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 March 31, 1997.
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
March 31, 1997.
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 March 31, 1997 and
December 31, 1996; (ii) statements of income for the three months ended
March 31, 1997 and 1996; (iii) statement of shareholder's equity for the
three months ended March 31, 1997; and, (iv) statements of cash flows for
the three months ended March 31, 1997 and 1996. Also attached are the
accompanying notes to the Company's financial statements that have changed
significantly during the three months ended March 31, 1997. 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, 1996, 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
First Quarter 1997 Compared with First Quarter 1996
The net loss for the first quarter of 1997 was $2.1 million compared with a
net loss of $5.2 million in 1996. The operating loss for the first quarter
of 1997 was $1.5 million compared to an operating loss of $3.4 million for
1996. The smaller operating loss reflects higher passenger load factors
and yields. Airline financial and statistical data is shown following the
financial statements. A discussion of this data follows.
The operating loss decreased to $1.5 million, resulting in a negative 0.5%
operating margin as compared to a negative 1.2% margin in 1996. Operating
revenue per available seat mile (ASM) increased 8.6% to 8.70 cents while
operating expenses per ASM increased 7.8% to 8.74 cents.
The increase in revenue per ASM was primarily due to a 4.7 point
improvement in system passenger load factor. Essentially all markets
experienced increases in load factors. The Seattle-Anchorage market
experienced a 13.2 point increase in load factor. The increase in revenue
per ASM was also favorably impacted by a 2.8% increase in system passenger
yield. Increased yields in the Pacific Northwest to the Bay Area and to
Southern California markets were partially offset by lower yields in the
Seattle-Anchorage market.
Freight and mail revenues decreased 7% due to a reduction in military
charter work in Alaska and lower mail volumes. Other-net revenues
increased 1.2% due to increased revenues from travel partners in Alaska's
frequent flyer program, offset by lower maintenance service revenue.
The table below shows the major operating expense elements on a cost per
ASM basis for Alaska for the first quarters of 1996 and 1997.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 2.61 2.77 .16 6
Aircraft fuel 1.22 1.50 .28 23
Aircraft maintenance .39 .41 .02 5
Aircraft rent 1.02 1.02 - -
Commissions .56 .63 .07 13
Depreciation & amortization .41 .38 (.03) (7)
Landing fees and other rentals .34 .36 .02 6
Other 1.56 1.67 .11 7
Alaska Airlines Total 8.11 8.74 .63 8
Alaska's higher unit costs were primarily due to higher fuel prices and
costs associated with higher load factors. Significant unit cost changes
are discussed below.
Higher load factors resulted in revenue passengers increasing by 7.5% while
ASMs grew only 2.3%. Employees increased 8.6% (primarily in reservation
and customer service positions) to service the added workload. The net
effect was that wages and benefits expense increased more than the ASM
growth, resulting in a 6% increase in cost per ASM.
Fuel expense per ASM increased 23%, due to a 21% increase in the price of
fuel and lower fuel efficiency due to heavier passenger loads and shorter
average aircraft stage length.
Maintenance expense per ASM increased 5% because Alaska performed more
repair work that is expensed currently and less major airframe and engine
overhaul work which is capitalized.
Commission expense per ASM increased 13%, in line with the 13% increase in
passenger revenues.
Depreciation and amortization expense per ASM decreased 7% primarily due to
the sale (and leaseback) of two aircraft in late March 1996 and a 2%
increase in aircraft utilization.
Other expense per ASM increased 7% primarily due to higher costs related to
higher loads, such as booking fees, communications charges, credit card
commissions and food expense.
Other Income (Expense) Non-operating expense decreased $3.6 million to $5.9
million primarily due to smaller average debt balances and lower interest
rates on variable debt.
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 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 44.7% tax rate for the first
quarter of 1997, 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 38.8% tax rate used for full year 1996. 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.
Dec. 31, 1996 March 31, 1997 Change
(In millions, except debt-to-equity)
Cash and marketable securities $ 101.6 $ 78.0 $ (23.6)
Working capital (deficit) (152.0) (170.3) (18.3)
Long-term debt and
capital lease obligations 217.8 211.0 (6.8)
Shareholders' equity 357.0 354.9 (2.1)
Debt-to-equity 38%:62% 37%:63% NA
The Company's cash and marketable securities portfolio decreased by $24
million during the first three months of 1997. Operating activities
provided $31 million of cash during this period. Cash was used for $28
million of capital expenditures including the purchase of a previously
leased B737-200C aircraft, flight equipment deposits and airframe and
engine overhauls, net repayment of short-term borrowings ($19 million) and
the repayment of debt ($6 million).
The working capital deficit increased by $18 million primarily due to the
purchase of property and equipment.
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, 1996, and
were all reinstated effective March 7, 1997. These taxes are due to expire
on September 30, 1997.
ITEM 6. Exhibits and Reports on Form 8-K
(a) A report on Form 8-K describing changes in the employee profit sharing
program was filed on February 20, 1997.
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: May 2, 1997
/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
December 31, March 31,
(In Millions) 1996 1997
Current Assets
Cash and cash equivalents $49.2 $18.1
Marketable securities 52.4 59.9
Receivables from related companies 100.1 95.6
Receivables - net 59.8 74.6
Inventories and supplies 28.6 29.1
Prepaid expenses and other assets 76.8 66.0
Total Current Assets 366.9 343.3
Property and Equipment
Flight equipment 753.1 759.0
Other property and equipment 236.0 242.9
Deposits for future flight equipment 59.0 67.9
1,048.1 1,069.8
Less accumulated depreciation and amortization 282.4 293.4
765.7 776.4
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 25.4 26.0
19.0 18.4
Total Property and Equipment - Net 784.7 794.8
Intangible Assets - Subsidiaries 15.0 14.9
Other Assets 81.3 80.3
Total Assets $1,247.9 $1,233.3
See accompanying notes to financial statements.
BALANCE SHEET
Alaska Airlines, Inc.
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, March 31,
(In Millions) 1996 1997
Current Liabilities
Accounts payable $71.0 $58.7
Accrued aircraft rent 42.4 43.7
Accrued wages, vacation and payroll taxes 44.1 40.1
Other accrued liabilities 74.3 55.6
Short-term borrowings
(Interest rate: 1996 - 5.6%; 1997 - 5.9%) 47.0 28.0
Air traffic liability 162.0 208.9
Note payable to related company 54.0 54.0
Current portion of long-term debt and
capital lease obligations 24.1 24.6
Total Current Liabilities 518.9 513.6
Long-Term Debt and Capital Lease Obligations 217.8 211.0
Other Liabilities and Credits
Deferred income taxes 65.6 63.9
Deferred income 11.1 10.4
Other liabilities 77.5 79.5
154.2 153.8
Shareholder's Equity 0.0 0.0
Common stock, $1 par value 0.0 0.0
Authorized: 1,000 shares
Issued: 1996 and 1997 - 500 shares 0.0 0.0
Capital in excess of par value 225.8 225.8
Retained earnings 131.2 129.1
357.0 354.9
Total Liabilities and Shareholder's Equity $1,247.9 $1,233.3
See accompanying notes to financial statements.
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.
Three Months Ended March 31
(In Millions) 1996 1997
Operating Revenues
Passenger $245.1 $277.4
Freight and mail 18.7 17.4
Other - net 16.6 16.8
Total Operating Revenues 280.4 311.6
Operating Expenses
Wages and benefits 91.5 99.2
Aircraft fuel 42.8 53.7
Aircraft maintenance 13.6 14.8
Aircraft rent 35.6 36.4
Commissions 19.6 22.6
Depreciation and amortization 14.2 13.7
Loss on disposition of assets 0.1 -
Landing fees and other rentals 11.9 12.7
Other 54.5 60.0
Total Operating Expenses 283.8 313.1
Operating Loss (3.4) (1.5)
Other Income (Expense)
Interest income 2.6 2.4
Interest expense (8.9) (6.2)
Interest capitalized - 0.7
Other - net 0.4 0.8
(5.9) (2.3)
Loss before income tax (9.3) (3.8)
Income tax credit 4.1 1.7
Net Loss $(5.2) $(2.1)
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, 1996 $ - $225.8 $131.2 $357.0
Net loss for the three months
ended March 31, 1997 (2.1) (2.1)
Balances at March 31, 1997 $ - $225.8 $129.1 $354.9
See accompanying notes to financial statements.
STATEMENT OF CASH FLOWS
Alaska Airlines, Inc.
Three Months Ended March 31 (In Millions) 1996 1997
Cash flows from operating activities:
Net loss $(5.2) $(2.1)
Adjustments to reconcile net loss to cash:
Depreciation and amortization 14.2 13.7
Amortization of airframe and engine overhauls 6.5 7.2
Loss on disposition of assets 0.1 -
Decrease in deferred income taxes (4.1) (1.7)
Increase in accounts receivable (21.6) (10.4)
Decrease in other current assets 14.3 10.4
Increase in air traffic liability 45.4 46.9
Increase in other current liabilities (11.5) (33.7)
Other-net 4.7 0.4
Net cash provided by operating activities 42.8 30.7
Cash flows from investing activities:
Proceeds from disposition of assets 0.6 -
Purchases of marketable securities (13.4) (14.6)
Sales and maturities of marketable securities 48.4 7.0
Restricted deposits 2.4 (0.6)
Additions to flight equipment deposits - (9.0)
Additions to property and equipment (17.2) (19.3)
Net cash provided by (used in) investing activities 20.8 (36.5)
Cash flows from financing activities:
Proceeds from short-term borrowings - 28.0
Repayment of short-term borrowings (65.9) (47.0)
Proceeds from sale and leaseback transactions 57.4 -
Long-term debt and capital lease payments (17.4) (6.3)
Net cash used in financing activities (25.9) (25.3)
Net increase (decrease) in cash and cash equivalent 37.7 (31.1)
Cash and cash equivalents at beginning of year 25.6 49.2
Cash and cash equivalents at end of year $63.3 $18.1
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) $8.9 $5.0
Income taxes (refunds) - -
Noncash investing and financing activities None None
See accompanying notes to financial statements.
Income taxes (refunds) (0.4) 0.3
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 THAT HAVE CHANGED SIGNIFICANTLY DURING THE
THREE MONTHS ENDED MARCH 31, 1997
Alaska Airlines, Inc.
Note 1. Summary of Significant Policies (See Note 1 to Financial
Statements at December 31, 1996)
Property, Equipment and Depreciation
Effective January 1, 1997, the estimated salvage value of B737-400 flight
equipment was changed to 10% from 20%. The new estimate was adopted to
recognize the lower expected salvage values for this aircraft type. The
annual effect of the change will be to increase depreciation expense $0.5
million and decrease net income $0.3 million.
Airline Financial and Statistical Data
Quarter Ended March 31
Alaska Airlines
%
Financial Data (in millions): 1996 1997 Change
Operating Revenues:
Passenger $245.1 $277.4 13.2
Freight and mail 18.7 17.4 (7.0)
Other - net 16.6 16.8 1.2
Total Operating Revenues 280.4 311.6 11.1
Operating Expenses:
Wages and benefits 91.5 99.2 8.4
Aircraft fuel 42.8 53.7 25.5
Aircraft maintenance 13.6 14.8 8.8
Aircraft rent 35.6 36.4 2.2
Commissions 19.6 22.6 15.3
Depreciation and amortization 14.2 13.7 (3.5)
Loss (gain) on sale of assets 0.1 0.0 NM
Landing fees and other rentals 11.9 12.7 6.7
Other 54.5 60.0 10.1
Total Operating Expenses 283.8 313.1 10.3
Operating Loss (3.4) (1.5)
Interest income 2.6 2.4
Interest expense (8.9) (6.2)
Interest capitalized 0.0 0.7
Other - net 0.4 0.8
(5.9) (2.3)
Loss before income tax credit $(9.3) $(3.8)
Operating Statistics:
Revenue passengers (000) 2,576 2,770 7.5
RPMs (000,000) 2,126 2,342 10.2
ASMs (000,000) 3,500 3,582 2.3
Passenger load factor 60.7% 65.4% 4.7 pts
Breakeven load factor 64.2% 67.1% 2.9 pts
Yield per passenger mile 11.53c 11.84c 2.8
Operating revenues per ASM 8.0c 8.7c 8.6
Operating expenses per ASM 8.1c 8.7c 7.8
Fuel cost per gallon 68.5c 83.2c 21.3
Fuel gallons (000,000) 62.5 64.6 3.4
Average number of employees 7,297 7,921 8.6
Aircraft utilization (block hours) 10.9 11.2 2.3
Operating fleet at period-end 74 75 1.4
c = cents
NM = Not Meaningful
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES INC FIRST QUARTER 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
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