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, 1998.
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, 1998.
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, 1998 and
December 31, 1997; (ii) statements of income for the three months ended
March 31, 1998 and 1997; (iii) statement of shareholder's equity for the
three months ended March 31, 1998; and, (iv) statements of cash flows for
the three months ended March 31, 1998 and 1997. Also attached are the
accompanying notes to the Company's financial statements that have changed
significantly during the three months ended March 31, 1998. 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, 1998, 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 1998 Compared with First Quarter 1997
Net income for the first quarter of 1998 was $14.6 million compared with a
net loss of $2.1 million in 1997. Operating income for the first quarter
of 1998 was $22.5 million compared to an operating loss of $1.5 million for
1997. Lower fuel prices, adjusted for profit sharing, accounted for $16.0
million of the $24.0 million improvement in operating income. Airline
financial and statistical data is shown following the financial statements.
A discussion of this data follows.
Operating income improved to $22.5 million, resulting in a 6.5% operating
margin as compared to a negative 0.5% margin in 1997. Operating revenue
per available seat mile (ASM) increased 4.1% to 9.06 cents while operating
expenses per ASM decreased 3.1% to 8.47 cents.
The increase in revenue per ASM was due to a 6.4% increase in system
passenger yield partially offset by a 0.7 point decrease in passenger load
factor. Most markets, including the three largest (Seattle - Anchorage,
Pacific Northwest - Southern California and Pacific Northwest - Northern
California), experienced increases in yields and load factors. The higher
yields and load factors reflect a more stabilized competitive environment
in those markets in 1998. Most of the ASM growth was in the Company's
newest market, Vancouver, Canada, where daily round trip flights have
increased from three to nine. Excluding this new market, the passenger
load factor would have shown a slight increase over the prior year.
Freight and mail revenues increased 5.7%, primarily due to higher mail
volumes and rates. Other-net revenues decreased 5.4% due to an increased
deferral of revenue from travel partners in Alaska's frequent flyer
program, and 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 1997 and 1998.
<TABLE>
<CAPTION>
Alaska Airlines Operating Expenses Per ASM (In Cents)
1997 1998 Change % Change
<S> <C> <C> <C> <C>
Wages and benefits 2.77 2.92 .15 5
Employee profit sharing -- .05 .05 NM
Contracted services .28 .32 .04 14
Aircraft fuel 1.50 1.03 (.47) (31)
Aircraft maintenance .41 .48 .07 17
Aircraft rent 1.02 .98 (.04) (4)
Food and beverage service .30 .29 (.01) (3)
Commissions .63 .57 (.06) (10)
Other selling expenses .45 .45 -- --
Depreciation and amortization .38 .40 .02 5
Landing fees and other rentals .36 .35 (.01) (3)
Other .64 .63 (.01) (2)
Alaska Airlines Total 8.74 8.47 (.27) (3)
NM = Not Meaningful
</TABLE>
Alaska's lower unit costs were primarily due to lower fuel prices, offset
by higher labor costs. Significant unit cost changes are discussed below.
Employees increased 5.4%, in line with the 6.0% increase in ASMs.
Excluding profit sharing, average wages and benefits per employee were up
5.8%, primarily due to higher pilot wage rates and pension costs. The net
effect was that wages and benefits expense increased more than the ASM
growth, resulting in a 5% increase in cost per ASM.
Fuel expense per ASM decreased 31%, due to a 31% decrease in the price of
fuel.
Maintenance expense per ASM increased 17%, because the 1997 results
included a $1.0 million favorable spare parts adjustment, whereas the 1998
results included $0.9 million more materials usage and $0.8 million more
amortization of engine and airframe overhauls.
Commission expense per ASM decreased 10%, because the commission rate paid
to travel agents decreased from 10% to 8% for sales made October 1, 1997
and thereafter. As a percentage of passenger revenue, commissions
decreased 15%, from 8.2% to 7.0%
Nonoperating Income (Expense) The net of these items changed from $2.3
million expense to $1.6 million income due to more interest income earned
on higher cash balances and less intercompany interest expense incurred.
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 39.4% tax rate for the first
quarter of 1998, 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 40.3% tax rate used for full year 1997. 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.
<TABLE>
<CAPTION>
Dec. 31, 1997 March 31, 1998 Change
(In millions, except debt-to-equity)
<S> <C> <C> <S>
Cash and marketable securities $ 212.4 $ 250.9 $ 38.5
Working capital (deficit) (151.4) (144.1) 7.3
Long-term debt and
capital lease obligations 215.3 208.3 (7.0)
Shareholders' equity 433.0 447.6 14.6
Debt-to-equity 33%:67% 32%:68% NA
</TABLE>
The Company's cash and marketable securities portfolio decreased by $39
million during the first three months of 1998. Operating activities
provided $77 million of cash during this period. Additional cash was
provided by the sale and leaseback of two B737-400 aircraft ($64 million).
Cash was used for $96 million of capital expenditures, including the
purchase of three new B737-400 aircraft, flight equipment deposits and
airframe and engine overhauls and the repayment of debt ($7 million).
Year 2000 Computer Issue The Company uses a significant number of computer
software programs and embedded operating systems that were not originally
designed to process dates beyond 1999. The Company has implemented a
project to ensure that the Company's systems will function properly in the
year 2000 and thereafter. The Company anticipates completing this project
for key systems in early 1999 and believes that, with modifications to its
existing software and systems and/or conversions to new software, the year
2000 issue will not pose significant operational problems. The total
direct costs of the Company's year 2000 project are currently estimated at
less than $1 million. Additional systems currently under review may
require further resources. The Company does not expect any cost increases
to have a material effect on its results of operations.
The Company is also in contact with its significant suppliers and vendors
with which its systems interface and exchange data or upon which its
business depends. These efforts are designed to minimize the extent to
which its business will be vulnerable to their failure to remediate their
own year 2000 issues. The Company's business is also dependent upon
certain governmental organizations or entities such as the Federal Aviation
Administration (FAA) that provide essential aviation industry
infrastructure. There can be no assurance that such third parties on which
the Company's business relies will successfully remediate their systems on
a timely basis. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of its
systems or those operated by other parties to operate properly beyond 1999.
Areas that could be adversely affected include flight operations,
maintenance, planning, reservations, sales, accounting and the frequent
flyer program. To the extent possible, the Company is developing and
executing contingency plans designed to allow continued operation in the
event of failure of third party systems or products.
PART II. OTHER INFORMATION
ITEM 5. Other Information
During the first quarter of 1998, Alaska's mechanics, inspectors, cleaners,
janitors and fleet service employees voted to be represented by the
Aircraft Mechanics Fraternal Association (AMFA) rather than the
International Association of Machinists (IAM). The negotiation of an
initial contract is expected to begin during June 1998. The IAM will
continue to represent Alaska's stock clerks and ramp service employees,
whose contract became amendable August 31, 1997. Negotiation of a new
contract for those employees is expected to resume during the second
quarter of 1998.
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 first quarter of 1998.
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: April 29, 1998
/s/ John F. Kelly
John F. Kelly
Chairman and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Finance
(Principal Financial Officer)
<PAGE>
<TABLE>
BALANCE SHEET
Alaska Airlines, Inc.
<CAPTION>
ASSETS
December 31, March 31,
(In Millions) 1997 1998
<S> <C> <C>
Current Assets
Cash and cash equivalents $102.3 $77.5
Marketable securities 110.1 173.4
Receivables from related companies 4.3 15.6
Receivables - net 65.5 82.3
Inventories and supplies 26.5 25.2
Prepaid expenses and other assets 86.6 87.0
Total Current Assets 395.3 461.0
Property and Equipment
Flight equipment 886.4 920.2
Other property and equipment 222.8 227.9
Deposits for future flight equipment 80.0 69.3
1,189.2 1,217.4
Less accumulated depreciation and amortization 324.6 337.7
864.6 879.7
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 27.5 28.1
16.9 16.3
Total Property and Equipment - Net 881.5 896.0
Intangible Assets - Subsidiaries 14.5 14.4
Other Assets 79.4 78.9
Total Assets $1,370.7 $1,450.3
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
BALANCE SHEET
Alaska Airlines, Inc.
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
December 31, March 31,
(In Millions) 1997 1998
<S> <C> <C>
Current Liabilities
Accounts payable $55.8 $65.9
Payables to related companies 50.8 108.4
Accrued aircraft rent 47.7 47.8
Accrued wages, vacation and payroll taxes 60.5 47.1
Other accrued liabilities 83.0 93.8
Air traffic liability 166.2 212.9
Note payable to related company 54.0 -
Current portion of long-term debt and
capital lease obligations 28.7 29.2
Total Current Liabilities 546.7 605.1
Long-Term Debt and Capital Lease Obligations 215.3 208.3
Other Liabilities and Credits
Deferred income taxes 72.2 80.8
Deferred income 15.4 20.3
Other liabilities 88.1 88.2
175.7 189.3
Shareholder's Equity 0.0 0.0
Common stock, $1 par value 0.0 0.0
Authorized: 1,000 shares
Issued: 1997 and 1998 - 500 shares 0.0 0.0
Capital in excess of par value 225.8 225.8
Retained earnings 207.2 221.8
433.0 447.6
Total Liabilities and Shareholder's Equity $1,370.7 $1,450.3
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF INCOME
Alaska Airlines, Inc.
<CAPTION>
Three Months Ended March 31
(In Millions) 1997 1998
<S> <C> <C>
Operating Revenues
Passenger $277.4 $309.8
Freight and mail 17.4 18.4
Other - net 16.8 15.9
Total Operating Revenues 311.6 344.1
Operating Expenses
Wages and benefits 99.2 112.7
Contracted services 10.0 12.0
Aircraft fuel 53.7 39.1
Aircraft maintenance 14.8 18.3
Aircraft rent 36.4 37.2
Food and beverage service 10.6 11.0
Commissions 22.6 21.6
Other selling expenses 16.1 17.2
Depreciation and amortization 13.7 15.1
Landing fees and other rentals 12.7 13.3
Other 23.3 24.1
Total Operating Expenses 313.1 321.6
Operating Income (Loss) (1.5) 22.5
Nonoperating Income (Expense)
Interest income 2.4 4.4
Interest expense (6.2) (4.7)
Interest capitalized 0.7 1.1
Other - net 0.8 0.8
(2.3) 1.6
Income (loss) before income tax (3.8) 24.1
Income tax expense (credit) (1.7) 9.5
Net Income (Loss) $(2.1) $14.6
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF SHAREHOLDER'S EQUITY
Alaska Airlines, Inc.
<CAPTION>
Capital in
Common Excess of Retained
(In Millions) Stock Par Value Earnings Total
<S> <C> <C> <C> <C>
Balances at December 31, 1997 $ - $225.8 $207.2 $433.0
Net income for the three months
ended March 31, 1998 14.6 14.6
Balances at March 31, 1998 $ - $225.8 $221.8 $447.6
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
Alaska Airlines, Inc.
<CAPTION>
Three Months Ended March 31 (In Millions) 1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2.1) $14.6
Adjustments to reconcile net income (loss) to cash:
Depreciation and amortization 13.7 15.1
Amortization of airframe and engine overhauls 7.2 8.0
Increase (decrease) in deferred income taxes (1.7) 8.6
Increase in accounts receivable (10.4) (28.1)
Decrease in other current assets 10.4 0.9
Increase in air traffic liability 46.9 46.9
Increase (decrease) in other current liabilities (33.7) 11.1
Other-net 0.4 (0.2)
Net cash provided by operating activities 30.7 76.9
Cash flows from investing activities:
Purchases of marketable securities (14.6) (84.2)
Sales and maturities of marketable securities 7.0 20.9
Restricted deposits (0.6) (0.4)
Additions to flight equipment deposits (9.0) (10.2)
Additions to property and equipment (19.3) (85.3)
Net cash used in investing activities (36.5) (159.2)
Cash flows from financing activities:
Proceeds from short-term borrowings 28.0 -
Repayment of short-term borrowings (47.0) -
Proceeds from sale and leaseback transactions - 64.0
Long-term debt and capital lease payments (6.3) (6.5)
Net cash provided by (used in) financing activities (25.3) 57.5
Net decrease in cash and cash equivalents (31.1) (24.8)
Cash and cash equivalents at beginning of period 49.2 102.3
Cash and cash equivalents at end of period $18.1 $77.5
Supplemental disclosure of cash paid during the period for:
Interest $5.0 $4.9
Income taxes - -
Noncash investing and financing activities:
1998 - A $54.0 million note payable to Alaska Air Group was exchanged
for a non-interest bearing payable.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY DURING THE
THREE MONTHS ENDED MARCH 31, 1998
Alaska Airlines, Inc.
Note 1. Commitments (See Note 6 to Financial Statements at December 31,
1997)
During the first three months of 1998, Alaska's lease commitments increased
approximately $92 million due to the sale and leaseback of two B737-400
aircraft under 18-year operating leases.
<PAGE>
<TABLE>
Airline Financial and Statistical Data
<CAPTION>
Quarter Ended March 31
Alaska Airlines
Financial Data (in millions): 1997 1998 % Change
<S> <C> <C> <C>
Operating Revenues:
Passenger $277.4 $309.8 11.7
Freight and mail 17.4 18.4 5.7
Other - net 16.8 15.9 (5.4)
Total Operating Revenues 311.6 344.1 10.4
Operating Expenses:
Wages and benefits 99.2 110.7 11.6
Employee profit sharing 0.0 2.0 NM
Contracted services 10.0 12.0 20.0
Aircraft fuel 53.7 39.1 (27.2)
Aircraft maintenance 14.8 18.3 23.6
Aircraft rent 36.4 37.2 2.2
Food and beverage service 10.6 11.0 3.8
Commissions 22.6 21.6 (4.4)
Other selling expenses 16.1 17.2 6.8
Depreciation and amortization 13.7 15.1 10.2
Gain on sale of assets 0.0 0.0
Landing fees and other rentals 12.7 13.3 4.7
Other 23.3 24.1 3.4
Total Operating Expenses 313.1 321.6 2.7
Operating Income (Loss) (1.5) 22.5
Interest income 2.4 4.4
Interest expense (6.2) (4.7)
Interest capitalized 0.7 1.1
Other - net 0.8 0.8
(2.3) 1.6
Income (Loss) Before Income Tax $(3.8) $24.1
Operating Statistics:
Revenue passengers (000) 2,770 2,863 3.4
RPMs (000,000) 2,342 2,459 5.0
ASMs (000,000) 3,582 3,798 6.0
Passenger load factor 65.4% 64.7% (0.7)pts
Breakeven load factor 67.1% 60.0% (7.1)pts
Yield per passenger mile 11.84c 12.60c 6.4
Operating revenue per ASM 8.7c 9.1c 4.1
Operating expenses per ASM 8.7c 8.5c (3.1)
Fuel cost per gallon 83.2c 57.5c (30.8)
Fuel gallons (000,000) 64.6 67.9 5.1
Average number of employees 7,921 8,353 5.4
Aircraft utilization (block hours) 11.2 11.2 0.0
Operating fleet at period-end 75 80 6.7
NM = Not Meaningful
c = cents
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES INC FIRST QUARTER 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 77500
<SECURITIES> 173400
<RECEIVABLES> 97900
<ALLOWANCES> 0
<INVENTORY> 25200
<CURRENT-ASSETS> 461000
<PP&E> 1261800
<DEPRECIATION> 365800
<TOTAL-ASSETS> 1450300
<CURRENT-LIABILITIES> 605100
<BONDS> 208300
0
0
<COMMON> 1
<OTHER-SE> 447599
<TOTAL-LIABILITY-AND-EQUITY> 1450300
<SALES> 344100
<TOTAL-REVENUES> 344100
<CGS> 321600
<TOTAL-COSTS> 321600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4700
<INCOME-PRETAX> 24100
<INCOME-TAX> 9500
<INCOME-CONTINUING> 14600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14600
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
