to serve its various Mexico and Russia
destinations are to be reviewed during 1997-2002 and 1998-2001,
respectively. The Company expects to be granted authority to continue to
operate its international routes.
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated by Alaska and their
average age at December 31, 1996.
Passenger Average Age
Aircraft Type Capacity Owned Leased Total in Years
Boeing 737-200C 111 6 2 8 16.4
Boeing 737-400 140 3 21 24 3.4
McDonnell Douglas MD-80 140 14 28 42 7.6
23 51 74 7.2
Eleven of the 23 aircraft owned by Alaska as of December 31, 1996 are
subject to liens securing long-term debt. Alaska's leased B737-200C, B737-
400 and MD-80 aircraft have lease expiration dates between 1997 and 1999,
2002 and 2014, and 1997 and 2013, respectively. Alaska has the option to
extend most of the leases for additional periods, or the right to purchase
the aircraft at the end of the lease term, usually at the then fair market
value of the aircraft. For information regarding obligations under capital
leases and long-term operating leases, see Notes to Financial Statements.
Special noise ordinances or agreements restrict the type of aircraft, the
timing and the number of flights operated by Alaska and other air carriers
at four Los Angeles area airports plus San Diego, Palm Springs, San
Francisco and Seattle. Alaska's only Stage II aircraft (under the Airport
Noise and Capacity Act of 1990) are eight Boeing 737-200Cs, and the Company
plans to modify these aircraft in 1997-1999 to meet applicable noise
requirements.
Ground Facilities and Services
Alaska leases ticket counter, gates, cargo and baggage, office space and
other support areas at the majority of the airports it serves. Alaska also
owns terminal buildings at various Alaska cities.
Alaska has centralized operations in several buildings located at or near
Seattle-Tacoma International Airport (Sea-Tac) in Seattle, Washington. The
owned buildings, including land unless located on leased airport property,
include: a three-bay hangar facility with maintenance shops; a flight
operations and training center; an air cargo facility; a reservation and
office facility; a four-story office building; its corporate headquarters;
and two storage warehouses. Alaska also leases a two-bay hangar/office
facility at Sea-Tac.
Alaska's other major facilities include its Anchorage regional headquarters
building and Phoenix reservations center; a leased two-bay maintenance
facility in Oakland; and a leased hangar/office facility in Anchorage. A
new $8 million air cargo facility is under construction in Anchorage and is
expected to be completed in mid-1998.
ITEM 3. LEGAL PROCEEDINGS
In October 1991, Alaska gave notice of termination of its code sharing and
frequent flyer relationship with MarkAir, an airline based in the state of
Alaska. Both companies have filed suit against one another in connection
with that termination alleging breach of contract and other causes of
action under state law. In addition, MarkAir claimed that the termination
was in violation of Federal Antitrust Laws. In June 1992, MarkAir filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. In December
1993, MarkAir dismissed all antitrust claims against the Company.
Discovery continues in a related Alaska state court case pertaining to
breach of contract and other state law claims. The Company believes the
ultimate resolution of this legal proceeding will not result in a material
adverse impact on the financial position or results of operations of the
Company.
PART II
ITEM 5. MARKET PRICE FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
All of Alaska's outstanding common stock is held by Alaska Air Group, Inc.
and such stock is not traded in any market. No cash dividend has been paid
since 1989 and Alaska does not expect to pay regular dividends to Alaska
Air Group.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Industry Conditions
During the last several years the character of competition has changed on
the West Coast due to the purchase of Morris Air by Southwest Airlines and
the start-up of Shuttle by United. Low air fares are now a permanent part
of the fare structure on the West Coast. During 1995, MarkAir (a
significant competitor in the Alaska marketplace since 1992) ceased
operations and Reno Air began flying to Alaska. During 1996, America West
began flying to Alaska and United ceased flying from Seattle to Alaska.
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, and
were all reinstated effective August 27, 1996. These taxes expired on
December 31, 1996. Management believes that some form of these taxes will
likely be reinstated in 1997 and that it is unlikely that any reinstatement
will be retroactive. The seven largest U.S. airlines have proposed a user
fee to replace the 10% passenger ticket tax. The U.S. General Accounting
Office has determined that the proposed user fee would benefit the seven
largest airlines at the expense of smaller airlines. The Company is
opposed to the proposed user fee because it would effectively transfer
hundreds of millions of dollars of operating costs to smaller airlines,
such as Alaska and Horizon.
During 1996, fuel prices increased significantly for the Company and most
of its competitors (approximately 20% or 12 cents per gallon for Alaska
Airlines).
RESULTS OF OPERATIONS
1996 Compared with 1995 Net income in 1996 was $45.6 million, compared
with $24.8 million in 1995. Operating income was $90.0 million in 1996
compared to $72.3 million in 1995. The 1996 results included a $9.3
million gain on sale of assets (compared to a $0.1 million loss in 1995).
Airline financial and statistical data is shown following the financial
statements. A discussion of this data follows.
Operating income increased 24.5% to $90.0 million, resulting in a 6.9%
operating margin as compared to a 6.3% margin in 1995. Operating income
increased in each of the first three quarters, but decreased in the fourth
quarter as a result of higher fuel prices, canceled flights due to extreme
weather during the last week of December, and matching of competitor's
lower fares. 1996 operating revenue per available seat mile (RASM)
increased 5.8% to 8.70 cents while operating expenses per available seat
mile increased 5.1% to 8.10 cents.
The increase in RASM was primarily due to a 4.2 point improvement in system
passenger load factor. The Pacific Northwest to the Bay Area and to
Southern California markets (which compose half of the system) experienced
a 6.8 point increase in load factor. Changes in passenger yield varied
from a 3.4% increase in the first quarter to a 1.4% decrease in the fourth
quarter, resulting in a slight increase of 0.7% for the full year.
Increased yield in the first half of 1996 is believed to be due in part to
the absence of the 10% passenger transportation tax. Decreased yield in the
second half of 1996 was due to lower fares in the Seattle-Anchorage and
Mexico markets.
Freight and mail revenues decreased 1.7% reflecting increased competition
in the Alaska markets. Other-net revenues rose 6.8% primarily due to
increased revenues from partners in Alaska's frequent flyer program.
The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis in 1996 and 1995.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1995 1996 Change % Change
Wages and benefits 2.46 2.57 .11 4
Employee profit sharing -- .01 .01 NM
Aircraft fuel 1.11 1.35 .24 22
Aircraft maintenance .33 .38 .05 15
Aircraft rent .99 .98 (.01) (1)
Commissions .54 .59 .05 9
Depreciation & amortization .42 .38 (.04) (10)
Loss (gain) on sale of assets -- (.06) (.06) NM
Landing fees and other rentals .33 .33 - -
Other 1.53 1.57 .04 3
Alaska Airlines Total 7.71 8.10 .39 5
NM = Not Meaningful
Alaska's higher unit costs were largely due to higher fuel prices and
heavier passenger loads. Significant unit cost changes are discussed
below.
Revenue passengers increased 16.4%. Employees increased 9% primarily due
to increases in reservation and customer service employees. Wages and
benefits per employee (excluding profit sharing) increased 2.5% due to
annual wage increases and a higher cost of fringe benefits, offset by lower
wages for new hires. The net effect was that wages and benefits increased
more than ASMs, resulting in a 4% increase in cost per ASM.
Fuel expense per ASM increased 22%, due to a 20% increase in the price of
fuel. Approximately one fourth of the 12.3 cent fuel price increase was
due to a 4.3 cent Federal excise tax on domestic fuel consumption that
began October 1, 1995. Currently, a 1 cent change in fuel prices affects
annual fuel costs by approximately $2.7 million.
Maintenance expense per ASM increased 15% 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 more than ASM growth. Commission expense
as a percentage of passenger revenue was 7.7% in 1996 versus 7.6% in 1995.
Depreciation and amortization expense per ASM decreased 10% primarily due
to the sale (and leaseback) of two aircraft in early 1996 and a 4% increase
in aircraft utilization.
The gain on sale of assets in 1996 is primarily due to the sale of three
jet aircraft. A new accounting standard requires that gains or losses on
long-lived assets be included in operating income.
Other Income (Expense) Non-operating expense decreased from $28.4 million
to $15.5 million primarily due to lower interest rates on variable debt and
smaller average debt balances.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
Dec. 31, 1995 Dec. 31, 1996 Change
(In millions, except debt-to-equity)
Cash and marketable securities $ 134.9 $ 101.6 $ (33.3)
Working capital (deficit) (91.4) (152.0) (60.6)
Long-term debt and
capital lease obligations 322.5 217.8 (104.7)
Shareholders' equity 311.4 357.0 45.6
Debt-to-equity 51%:49% 38%:62% NA
1996 Financial Changes The Company's cash and marketable securities
portfolio decreased by $33 million during 1996. Operating activities
provided $203 million of cash in 1996. Additional cash was provided by the
sale and leaseback of three B737-400 aircraft ($86 million) and the sale of
three MD-80 aircraft ($52 million). Cash was used for the purchase of two
new MD-83 aircraft, two used B737-400 aircraft, two previously leased B737-
200Cs, airframe and engine overhauls and other capital expenditures ($189
million), and aircraft purchase deposits ($41 million). Cash was also used
to repay net short-term borrowings ($19 million), and $115 million of long-
term debt (including $87 million repaid early).
Like most airlines, the Company has a working capital deficit. The
existence of a working capital deficit has not in the past impaired the
Company's ability to meet its obligations as they become due and it is not
expected to do so in the future.
Financing Arrangements During 1996, Alaska sold and leased back three
B737-400 aircraft for approximately 18 years, and replaced its $75 million
credit facility with a $125 million credit facility with substantially the
same terms and conditions.
Commitments During 1996, Alaska's lease commitments increased
approximately $141 million due to the sale and leaseback of three B737-400
aircraft. In addition, Alaska ordered 12 Boeing 737-400 aircraft along
with an option to acquire 12 more. The value of the firm commitments,
based on the manufacturer's list price, is about $540 million. The new
B737-400s will be phased in over the next three years, with the first plane
scheduled to enter the fleet in June 1997. The new planes will replace 12
older McDonnell Douglas MD-80s. During 1996 Alaska sold three MD-80s and
plans to return three more to lessors in 1997. Alaska expects to finance
the new planes with either leases, long-term debt or internally generated
cash.
At December 31, 1996, the Company had firm orders for 15 aircraft with a
total cost of approximately $655 million as set forth below.
Delivery Period - Firm Orders
Aircraft 1997 1998 1999 Total
Boeing B737-400 4 7 2 13
McDonnell Douglas MD-83 2 -- -- 2
Total 6 7 2 15
Cost (Millions) $250 $315 $90 $655
The Company accrues the costs associated with returning leased aircraft
over the lease period. As leased aircraft are retired, the costs are
charged against the established reserve. At December 31, 1996, $35 million
was reserved for leased aircraft returns.
Deferred Taxes At December 31, 1996, net deferred tax liabilities were $57
million, which includes $103 million of net temporary differences, offset
by $2 million of net operating loss (NOL) carryforwards and $44 million of
Alternative Minimum Tax (AMT) credits. The Company believes that all of
its deferred tax assets, including the NOL and AMT credits, will be
realized through the reversal of existing temporary differences or tax
planning strategies such as the sale of aircraft.
ITEM 8. FINANCIAL STATEMENTS
See Item 14.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K
(a) (1) Financial Statements
Page(s)
Balance Sheet as of December 31, 1995 and 1996 12-13
Statement of Income for the years ended
December 31, 1994, 1995 and 1996 14
Statement of Shareholder's Equity for the years ended
December 31, 1994, 1995 and 1996 15
Statement of Cash Flows for the years ended December 31, 1994,
1995 and 1996 16
Notes to Financial Statements as of December 31, 1996 17-22
Report of Independent Public Accountants 24
(2) Financial Statement Schedule II, Valuation and Qualifying
Accounts, for the years ended December 31, 1994, 1995 and 1996 25
(3) Exhibits
See Exhibit Index on page 26.
(b) Alaska did not file any reports on Form 8-K during the fourth
quarter of 1996.
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.
ALASKA AIRLINES, INC.
By: /s/ John F. Kelly Date: February 10, 1997
John F. Kelly
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on February 10, 1997
on behalf of the registrant and in the capacities indicated.
/s/ John F. Kelly Chairman, Chief Executive Officer, President and
John F. Kelly Director
/s/ Harry G. Lehr Senior Vice President/Finance
Harry G. Lehr (Principal Financial Officer)
/s/ Bradley D. Tilden Controller
Bradley D. Tilden (Principal Accounting Officer)
/s/ William H. Clapp Director
William H. Clapp
/s/ Ronald F. Cosgrave Director
Ronald F. Cosgrave
/s/ R. Marc Langland Director
R. Marc Langland
BALANCE SHEET
Alaska Airlines, Inc.
ASSETS
As of December 31 (In Millions) 1995 1996
Current Assets
Cash and cash equivalents $25.6 $49.2
Marketable securities 109.3 52.4
Receivables from related companies 118.6 100.1
Receivables - less allowance for doubtful accounts
(1995 - $1.6; 1996 - $1.2) 55.5 59.8
Inventories and supplies 29.0 28.6
Prepaid expenses and other assets 65.9 76.8
Total Current Assets 403.9 366.9
Property and Equipment
Flight equipment 785.3 753.1
Other property and equipment 187.9 236.0
Deposits for future flight equipment 33.1 59.0
1,006.3 1,048.1
Less accumulated depreciation & amortization 271.6 282.4
734.7 765.7
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 23.4 25.4
21.0 19.0
Total Property and Equipment - Net 755.7 784.7
Intangible Assets 15.5 15.0
Other Assets 91.4 81.3
Total Assets $1,266.5 $1,247.9
See accompanying notes to financial statements.
BALANCE SHEET
Alaska Airlines, Inc.
LIABILITIES AND SHAREHOLDER'S EQUITY
As of December 31 (In Millions) 1995 1996
Current Liabilities
Accounts payable $81.4 $71.0
Accrued aircraft rent 32.9 42.4
Accrued wages, vacation and payroll taxes 36.6 44.1
Other accrued liabilities 55.2 74.3
Short-term borrowings
(Interest rate: 1995 - 6.2%; 1996 - 5.6%) 65.9 47.0
Air traffic liability 123.7 162.0
Note payable to related company 64.8 54.0
Current portion of long-term debt and
capital lease obligations 34.8 24.1
Total Current Liabilities 495.3 518.9
Long-Term Debt & Capital Lease Obligations 322.5 217.8
Other Liabilities and Credits
Deferred income taxes 57.4 65.6
Deferred income 12.6 11.1
Other liabilities 67.3 77.5
137.3 154.2
Commitments
Shareholder's Equity
Common stock, $1 par value
Authorized: 1,000 shares
Issued: 1995 and 1996 - 500 shares - -
Capital in excess of par value 225.8 225.8
Retained earnings 85.6 131.2
311.4 357.0
Total Liabilities and Shareholder's Equity $1,266.5 $1,247.9
See accompanying notes to financial statements.
STATEMENT OF INCOME
Alaska Airlines, Inc.
Year Ended December 31
(In Millions) 1994 1995 1996
Operating Revenues
Passenger $925.9 $994.7 $1,146.8
Freight and mail 81.8 84.1 82.7
Other - net 53.9 63.5 67.8
Total Operating Revenues 1,061.6 1,142.3 1,297.3
Operating Expenses
Wages and benefits 323.1 342.2 384.5
Aircraft fuel 130.9 153.6 200.5
Aircraft maintenance 41.1 45.2 57.1
Aircraft rent 136.8 137.7 146.0
Commissions 73.6 75.3 88.7
Depreciation and amortization 47.7 58.2 55.9
Loss (gain) on sale of assets 1.0 0.1 (9.3)
Landing fees and other rentals 47.4 45.5 49.9
Other 198.1 212.2 234.0
Total Operating Expenses 999.7 1,070.0 1,207.3
Operating Income 61.9 72.3 90.0
Other Income (Expense)
Interest income 7.9 10.3 11.5
Interest expense (34.3) (40.3) (29.7)
Interest capitalized - - 0.6
Other - net 3.8 1.6 2.1
(22.6) (28.4) (15.5)
Income before income tax 39.3 43.9 74.5
Income tax expense 16.7 19.1 28.9
Net Income $22.6 $24.8 $45.6
See accompanying notes to financial statements.
STATEMENT OF SHAREHOLDER'S EQUITY
Alaska Airlines, Inc.
Capital in
Common Excess of Retained
(In Millions) Stock Par Value Earnings Total
Balances at December 31, 1993 $ - $225.8 $38.2 $264.0
1994 net income 22.6 22.6
Balances at December 31, 1994 - 225.8 60.8 286.6
1995 net income 24.8 24.8
Balances at December 31, 1995 - 225.8 85.6 311.4
1996 net income 45.6 45.6
Balances at December 31, 1996 $ - $225.8 $131.2 $357.0
See accompanying notes to financial statements.
STATEMENT OF CASH FLOWS
Alaska Airlines, Inc.
Year Ended December 31 (In Millions) 1994 1995 1996
Cash flows from operating activities:
Net income $22.6 $24.8 $45.6
Adjustments to reconcile net income to cash:
Depreciation and amortization 47.7 58.2 55.9
Amortization of airframe and engine overhauls 16.9 22.0 28.9
Loss (gain) on disposition of assets 1.0 0.1 (9.3)
Increase in deferred income taxes 15.1 16.1 8.2
Decrease (increase) in accounts receivable (34.4) (25.1) 14.2
Increase in other current assets (1.4) (12.6) (10.5)
Increase in air traffic liability 15.1 0.4 38.3
Increase in other current liabilities 29.5 21.5 25.7
Other-net (13.4) (1.0) 6.0
Net cash provided by operating activities 98.7 104.4 203.0
Cash flows from investing activities:
Proceeds from disposition of assets 5.3 2.5 53.0
Purchases of marketable securities (76.1) (169.4) (53.5)
Sales and maturities of marketable securities 56.8 153.5 110.4
Restricted deposits (2.5) (1.4) 0.1
Flight equipment deposits returned - 8.9 -
Additions to flight equipment deposits (0.5) - (41.3)
Additions to property and equipment (172.6) (87.9) (188.6)
Repayments from related companies 3.5 - -
Net cash used in investing activities (186.1) (93.8) (119.9)
Cash flows from financing activities:
Proceeds from short-term borrowings 25.0 69.9 47.0
Repayment of short-term borrowings (20.0) (29.0) (65.9)
Loan repayments to Alaska Air Group (6.4) (3.6) (10.8)
Proceeds from sale and leaseback transactions - 56.0 85.6
Proceeds from issuance of long-term debt 104.0 - -
Long-term debt and capital lease payments (30.9) (89.6) (115.4)
Net cash provided by financing activities 71.7 3.7 (59.5)
Net increase (decrease) in cash and cash equivalents (15.7) 14.3 23.6
Cash and cash equivalents at beginning of year 27.0 11.3 25.6
Cash and cash equivalents at end of year $11.3 $25.6 $49.2
Supplemental disclosure of cash paid (received) during the year for:
Interest $33.8 $41.1 $30.0
Income taxes (refunds) (0.4) 0.3 21.4
Noncash investing and financing activities:
1994 - Capital lease obligations of $57.9 million were incurred
due to changes in lease agreements.
1996 and 1995 - None
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
Alaska Airlines, Inc.
December 31, 1996
Note 1. Summary of Significant Accounting Policies
Organization and Nature of Operations
Alaska Airlines, Inc. (Alaska), an Alaska corporation, is a wholly owned
subsidiary of Alaska Air Group, Inc. (Air Group), a Delaware corporation.
Air Group is also the parent company of Horizon Air Industries, Inc.
(Horizon). The Company is a major airline serving Alaska, the West Coast,
Mexico and Eastern Russia. It operates an all jet fleet and its average
passenger trip is 833 miles.
Basis of Presentation
Preparation of financial statements requires the use of management's
estimates. Actual results could differ from those estimates. Certain
reclassifications have been made in prior years' financial statements to
conform to the 1996 presentation.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. They are carried at cost, which
approximates market. The Company reduces its cash on hand when checks are
disbursed. Due to the time delay in checks clearing the banks, the Company
normally maintains a negative cash balance on its books which is reported
as a current liability. The amount of the negative cash balance was $11.1
million and $10.8 million at December 31, 1995 and 1996, respectively.
Inventories and Supplies
Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. An allowance for obsolescence is
accrued on a straight-line basis over the estimated useful lives of the
aircraft. Inventories related to the retired B727 fleet and other surplus
items are carried at their net realizable value. The allowance at December
31, 1995 and 1996 for all inventories was $10.9 million and $12.1 million,
respectively.
Property, Equipment and Depreciation
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, which are as
follows:
Aircraft and other
flight equipment 14-20 years
Buildings 10-30 years
Capitalized leases and
leasehold improvements Term of lease
Other equipment 3-15 years
Assets and related obligations for items financed under capital leases are
initially recorded at an amount equal to the present value of the future
minimum lease payments. The cost of major airframe overhauls, engine
overhauls, and other modifications which extend the life or improve the
usefulness of aircraft are capitalized and amortized over their estimated
period of use. Other repair and maintenance costs are expensed when
incurred. The Company periodically reviews long-lived assets for
impairment.
Capitalized Interest
Interest is capitalized on flight equipment purchase deposits and ground
facilities progress payments as a cost of the related asset and is
depreciated over the estimated useful life of the asset. Interest
capitalization is suspended when there is a substantial delay in aircraft
deliveries.
Intangible Assets-Subsidiaries
The excess of purchase price over the fair value of net assets acquired is
recorded as an intangible asset and is amortized over 40 years.
Accumulated amortization at December 31, 1995 and 1996 was $4.9 million and
$5.4 million, respectively.
Deferred Income
Deferred income results from the sale and leaseback of aircraft, the
receipt of manufacturer or vendor credits, and from the sale of foreign tax
benefits. This income is recognized over the term of the applicable
agreements.
Passenger Revenues
Passenger revenues are considered earned at the time service is provided.
Tickets sold but not yet used are reported as air traffic liability.
Frequent Flyer Awards
Alaska operates a frequent flyer award program that provides travel awards
to members based on accumulated mileage. The estimated incremental cost of
providing free travel is recognized as an expense and accrued as a
liability as miles are accumulated. Alaska also defers recognition of
income on a portion of the payments it receives from travel partners
associated with its frequent flyer program. The frequent flyer liability
is relieved as travel awards are issued.
Advertising
The costs of advertising are expensed the first time the advertising takes
place. Advertising expense was $10.6 million, $12.7 million and $12.9
million, respectively, in 1994, 1995 and 1996.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or
tax returns.
Derivative Financial Instruments
The Company periodically enters into interest rate swap agreements to hedge
interest rate risk. The differential to be paid or received from these
agreements is accrued as interest rates change and is recognized currently
in the income statement. The Company enters into hedge agreements to
reduce its exposure to fluctuations in the price of jet fuel. A gain or
loss is recorded quarterly if the fuel index average exceeds the ceiling
price or falls below the floor price.
Note 2. Marketable Securities
Marketable securities are investments that are readily convertible to cash
and have original maturities that exceed three months. They are classified
as available for sale and consisted of the following at December 31 (in
millions):
1995 1996
Cost:
U.S. government securities $102.8 $48.4
Other 6.5 4.0
$109.3 $52.4
Fair value:
U.S. government securities $103.1 $48.2
Other 6.6 4.0
$109.7 $52.2
There were no material unrealized holding gains or losses at December 31,
1995 or 1996.
Of the marketable securities on hand at December 31, 1996, 87% will mature
during 1997 and the remainder will mature during 1998. Based on specific
identification of securities sold, the following occurred in 1995 and 1996
(in millions):
1995 1996
Proceeds from sales $153.5 $110.4
Gross realized gains .3 .3
Gross realized losses .5 .1
Realized gains and losses are reported as a component of interest income.
Note 3. Other Assets
Other assets consisted of the following at December 31 (in millions):
1995 1996
Restricted deposits $63.7 $63.6
Leasehold rights 11.2 8.4
Deferred costs and other 16.5 9.3
$91.4 $81.3
Leasehold rights and deferred costs are amortized over the term of the
related lease or contract.
Note 4. Related Company Transactions
In May 1991, Air Group made an $88.3 million capital contribution and a
$95.2 million loan to Alaska. The loan is due on demand. Alaska made
loan repayments of $6.4 million, $3.6 million and $10.8 million in 1994,
1995 and 1996, respectively. The weighted average interest rate was 7.0%
in all three years. At December 31, 1996, the loan balance outstanding
was $54.0 million.
During 1993, the Company made a $34.4 million non-interest bearing
advance, which is due on demand, to Alaska Air Group.
Note 5. Long-Term Debt and Capital Lease Obligations
At December 31, 1995 and 1996, long-term debt and capital lease
obligations were as follows (in millions):
1995 1996
7.5%* notes payable due
through 2009 $327.4 $214.1
Capital lease obligations 29.9 27.8
Less current portion (34.8) (24.1)
$322.5 $217.8
* weighted average for 1996
At December 31, 1996, borrowings of $214.1 million are secured by flight
equipment and real property.
At December 31, 1996, Alaska had a $125 million credit facility with
commercial banks. Advances under this facility may be for up to a maximum
maturity of four years. Borrowings may be used for aircraft acquisitions
or other corporate purposes, and they bear interest at a rate which varies
based on LIBOR.
Certain Alaska loan agreements contain provisions that require maintenance
of specific levels of net worth, leverage and fixed charge coverage, and
limit investments, lease obligations, sales of assets and additional
indebtedness. At December 31, 1996, the Company was in compliance with all
loan provisions, and under the most restrictive loan provisions, Alaska had
$79.2 million of net worth above the minimum.
At December 31, 1996, long-term debt principal payments for the next five
years were (in millions):
1997 $21.9
1998 $22.9
1999 $22.8
2000 $53.9
2001 $44.2
Note 6. Commitments
Lease Commitments
Lease contracts for 51 aircraft have remaining lease terms of one to 18
years. The majority of airport and terminal facilities are also leased.
Total rent expense was $160.7 million, $162.5 million and $173.3 million,
in 1994, 1995 and 1996, respectively. Future minimum lease payments under
long-term operating leases and capital leases as of December 31, 1996 are
shown below (in millions):
Operating Leases Capital
Aircraft Facilities Leases
1997 $ 140.5 $14.9 $ 4.1
1998 133.2 14.5 4.1
1999 123.1 14.4 4.1
2000 114.5 12.7 4.1
2001 105.6 8.5 4.1
Thereafter 614.5 32.5 11.0
Total lease payments $1,231.4 $97.5 31.5
Less amount representing interest (3.7)
Present value of capital lease payments $27.8
Aircraft Commitments
The Company has firm orders for 13 B737-400s to be delivered between 1997
and 1999, and two MD-83s to be delivered in 1997. The total amount of
these commitments is approximately $655 million. As of December 31, 1996,
deposits related to these deliveries were $54.6 million.
Note 7. Employee Benefit Plans
Pension Plans
Four defined benefit and four defined contribution retirement plans cover
essentially all employees. The defined benefit plans provide benefits
based on an employee's term of service and average compensation for a
specified period of time before retirement. Pension plans are funded as
required by the Employee Retirement Income Security Act of 1974 (ERISA).
The defined benefit plan assets are primarily common stocks and fixed
income securities. Plan assets exceeded the accumulated benefit obligation
at December 31, 1995 and 1996. The following table sets forth the funded
status of the plans at December 31, 1995 and 1996 (in millions):
1995 1996
Benefit obligation -
Vested $155.8 $180.9
Nonvested 22.0 22.1
Accumulated benefit
obligation $177.8 $203.0
Plan assets at fair value $184.4 $223.7
Projected benefit obligation 199.9 230.7
Plan assets less projected
benefit obligation (15.5) (7.0)
Unrecognized transition asset (1.1) (.8)
Unrecognized prior service cost 2.8 2.6
Unrecognized loss 32.6 32.6
Prepaid pension cost $ 18.8 $ 27.4
The weighted average discount rate used to determine the projected benefit
obligation was 7.5% and 7.5% as of December 31, 1995 and 1996,
respectively. The calculation assumed a weighted average rate of increase
for future compensation levels of 5.1% and 5.1% for 1995 and 1996,
respectively. The expected long-term rate of return on plan assets used in
1995 and 1996 was 10%.
Net pension expense for the defined benefit plans included the following
components for 1994, 1995 and 1996 (in millions):
1994 1995 1996
Service cost (benefits earned
during the period) $ 12.4 $11.4 $15.9
Interest cost on projected
benefit obligation 11.9 12.9 15.4
Actual return on assets (2.1) (37.0) (23.6)
Net amortization
and deferral (10.9) 23.3 6.5
Net pension expense $ 11.3 $10.6 $14.2
The defined contribution plans are deferred compensation plans under
section 401(k) of the Internal Revenue Code. Some of these plans require
Company matching contributions based on a percentage of participants'
contributions. One plan has an Employee Stock Ownership Plan (ESOP)
feature. The ESOP owns Air Group common shares which are held in trust for
eligible employees. The Company records compensation for payments made to
the Plan. As Alaska's contributions are received, the Plan releases the
shares of common stock to the employees' accounts.
Alaska also maintains an unfunded, noncontributory benefit plan for certain
elected officers. The present value of unfunded benefits for this plan was
accrued as of December 31, 1995 and 1996.
Total expense for all pension plans was $19.2 million, $18.3 million and
$22.1 million, respectively, in 1994, 1995 and 1996.
Profit Sharing Plans
Alaska has an employee profit sharing plan. Profit sharing expense for
1994, 1995 and 1996 was $-0-, $-0- and $0.9 million, respectively.
Other Postretirement Benefits
The Company allows retirees to continue their medical, dental and vision
benefits by paying the active employee plan premium until age 65. This
results in a subsidy to retirees because the premiums received by the
Company are less than the actual cost of the retirees' claims. The accrued
postretirement benefit obligation (APBO) for this subsidy at December 31,
1995 and 1996 was $12.1 million and $13.5 million, respectively. The APBO
is unfunded and is included with other liabilities on the Balance Sheet.
Annual expense related to this subsidy is not considered material to
disclose.
Note 8. Income Taxes
Alaska files a consolidated tax return with Air Group and other Air Group
subsidiaries. Each member of the consolidated group, including Alaska,
calculates its tax provision and tax liability, if applicable, on a
separate-entity basis. Any differences between the consolidated amounts
and the total of the subsidiaries' amounts are included in the tax
provision of the parent company.
Deferred income taxes result from temporary differences in the timing of
recognition of revenue and expense for tax and financial reporting
purposes. Deferred tax assets and liabilities comprise the following at
December 31 (in millions):
1995 1996
Excess of tax over book
depreciation $135.6 $142.3
Training expense 1.6 .8
Other - net 5.6 1.8
Gross deferred tax liabilities 142.8 144.9
Loss carryforward (25.0) (2.1)
Alternative minimum tax (29.3) (44.1)
Capital leases (3.1) (4.4)
Ticket pricing adjustments (.9) (.7)
Frequent flyer program (6.6) (6.5)
Employee benefits (7.9) (8.8)
Aircraft return provisions (14.6) (12.7)
Gain on sale of assets (.6) (1.7)
Capitalized interest (1.5) (1.3)
Inventory obsolescence (4.9) (5.9)
Gross deferred tax assets (94.4) (88.2)
Net deferred tax liabilities $ 48.4 $ 56.7
Current deferred tax asset $(9.0) $(8.9)
Noncurrent deferred tax liability 57.4 65.6
Net deferred tax liabilities $ 48.4 $ 56.7
The book income and temporary differences for 1996 resulted in taxable
income of $71 million. This was offset by Net Operating Losses generated
in prior years. Federal loss carryforwards can be used through year 2008.
$15 million of alternative minimum tax was paid in 1996.
The components of income tax expense were as follows (in millions):
1994 1995 1996
Current tax expense (credit):
Federal $(1.2) $ 3.6 $19.9
State .1 .3 .9
Total current (1.1) 3.9 20.8
Deferred tax expense:
Federal 15.6 13.0 6.9
State 2.2 2.2 1.2
Total deferred 17.8 15.2 8.1
Total tax expense $16.7 $19.1 $28.9
Income tax expense reconciles to the amount computed by applying the U.S.
federal rate of 35% to income before taxes as follows (in millions):
1994 1995 1996
Income before
income tax $39.3 $43.9 $74.5
Expected tax expense $13.8 $15.4 $26.1
Nondeductible expenses 1.5 1.9 1.9
State income tax 1.5 1.8 .9
Other - net (.1) -- --
Actual tax expense $16.7 $19.1 $28.9
Effective tax rate 42.5% 43.5% 38.8%
Note 9. Financial Instruments
The estimated fair values of the Company's financial instruments were as
follows (in millions):
December 31, 1995
Carrying Fair
Amount Value
Cash and cash equivalents $ 25.6 $ 25.6
Marketable securities 109.3 109.7
Restricted deposits 63.7 63.7
Long-term debt 327.4 327.4
December 31, 1996
Carrying Fair
Amount Value
Cash and cash equivalents $ 49.2 $ 49.2
Marketable securities 52.4 52.2
Restricted deposits 63.6 63.6
Long-term debt 214.1 214.1
The fair value of cash equivalents approximates carrying value due to the
short maturity of these instruments. The fair value of marketable
securities is based on quoted market prices. The fair values of
restricted deposits and long-term debt approximate the carrying amounts.
<TABLE>
Alaska Airlines Financial and Statistical Data
<CAPTION>
Quarter Ended December 31 Year Ended December 31
% %
Financial Data (in millions): 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $254.8 $237.3 7.4 $1,146.8 $994.7 15.3
Freight and mail 19.3 20.5 (5.9) 82.7 84.1 (1.7)
Other - net 18.4 16.0 15.0 67.8 63.5 6.8
Total Operating Revenues 292.5 273.8 6.8 1,297.3 1,142.3 13.6
Operating Expenses:
Wages and benefits 96.8 83.9 15.4 383.6 342.2 12.1
Employee profit sharing (6.7) 0.0 NM 0.9 0.0 NM
Aircraft fuel 51.5 42.1 22.3 200.5 153.6 30.5
Aircraft maintenance 16.3 9.9 64.6 57.1 45.2 26.3
Aircraft rent 37.6 35.1 7.1 146.0 137.7 6.0
Commissions 19.7 18.1 8.8 88.7 75.3 17.8
Depreciation and amortization 13.6 14.3 (4.9) 55.9 58.2 (4.0)
Loss (gain) on sale of assets (5.7) (1.3) NM (9.3) 0.1 NM
Landing fees and other rentals 12.4 10.4 19.2 49.9 45.5 9.7
Other 58.0 52.8 9.8 234.0 212.2 10.3
Total Operating Expenses 293.5 265.3 10.6 1,207.3 1,070.0 12.8
Operating Income (Loss) (1.0) 8.5 NM 90.0 72.3 24.5
Interest income 3.1 3.2 11.5 10.3
Interest expense (6.1) (9.6) (29.7) (40.3)
Interest capitalized 0.6 0.0 0.6 0.0
Other - net 1.3 0.4 2.1 1.6
(1.1) (6.0) (15.5) (28.4)
Income Before Income Tax $(2.1) $2.5 $74.5 $43.9
Operating Statistics:
Revenue passengers (000) 2,804 2,592 8.2 11,805 10,140 16.4
RPMs (000,000) 2,307 2,119 8.9 9,831 8,584 14.5
ASMs (000,000) 3,495 3,373 3.6 14,904 13,885 7.3
Passenger load factor 66.0% 62.8% 3.2 pts 66.0% 61.8% 4.2 pts
Breakeven load factor 69.3% 63.4% 5.9 pts 62.4% 59.4% 3.0 pts
Yield per passenger mile 11.04c 11.20c (1.4) 11.67c 11.59c 0.7
Operating revenue per ASM 8.37c 8.12c 3.1 8.70c 8.23c 5.8
Operating expenses per ASM 8.40c 7.87c 6.8 8.10c 7.71c 5.1
Fuel cost per gallon 80.7c 69.5c 16.0 75.2c 62.9c 19.6
Average number of employees 7,923 7,141 11.0 7,652 6,993 9.4
Aircraft utilization (block hours) 10.8 10.4 3.9 11.3 10.8 4.4
Operating fleet at period-end 74 74 0.0 74 74 0.0
NM = Not Meaningful
c = cents
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of Alaska Airlines, Inc.:
We have audited the accompanying balance sheet of Alaska Airlines, Inc. (an
Alaska corporation) as of December 31, 1996 and 1995, and the related
statements of income, shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alaska Airlines, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
January 24, 1997
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
Alaska Airlines, Inc. Schedule II
<CAPTION>
Additions
Beginning Charged (A) Ending
(In Millions) Balance to Expense Deductions Balance
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2.5 $0.9 $(1.3) $2.1
Obsolescence allowance for
flight equipment spare parts $6.9 $3.9 $(0.7) $10.1
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $28.4 $7.3 $(13.2) $22.5
Year Ended December 31, 1995
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2.1 $0.6 $(1.1) $1.6
Obsolescence allowance for
flight equipment spare parts $10.1 $2.0 $(1.2) $10.9
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $22.5 $8.0 $(0.3) $30.2
Year Ended December 31, 1996
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.6 $0.6 $(1.0) $1.2
Obsolescence allowance for
flight equipment spare parts $10.9 $2.2 $(1.0) $12.1
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $30.2 $7.6 $(2.8) $35.0
(A) Deduction from reserve for purpose for which reserve was created.
</TABLE>
EXHIBIT INDEX
Certain of the following exhibits have heretofore been filed with the
Commission and are incorporated herein by reference from the document
described in parenthesis. Certain others are filed herewith.
3.1 Articles of Incorporation of Alaska Airlines, Inc. as amended
through February 26, 1991.
3.2 Bylaws of Alaska Airlines, Inc. as amended and in effect February
26, 1991.
4.1 Trust Indentures and Security Agreement for Alaska Airlines
Equipment Trust Certificates, Series A and B (Exhibit No. 4(a)(1) to
Form S-3, Amendment No. 1, Registration No. 33-46668).
4.2 Trust Indentures and Security Agreement for Alaska Airlines
Equipment Trust Certificates, Series C and D (Exhibit No. 4(a)(1) to
Form S-3, Amendment No. 2, Registration No. 33-46668).
4.3 Participation Agreement for Alaska Airlines Equipment Trust
Certificates, Series A and B (Exhibit No. 4(b)(1) to Form S-3,
Amendment No. 1, Registration No. 33-46668).
4.4 Participation Agreement for Alaska Airlines Equipment Trust
Certificates, Series C and D (Exhibit No. 4(b)(1) to Form S-3,
Amendment No. 2, Registration No. 33-46668).
4.5 Lease Agreement for Alaska Airlines Equipment Trust Certificates
(Exhibit No. 4(b)(2) to Form S-3, Registration No. 33-46668).
10.1 Lease and Assignment of Sublease Agreement dated February 1, 1979
between Alaska Airlines, Inc. and the Alaska Industrial Development
Authority.
10.2 Lease and Assignment and Sublease Agreement dated April 1, 1978
between Alaska Airlines, Inc. and the Alaska Industrial Development
Authority.
10.3 Management Incentive Plan (1992 Alaska Air Group, Inc. Proxy
Statement).
10.4 Loan Agreement dated as of December 1, 1984, between Alaska
Airlines, Inc. and the Industrial Development Corporation of the
Port of Seattle.
10.5 Purchase Agreement between McDonnell Douglas Corporation and Alaska
Airlines, Inc. DAC 88-36-D, dated October 14, 1988 (Exhibit 10-17 to
1988 Alaska Air Group, Inc. 10-K, Commission File No. 1-8957).
10.6 Officers Supplementary Retirement Plan (1996 Alaska Air Group, Inc.
Proxy Statement).
10.7 Severance agreement between Alaska Air Group, Inc. and Raymond J.
Vecci (1995 Alaska Air Group, Inc. Proxy Statement).
#10.8 Lease Agreement dated January 22, 1990 between International Lease
Finance Corporation and Alaska Airlines, Inc. for the lease of a
B737-400 aircraft, summaries of 19 substantially identical lease
agreements for 19 additional B737-400 aircraft and Letter Agreement
#1 dated January 22, 1990 (Exhibit 10-14 to 1990 Alaska Air Group,
Inc. 10-K, Commission File No. 1-8957).
#10.9 Agreement dated September 18, 1996 between Alaska Airlines, Inc. and
Boeing for the purchase of 12 Boeing 737-400 aircraft (Exhibit 10.1
to Third Quarter 1996 10-Q).
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES, INC. 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 49200
<SECURITIES> 52400
<RECEIVABLES> 161100
<ALLOWANCES> 1200
<INVENTORY> 28600
<CURRENT-ASSETS> 366900
<PP&E> 1092500
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0
0
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</TABLE>
