<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Alaska 92-0009235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7079
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
The registrant has 500 common shares, par value $1.00, outstanding at June
30, 1999.
1
<PAGE>
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET (UNAUDITED)
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
ASSETS
- ------------------------------------------------------------------- ---------------
December 31, JUNE 30,
(In Millions) 1998 1999
- ------------------------------------------------------------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $29.1 $67.5
Marketable securities 277.2 253.5
Receivables from related companies 7.0 27.2
Receivables - net 66.0 96.0
Inventories and supplies 23.9 25.9
Prepaid expenses and other assets 103.5 98.4
- ------------------------------------------------------------------- ---------------
TOTAL CURRENT ASSETS 506.7 568.5
- ------------------------------------------------------------------- ---------------
PROPERTY AND EQUIPMENT
Flight equipment 926.0 1,046.9
Other property and equipment 243.2 268.1
Deposits for future flight equipment 130.4 141.8
- ------------------------------------------------------------------- ---------------
1,299.6 1,456.8
Less accumulated depreciation and amortization 364.1 391.1
- ------------------------------------------------------------------- ---------------
935.5 1,065.7
- ------------------------------------------------------------------- ---------------
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 29.6 30.7
- ------------------------------------------------------------------- ---------------
14.8 13.7
- ------------------------------------------------------------------- ---------------
TOTAL PROPERTY AND EQUIPMENT - NET 950.3 1,079.4
- ------------------------------------------------------------------- ---------------
INTANGIBLE ASSETS - SUBSIDIARIES 14.0 13.7
- ------------------------------------------------------------------- ---------------
OTHER ASSETS 77.8 72.3
- ------------------------------------------------------------------- ---------------
TOTAL ASSETS $1,548.8 $1,733.9
- ------------------------------------------------------------------- ---------------
- ------------------------------------------------------------------- ---------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
BALANCE SHEET (UNAUDITED)
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------------- -----------------
December 31, JUNE 30,
(In Millions) 1998 1999
- ------------------------------------------------------------------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $63.8 $77.9
Payables to related companies 104.4 108.2
Accrued aircraft rent 62.1 66.3
Accrued wages, vacation and payroll taxes 68.9 59.5
Other accrued liabilities 88.3 106.7
Air traffic liability 177.7 253.5
Current portion of long-term debt and
capital lease obligations 27.2 27.0
- ------------------------------------------------------------------------- -----------------
TOTAL CURRENT LIABILITIES 592.4 699.1
- ------------------------------------------------------------------------- -----------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 171.5 160.3
- ------------------------------------------------------------------------- -----------------
OTHER LIABILITIES AND CREDITS
Deferred income taxes 98.2 127.6
Deferred income 38.1 36.1
Other liabilities 99.1 105.9
- ------------------------------------------------------------------------- -----------------
235.4 269.6
- ------------------------------------------------------------------------- -----------------
SHAREHOLDER'S EQUITY
Common stock, $1 par value
Authorized: 1,000 shares
Issued: 1998 and 1999 - 500 shares --- ---
Capital in excess of par value 225.8 225.8
Retained earnings 323.7 379.1
- ------------------------------------------------------------------------- -----------------
549.5 604.9
- ------------------------------------------------------------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $1,548.8 $1,733.9
- ------------------------------------------------------------------------- -----------------
- ------------------------------------------------------------------------- -----------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ --------------
Three Months Ended June 30
(In Millions) 1998 1999
- ------------------------------------------------------------------ --------------
<S> <C> <C>
OPERATING REVENUES
Passenger $360.9 $386.4
Freight and mail 22.8 20.8
Other - net 19.4 21.5
- ------------------------------------------------------------------ --------------
TOTAL OPERATING REVENUES 403.1 428.7
- ------------------------------------------------------------------ --------------
OPERATING EXPENSES
Wages and benefits 123.1 130.2
Contracted services 12.7 13.1
Aircraft fuel 39.8 49.2
Aircraft maintenance 22.4 22.5
Aircraft rent 38.3 39.9
Food and beverage service 12.1 12.2
Commissions 23.8 24.5
Other selling expenses 18.7 20.6
Depreciation and amortization 15.3 16.4
Loss (gain) on sale of assets 0.2 0.1
Landing fees and other rentals 15.4 16.7
Other 23.6 27.5
- ------------------------------------------------------------------ --------------
TOTAL OPERATING EXPENSES 345.4 372.9
- ------------------------------------------------------------------ --------------
OPERATING INCOME 57.7 55.8
- ------------------------------------------------------------------ --------------
NONOPERATING INCOME (EXPENSE)
Interest income 5.5 5.6
Interest expense (4.5) (3.6)
Interest capitalized 1.5 1.8
Other - net 0.5 0.8
- ------------------------------------------------------------------ --------------
3.0 4.6
- ------------------------------------------------------------------ --------------
Income before income tax 60.7 60.4
Income tax expense 24.2 23.7
- ------------------------------------------------------------------ --------------
NET INCOME $36.5 $36.7
- ------------------------------------------------------------------ --------------
- ------------------------------------------------------------------ --------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------ -------------
Six Months Ended June 30
(In Millions) 1998 1999
- ------------------------------------------------------------------ -------------
<S> <C> <C>
OPERATING REVENUES
Passenger $670.7 $721.5
Freight and mail 41.2 38.8
Other - net 35.3 40.3
- ------------------------------------------------------------------ -------------
TOTAL OPERATING REVENUES 747.2 800.6
- ------------------------------------------------------------------ -------------
Operating Expenses
Wages and benefits 235.8 253.0
Contracted services 24.7 26.6
Aircraft fuel 78.9 84.6
Aircraft maintenance 40.7 45.4
Aircraft rent 75.5 80.4
Food and beverage service 23.1 24.0
Commissions 45.4 46.6
Other selling expenses 35.9 40.0
Depreciation and amortization 30.4 32.3
Loss on disposition of assets 0.2 0.2
Landing fees and other rentals 28.7 33.4
Other 47.7 52.2
- ------------------------------------------------------------------ -------------
TOTAL OPERATING EXPENSES 667.0 718.7
- ------------------------------------------------------------------ -------------
OPERATING INCOME 80.2 81.9
- ------------------------------------------------------------------ -------------
NONOPERATING INCOME (EXPENSE)
Interest income 9.9 10.8
Interest expense (9.2) (7.5)
Interest capitalized 2.6 3.6
Other - net 1.3 2.4
- ------------------------------------------------------------------ -------------
4.6 9.3
- ------------------------------------------------------------------ -------------
Income before income tax 84.8 91.2
Income tax expense 33.7 35.8
- ------------------------------------------------------------------ -------------
NET INCOME $51.1 $55.4
- ------------------------------------------------------------------ -------------
- ------------------------------------------------------------------ -------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Capital in
Common Excess of Retained
(In Millions) Stock Par Value Earnings Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 $--- $225.8 $323.7 $549.5
Net income for the six months
ended June 30, 1999 55.4 55.4
- ---------------------------------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1999 $--- $225.8 $379.1 $604.9
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
STATEMENT OF CASH FLOWS (UNAUDITED)
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------ --------------
Six Months Ended June 30 (In Millions) 1998 1999
- ------------------------------------------------------------------------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $51.1 $55.4
Adjustments to reconcile net income to cash:
Depreciation and amortization 30.4 32.3
Amortization of airframe and engine overhauls 16.2 20.9
Loss on disposition of assets 0.2 0.2
Increase in deferred income taxes 25.4 29.5
Increase in accounts receivable (24.1) (50.2)
Decrease in other current assets 1.1 3.0
Increase in air traffic liability 63.5 75.8
Increase in other current liabilities 28.5 31.1
Other-net 0.5 4.2
- ------------------------------------------------------------------------------ --------------
Net cash provided by operating activities 192.8 202.2
- ------------------------------------------------------------------------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 0.4 ---
Purchases of marketable securities (123.2) (54.3)
Sales and maturities of marketable securities 35.8 78.1
Restricted deposits (1.0) 0.9
Additions to flight equipment deposits (62.9) (50.4)
Additions to property and equipment (186.5) (126.7)
- ------------------------------------------------------------------------------ --------------
Net cash used in investing activities (337.4) (152.4)
- ------------------------------------------------------------------------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback transactions 224.0 ---
Long-term debt and capital lease payments (29.2) (11.4)
- ------------------------------------------------------------------------------ --------------
Net cash provided by (used in) financing activities 194.8 (11.4)
- ------------------------------------------------------------------------------ --------------
Net increase in cash and cash equivalents 50.2 38.4
Cash and cash equivalents at beginning of period 102.3 29.1
- ------------------------------------------------------------------------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $152.5 $67.5
- ------------------------------------------------------------------------------ --------------
- ------------------------------------------------------------------------------ --------------
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $7.7 $4.5
Income taxes 7.2 6.4
Noncash investing and financing activities:
1998 - A $54.0 million note payable to Alaska Air Group was exchanged for
a non-interest bearing payable.
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY DURING THE SIX
MONTHS ENDED JUNE 30, 1999
Alaska Airlines, Inc.
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Alaska Airlines, Inc. (the
Company or Alaska), 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. They 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.
8
<PAGE>
ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------------------- -----------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1998 1999 Change 1998 1999 Change
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $ 360.9 $ 386.4 7.1 $ 670.7 $ 721.5 7.6
Freight and mail 22.8 20.8 (8.8) 41.2 38.8 (5.8)
Other - net 19.3 21.5 11.4 35.3 40.3 14.2
----------------------- -----------------------
Total Operating Revenues 403.0 428.7 6.4 747.2 800.6 7.1
----------------------- -----------------------
Operating Expenses:
Wages and benefits 117.1 124.6 6.4 227.8 244.4 7.3
Employee profit sharing 6.0 5.6 (6.7) 8.0 8.6 7.5
Contracted services 12.8 13.1 2.3 24.7 26.6 7.7
Aircraft fuel 39.8 49.2 23.6 78.9 84.6 7.2
Aircraft maintenance 22.4 22.5 0.4 40.7 45.4 11.5
Aircraft rent 38.3 39.9 4.2 75.5 80.4 6.5
Food and beverage service 12.2 12.2 0.0 23.1 24.0 3.9
Commissions 23.8 24.5 2.9 45.4 46.6 2.6
Other selling expenses 18.7 20.6 10.2 35.9 40.0 11.4
Depreciation and amortization 15.3 16.4 7.2 30.4 32.3 6.3
Loss on sale of assets 0.2 0.1 NM 0.2 0.2 0.0
Landing fees and other rentals 15.4 16.7 8.4 28.7 33.4 16.4
Other 23.3 27.5 18.0 47.7 52.2 9.4
----------------------- -----------------------
Total Operating Expenses 345.3 372.9 8.0 667.0 718.7 7.8
----------------------- -----------------------
Operating Income 57.7 55.8 (3.3) 80.2 81.9 2.1
----------------------- -----------------------
Interest income 5.6 5.6 9.9 10.8
Interest expense (4.5) (3.6) (9.2) (7.5)
Interest capitalized 1.5 1.8 2.6 3.6
Other - net 0.4 0.8 1.3 2.4
----------------------- -----------------------
3.0 4.6 4.6 9.3
----------------------- -----------------------
Income Before Income Tax $ 60.7 $ 60.4 (0.5) $ 84.8 $ 91.2 7.5
----------------------- -----------------------
----------------------- -----------------------
Operating Statistics:
Revenue passengers (000) 3,321 3,439 3.6 6,183 6,511 5.3
RPMs (000,000) 2,876 2,976 3.5 5,335 5,678 6.4
ASMs (000,000) 4,166 4,266 2.4 7,964 8,384 5.3
Passenger load factor 69.0% 69.8% 0.8 pts 67.0% 67.7% 0.7 pts
Breakeven load factor 57.0% 58.6% 1.6 pts 58.4% 59.2% 0.8 pts
Yield per passenger mile 12.55c 12.98c 3.5 12.57c 12.71c 1.1
Operating revenue per ASM 9.67c 10.05c 3.9 9.38c 9.55c 1.8
Operating expenses per ASM 8.29c 8.74c 5.4 8.38c 8.57c 2.4
Fuel cost per gallon 54.3c 65.5c 20.6 55.9c 57.1c 2.2
Fuel gallons (000,000) 73.3 75.1 2.5 141.2 148.2 5.0
Average number of employees 8,639 9,244 7.0 8,496 9,065 6.7
Aircraft utilization (block hours) 11.5 11.1 (3.5) 11.4 11.1 (2.6)
Operating fleet at period-end 84 86 2.4 84 86 2.4
NM = Not Meaningful
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
Net income for the second quarter of 1999 was $36.7 million compared with a net
income of $36.5 million in 1998. Operating income for the second quarter of 1999
was $55.8 million compared with $57.7 million for 1998. Financial and
statistical data is shown on page nine. A discussion of this data follows.
REVENUES
Capacity grew by 2.4%, primarily due to above average growth in the Southern
California, Arizona, Nevada and Canada markets. Traffic grew by 3.5%, resulting
in almost a one point increase in passenger load factor. The Mexico, Canada and
Northern Alaska markets experienced above average increases in load factor,
while the Seattle-Anchorage and Southeast Alaska markets experienced decreases.
Passenger yields were up 3.5%, with all markets showing an increase over last
year. New marketing alliances with other airlines, improved yield management
techniques and small fare increases have helped improve yields. The higher load
factor combined with the higher yield resulted in a 3.9% increase in revenue per
available seat mile (ASM). Consequently, passenger revenues increased 7.1%.
Freight and mail revenues decreased 8.8%, due to lower freight and mail volumes.
Flight cancellations and a poor fish run in Alaska contributed to the lower
freight volumes. Other-net revenues increased 11.4%, primarily due to increased
revenue from travel partners in Alaska's frequent flyer program.
EXPENSES
Operating expenses grew by 8.0 % as a result of an 2.4% increase in capacity and
a 5.4% increase in cost per ASM. The increase in cost per ASM was partly due to
higher fuel prices in 1999. Without the higher fuel prices, cost per ASM would
have increased 3.3%. Explanations of significant year-over-year changes in the
components of operating expenses are as follows:
- Wages and benefits increased 6.4% due to a 7.0% increase in the number
of employees. Employees were added in all areas to service the 2.4%
capacity (ASM) increase and the 3.6% increase in passengers carried.
- Fuel expense increased 24%, due to a 3% increase in fuel usage and a
21% increase in the price of fuel.
- Maintenance expense increased less than 1%, in spite of a 2% increase
in block hours, primarily due to the timing of engine overhauls and
other repairs.
- Commission expense increased 3% on a 7% increase in passenger revenue.
As a percentage of passenger revenue, commission expense decreased 4%,
from 6.6% to 6.3%. In 1999, 70% of ticket sales were made through
travel agents, versus 72% in 1998.
10
<PAGE>
- Other selling expenses increased 10%, higher than the 7% increase in
passenger revenues, primarily due to increased credit card sales and
related commission rates.
- Depreciation increased 7%, primarily due to owning four more aircraft
in 1999.
- Landing fees and other rentals increased 8%, higher than the 2%
increase in capacity, due to rate increases at Seattle and several
other airports.
- Other expense increased 18%, primarily due to recording a $2.7 million
property tax credit in 1998. Absent this tax credit, the increase
would have been 6%.
NONOPERATING INCOME (EXPENSE) Net nonoperating items improved $1.6 million over
1998, primarily due to lower interest expense (due to lower debt balances and
lower interest rates on variable debt).
SIX MONTHS 1999 COMPARED WITH SIX MONTHS 1998
Net income for the six months ended June 30, 1999 was $55.4 million, compared
with a net income of $51.1 million in 1998. Operating income for the first half
of 1999 was $81.9 million compared to $80.2 million for 1998.
Operating income increased 2.1% to $81.9 million, resulting in a 10.2% operating
margin as compared to a 10.7% margin in 1998. Operating revenue per ASM
increased 1.8% to 9.55 cents while operating expenses per ASM increased 2.4% to
8.57 cents. The increase in revenue per ASM was due to a 1.1% increase in system
passenger yield combined with a 0.7 point increase in load factor.
Unit costs increased 2.4% due to higher fuel prices, lower aircraft utilization
and higher wages and benefits.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998 JUNE 30, 1999 CHANGE
- -------------------------------------------------------------------------------------------------------------------------
(In millions, except debt-to-equity)
<S> <C> <C> <C>
Cash and marketable securities $306.3 $321.0 $ 14.7
Working capital (deficit) (85.7) (130.6) (44.9)
Long-term debt and
capital lease obligations 171.5 160.3 (11.2)
Shareholders' equity 549.5 604.9 55.4
Debt-to-equity 24%:76% 21%:79% NA
Debt-to-equity assuming aircraft
operating leases are capitalized
at seven times annualized rent 71%:29% 68%:32% NA
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's cash and marketable securities portfolio increased by $15 million
during the first six months of 1999. Operating activities provided $202 million
of cash during this period. Cash was used for $177 million of capital
expenditures, including the purchase of three new B737-400 aircraft, flight
equipment deposits and airframe and engine overhauls, and for $11 million of
debt repayment.
COMMITMENTS At June 30, 1999, the Company had firm orders for 23 aircraft
requiring aggregate payments of approximately $652 million, as set forth below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DELIVERY PERIOD - FIRM ORDERS
- ---------------------------------------------------------------------------------------------------------
AIRCRAFT 1999 2000 2001 2002 TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Boeing B737-700 6 7 -- -- 13
Boeing B737-900 -- -- 5 5 10
- ---------------------------------------------------------------------------------------------------------
Total 6 7 5 5 23
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Payments (Millions) $192 $190 $155 $115 $652
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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's Y2K project comprises five phases for each affected
system: inventory, assessment, remediation, testing and implementation.
Inventory and assessment phases were completed for all systems by first quarter
1999. As of June 30, 1999 the Company has completed every phase, through
implementation, of 94% of its mission-critical systems, which is consistent with
the industry as a whole as reported by the Air Transport Association (ATA).
Remediation, testing and implementation of all remaining systems is scheduled to
take place during the third and early fourth quarters of 1999. The Company
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. Most of the Company's information technology projects in
the last several years have made the affected systems year 2000 compliant. The
direct costs of projects solely intended to correct year 2000 problems are
currently estimated at less than $2 million. The Company does not track certain
costs attributable to year 2000, such as salaries of information technology
staff
12
<PAGE>
not dedicated entirely to the project. 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 has received favorable Y2K readiness responses from all of its
mission-critical and 95% of its other high-priority vendors and suppliers, and
continues to follow up to ensure readiness predictions are being met. 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. The Company is working with the ATA
and the International Air Transport Association (IATA) to monitor the progress
of FAA and airports in making their systems year 2000 compliant. In addition,
the Company is independently working with certain rural Alaska airports. 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.
The Company already has in place certain disaster contingency plans anticipating
the potential loss of essential services such as electricity and financial
accounting systems. The Company is building its year 2000 contingency planning
on these existing plans. The Company is also developing and executing additional
contingency plans designed to allow continued operation in the event of failure
of key internal and third party systems or products. This planning involves (a)
making a list of critical operations processes, (b) assessing the effect of
their failure on safety, operations and revenue, (c) quantifying the risk of
failure of each, and (d) based on the foregoing, developing a discrete
contingency plan for each potential failure. Where applicable, the Company will
communicate its plans to airports to maximize coordination with their own
contingency planning. The Company expects to complete its contingency planning
during the third and fourth quarters of 1999. The foregoing Year 2000 Computer
Issue comments include forward-looking statements regarding the performance of
the Company. Actual results may differ materially from these projections.
Factors that could cause results to differ include the availability of adequate
resources to complete the Company's year 2000 plan, the ability to identify and
remediate noncompliant systems, and the success of third parties in remediating
their year 2000 issues.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
EMPLOYEES
In June 1999, a new 42-month contract covering approximately 1,100 aircraft
maintenance technicians, technician helpers, janitors and fleet service
employees was ratified. The contract establishes enhanced rates of pay,
retirement, health and 401(k) benefits. It also provides for a union shop and
binding arbitration of certain issues, including rates of pay.
Alaska and the Association of Flight Attendants are continuing negotiation of a
new labor contract covering approximately 1,900 flight attendants. Alaska and
the International Association of Machinists (IAM) are continuing negotiation of
a new contract (covering approximately 1,000 rampservice and stock clerk
employees) with the assistance of a federal mediator. Alaska and the IAM are
also continuing negotiation, with the assistance of a federal mediator, of a new
contract covering approximately 3,300 clerical, office and passenger service
employees.
ALLIANCES WITH OTHER AIRLINES
Alaska and Horizon have announced a number of new marketing alliances with other
airlines that allow reciprocal frequent flyer mileage accrual and redemption
privileges and codesharing on certain flights. The purpose of the alliances is
to enhance Alaska's and Horizon's revenues by (a) providing our customers more
value by offering them more travel destinations and better accrual/redemption
opportunities, and (b) gaining access to more connecting traffic from other
airlines. The following table shows which of these relationships were existing
as of December 31, 1998 (Existing), which are new (New) and which are planned
later in 1999 (Planned).
<TABLE>
<CAPTION>
CODESHARING-- CODESHARING--
FREQUENT ALASKA FLIGHT # OTHER AIRLINE FLIGHT #
FLYER ON FLIGHTS OPERATED ON FLIGHTS OPERATED
AGREEMENT BY OTHER AIRLINES BY ALASKA/HORIZON
-------- ------------------- -----------------------
<S> <C> <C> <C>
MAJOR U.S. OR
INTERNATIONAL AIRLINES
American Airlines New Planned None
British Airways Existing None None
Canadian Airlines New New New
Continental Airlines New New New
KLM Existing None Existing
Northwest Airlines Existing Existing Existing
Qantas Existing None New
TWA Existing None None
COMMUTER AIRLINES
American Eagle Existing* Existing None
Era Aviation Existing* Existing None
Harbor Airlines Existing* Existing None
Trans States Airlines Existing* Existing None
PenAir Existing* Existing None
Reeve Aleutian Airways Existing* Existing None
</TABLE>
* This airline does not have its own frequent flyer program. However, Alaska's
Mileage Plan members can accrue and redeem miles on this airline's route system.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial data schedule.
(b) No reports on Form 8-K were filed during the second quarter of 1999.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ALASKA AIRLINES, INC.
- ---------------------------------------
Registrant
Date: July 28, 1999
/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)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES, INC. SECOND QUARTER 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 67500
<SECURITIES> 253500
<RECEIVABLES> 123200
<ALLOWANCES> 0
<INVENTORY> 25900
<CURRENT-ASSETS> 568500
<PP&E> 1501200
<DEPRECIATION> 421800
<TOTAL-ASSETS> 1733900
<CURRENT-LIABILITIES> 699100
<BONDS> 160300
0
0
<COMMON> 1
<OTHER-SE> 604899
<TOTAL-LIABILITY-AND-EQUITY> 1733900
<SALES> 800600
<TOTAL-REVENUES> 800600
<CGS> 718700
<TOTAL-COSTS> 718700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7500
<INCOME-PRETAX> 91200
<INCOME-TAX> 35800
<INCOME-CONTINUING> 55400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55400
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
