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, 1998
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 (State or other jurisdiction of incorporation or organization)
92-0009235 (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 December 31, 1998, 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 27.
<PAGE>
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 that also owns Horizon Air Industries, Inc. (Horizon).
Alaska is a major airline that 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
1998, Alaska accounted for 83% 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, that 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 and five cities in
Mexico.. In each year since 1973, Alaska has carried more passengers
between Alaska and the U.S. mainland than any other airline. In 1998,
Alaska carried 13.1 million passengers. Passenger traffic within Alaska
and between Alaska and the U.S. mainland accounted for 25% of Alaska's
1998 revenue passenger miles, West Coast traffic (including Vancouver,
Canada) accounted for 67% and the Mexico markets 8%. Based on passenger
enplanements, Alaska's leading airports are Seattle, Portland, Los
Angeles and Anchorage. Based on revenues, its leading nonstop routes
are Seattle-Anchorage, Seattle-Los Angeles and Seattle-San Diego. At
December 31, 1998, Alaska's operating fleet consisted of 84 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 Airlines 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 six smaller
cities in California, six in Washington, two in Oregon and many small
communities in Alaska through code share marketing agreements with local
commuter carriers. In October 1998, Alaska suspended its service to
Russia due to economic instability in Russia.
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, government regulation, potential aircraft incidents 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. Alaska carries 2.3% of all U.S.
domestic passenger traffic. Alaska competes with one or more domestic
or foreign airlines on most of its routes. 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). 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.
Fuel
Fuel costs were 11.8% of the Company's total operating expenses in 1998.
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 $3.0 million. The
Company has in the past hedged against its exposure to fluctuations in
the price of jet fuel, but does not currently do so. The Company
evaluates hedging strategies on an ongoing basis.
Unionized Labor Force
Labor costs were 35% of the Company's total operating expenses in 1998.
Wage rates can have a significant impact on the Company's operating
results. At December 31, 1998, 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 the variety of 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 relatively highly leveraged, which
increases the volatility of its earnings. Due to its high fixed costs,
including aircraft lease commitments, a decrease in revenues results in
a disproportionately greater decrease in 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.
Government Regulation; International Routes
Like other airlines, the Company 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.
The Company is subject to bilateral agreements between the United States
and the foreign countries to which the Company provides service. There
can be no assurance that existing bilateral agreements between the
United States and the foreign governments will continue or that the
Company's designation to operate such routes will continue.
Risk of Loss and Liability; Weather
The Company is exposed to potential catastrophic losses in the event of
aircraft accidents or terrorist incidents. Consistent with industry
standards, the Company maintains vigorous safety, training and
maintenance programs, as well as insurance against such losses.
However, any aircraft accident, even if fully insured, could cause a
negative public perception of the Company with adverse financial
consequences. Unusually adverse weather can significantly reduce flight
operations, resulting in lost revenues and added expenses.
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 partner, 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. Unlike many other airlines, Alaska's miles do not expire. As
of the year-end 1997 and 1998, Alaska estimates that 652,000 and 812,000
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, 1998, fewer than
4% of these flight awards were issued and outstanding. For the years
1996, 1997 and 1998, approximately 173,000, 185,000 and 191,000 round
trip flight awards were redeemed and flown on Alaska and Horizon. These
awards represent approximately 4.4% for 1996, 3.2% for 1997, and 3.1%
for 1998, of the total passenger miles flown for each period.
Alaska maintains a liability for its Mileage Plan obligation that is
based on its total miles outstanding, less an estimate for miles that
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, 1997 and
1998, the total liability for miles outstanding was $22.3 million and
$28.0 million, respectively.
Employees
Alaska had 9,244 active full-time and part-time employees at December
31, 1998. Alaska's union contracts at December 31, 1998 were as follows:
Number of
Union Employee Group Employees Contract Status
Air Line Pilots Pilots 1,156 Amendable 4/30/03
Association International
Association of Flight attendants 1,635 Amendable 3/14/99
Flight Attendants
International Rampservice 932 Amendable 8/31/97
Association of and stock clerks In mediation
Machinists and
Aerospace Workers
Clerical, office 3,211 Amendable 5/20/99
and passenger service In negotiation
Aircraft Mechanics Mechanics, inspectors 1,031 Initial contract
Fraternal Association and cleaners In negotiation
Mexico Workers Mexico airport 71 Amendable 4/1/99
Association personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 2/9/02
Union of America
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated and their average
age at December 31, 1998.
Passenger Average Age
Aircraft Type Capacity Owned Leased Total in Years
Boeing 737-200C 111 7 1 8 18.4
Boeing 737-400 140 4 33 37 3.8
McDonnell Douglas MD-80 140 16 23 39 9.0
27 57 84 7.6
Eleven of the 27 aircraft owned by Alaska as of December 31, 1998 are
subject to liens securing long-term debt. Alaska's leased B737-200C,
B737-400 and MD-80 aircraft have lease expiration dates in 1999, between
2002 and 2016, and between 1999 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, San Jose, San
Francisco and Seattle. At December 31, 1998, all of Alaska's aircraft
meet the Stage 3 noise requirements under the Airport Noise and Capacity
Act of 1990.
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 reservations and office facility; two office buildings; 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: a regional headquarters
building, an air cargo facility and a leased hangar/office facility in
Anchorage; a Phoenix reservations center; and a leased two-bay
maintenance facility in Oakland.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, the Company announced that it had reached an agreement in
principle with the trustee for creditors of the defunct MarkAir, Inc.
regarding a breach of contract lawsuit. Subsequently, a formal
settlement agreement was approved by the bankruptcy court. The $16.5
million settlement resulted in an after-tax charge of $10.1 million in
the third quarter of 1998.
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
The airline industry is cyclical due to a high correlation between
demand for air travel and general economic conditions. Generally
speaking, economic conditions have been strong during the years covered
by this discussion. Because the industry has high fixed costs in
relation to revenues, a small change in load factors or fare levels has
a large impact on profits.
For most airlines, labor and fuel account for almost half of operating
expenses. The strong economy has increased employee turnover and put
upward pressure on labor costs. Fuel prices have been volatile in the
last three years. For Alaska Airlines, fuel prices increased 20% in
1996, decreased 4% in 1997 and decreased another 25% in 1998.
In recent years, airlines have reduced their ticket distribution costs
by capping travel agent commissions, by decreasing commission rates from
10% to 8%, by partially eliminating paper tickets and by selling tickets
directly to passengers via the Internet.
RESULTS OF OPERATIONS
1998 Compared with 1997 Net income in 1998 was $116.5 million, compared
with $76.0 million in 1997. The 1998 results include an after-tax
charge of $10.1 million for settlement of the MarkAir litigation.
Operating income was $194.0 million in 1998 compared to $134.3 million
in 1997. Lower fuel prices accounted for $48.1 million of the $59.7
million improvement in operating income. Airline financial and
statistical data is shown following the financial statements. A
discussion of this data follows.
Operating income increased 44.5% to $194.0 million, resulting in a 12.4%
operating margin as compared to a 9.3% margin in 1997. Operating
revenue per available seat mile (ASM) decreased 0.6% to 9.32 cents while
operating expenses per ASM decreased 4.1% to 8.17 cents.
The decrease in revenue per ASM was primarily due to a 0.2 point
decrease in passenger load factor. The Pacific Northwest-Southern
California and Pacific Northwest-Northern California markets experienced
modest increases in load factor, while the Seattle-Anchorage market
experienced a small decrease. Alaska's top five markets, which
represent 79% of its traffic, experienced increases in passenger yield.
Several smaller markets, including the new Canadian market, had
decreases in yield.
Freight and mail revenues increased 1.0% primarily due to a 4.7%
increase in mail pounds and a 0.5% increase in freight pounds carried.
Freight rates were down due to increased competition in the Seattle-
Anchorage market. Other-net revenues increased 6.2% due to increased
revenue from travel partners in Alaska's frequent flyer program.
Wages and benefits increased 10.0% due to a 5.7% increase in the number
of employees combined with a 4.1% increase in average wages and benefits
per employee. Employees were added in all areas to service the 8.9%
capacity (ASM) increase and the 6.3% increase in passengers carried.
Average wages and benefits per employee increased primarily due to
higher pilot wage rates and pension costs that resulted from a new pilot
contract signed in late 1997.
Profit sharing expense increased 63% due to a large increase in pretax
income.
Contracted services increased 15%, due to growth in ground handling and
security charges as a result of more flights to Canada and other cities,
greater use of temporary employees (particularly in computer systems
development), higher shipping charges incurred and increased navigation
fees in Canada and Mexico.
Fuel expense decreased 19%, as the 8% increase in fuel consumption was
more than offset by a 25% decrease in the price of fuel.
Maintenance expense increased 15%, exceeding the 9% increase in
capacity, due to a greater number of annual aircraft inspections (C
checks) performed, and increased engine overhaul expense.
Aircraft rent increased 7%, primarily due to leasing nine new aircraft
in 1998.
Food and beverage expense increased 5%, in line with the 6% increase in
passengers carried.
Commission expense decreased 6% (in spite of a 9% increase in passenger
revenue), primarily because the commission rate paid to travel agents
decreased from 10% to 8% for sales made since October, 1997. As a
percentage of passenger revenue, commission expense decreased 14%, from
7.8% to 6.7%. In 1998, 70% of ticket sales were made through travel
agents, versus 72% in 1997.
Other selling expenses increased 18%, higher than the 9% increase in
passenger revenues, due to increased advertising to promote the new
Canada market and other markets.
Depreciation and amortization expense increased 9%, primarily due to
modifications (made in late 1997) to the B737-200C fleet to meet Stage 3
noise requirements, a full year of depreciation on two MD-80s purchased
in 1997 and added depreciation on computers and related equipment.
Landing fees and other rentals increased 12%, higher than the 9%
increase in capacity, primarily due to rental rate and space increases
at several airports and higher than average fees in Canada.
Other expense decreased 1%, primarily due to a $2.7 million recovery of
California property taxes that resulted from settlement of industry
litigation, lower long distance telephone rates and lower insurance
rates. These savings were partly offset by higher expenditures for
operating supplies, employee hiring, flight crew hotels and legal fees.
Nonoperating Income (Expense) Net nonoperating items improved $3.4
million over 1997 due to lower interest expense (due to less
intercompany and other debt ) and higher interest income (due to higher
cash balances), which were partly offset by a $16.5 million charge for
settlement of the MarkAir litigation.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
Dec. 31, 1997 Dec. 31, 1998 Change
(In millions, except debt-to-equity)
Cash and marketable securities $212.4 $306.3 $93.9
Working capital (deficit) (151.4) (85.7) 65.7
Long-term debt and
capital lease obligations 215.3 171.5 (43.8)
Shareholders' equity 433.0 549.5 116.5
Debt-to-equity 33%:67% 24%:76% NA
1998 Financial Changes The Company's cash and marketable securities
portfolio increased by $94 million during 1998. Operating activities
provided $272 million of cash during this period. Additional cash was
provided by the sale and leaseback of nine B737-400 aircraft ($288
million). Cash was used for $420 million of capital expenditures,
including the purchase of nine new B737-400 aircraft, a previously
leased B737-400 aircraft, flight equipment deposits and airframe and
engine overhauls and the repayment of debt ($45 million).
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 1998, Alaska sold nine B737-400 aircraft
and leased them back for 18 years.
Commitments During 1998, Alaska's lease commitments increased
approximately $414 million due to the sale and leaseback of nine B737-
400 aircraft. In addition, Alaska ordered eight Boeing 737 aircraft
with a cost of approximately $256 million. Alaska expects to finance
the new planes with either leases, long-term debt or internally
generated cash. At December 31, 1998, the Company had firm orders for
25 aircraft with a total cost of approximately $818 million as set forth
below. In addition, Alaska has options to acquire 26 more B737s.
Delivery Period - Firm Orders
Aircraft 1999 2000 2001 2002 Total
Boeing B737-400 3 -- -- -- 3
Boeing B737-700 5 7 -- -- 12
Boeing B737-900 -- -- 5 5 10
Total 8 7 5 5 25
Cost (Millions) $251 $217 $175 $175 $818
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, 1998, $45
million was reserved for leased aircraft returns.
Deferred Taxes At December 31, 1998, net deferred tax liabilities were
$92 million, which includes $115 million of net temporary differences
offset by $23 million of Alternative Minimum Tax (AMT) credits. The
Company believes that all of its deferred tax assets, including its AMT
credits, will be realized through profitable operations.
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 expects to
remediate most of its major systems by early 1999 and substantially to
complete the project by the end of June 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 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'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 Airline Transport
Association (ATA) and the International Airline 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 not within ATA's purview.
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 will
leverage its year 2000 contingency planning off these existing plans.
In addition, the Company is developing and executing additional
contingency plans designed to allow continued operation in the event of
failure of key third party systems or products. 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.
New Accounting Standards During June 1998, the Financial Accounting
Standards Board issued FAS 133, Accounting for Derivative Instruments
and Hedging Activities The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Due to the
Company's minimal use of derivatives, the new standard is expected to
have no material impact on its financial position or results of
operations. FAS 133 will be effective for the Company's fiscal year
beginning January 1, 2000.
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, 1997 and 1998 13-14
Statement of Income for the years ended
December 31, 1996, 1997 and 1998 15
Statement of Shareholder's Equity for the years ended
December 31, 1996, 1997 and 1998 16
Statement of Cash Flows for the years ended December 31, 1996,
1997 and 1998 17
Notes to Financial Statements as of December 31, 1998 18-23
Report of Independent Public Accountants 25
(2) Financial Statement Schedule II, Valuation and Qualifying
Accounts, for the years ended December 31, 1996, 1997 and 1998 26
(3) Exhibits
See Exhibit Index on page 27.
(b) No reports on Form 8-K were filed during the fourth quarter of
1998.
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, 1999
John F. Kelly
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on February
10, 1999 on behalf of the registrant and in the capacities indicated.
/s/ John F. Kelly Chairman and Chief Executive Officer
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/ Ronald F. Cosgrave Director
Ronald F. Cosgrave
/s/ Mary Jane Fate Director
Mary Jane Fate
/s/ R. Marc Langland Director
R. Marc Langland
/s/ Robert L. Parker, Jr. Director
Robert L. Parker, Jr.
/s/ Patricia Q. Stonesifer Director
Patricia Q. Stonesifer
<TABLE>
BALANCE SHEET
Alaska Airlines, Inc.
<CAPTION>
ASSETS
As of December 31 (In Millions) 1997 1998
<S> <C> <C>
Current Assets
Cash and cash equivalents $102.3 $29.1
Marketable securities 110.1 277.2
Receivables from related companies 4.3 7.0
Receivables - less allowance for doubtful accounts
(1997 - $1.2; 1998 - $0.9) 65.5 66.0
Inventories and supplies 26.5 23.9
Prepaid expenses and other assets 86.6 103.5
Total Current Assets 395.3 506.7
Property and Equipment
Flight equipment 886.4 926.0
Other property and equipment 222.8 243.2
Deposits for future flight equipment 80.0 130.4
1,189.2 1,299.6
Less accumulated depreciation & amortization 324.6 364.1
864.6 935.5
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 27.5 29.6
16.9 14.8
0.0 0.0
Total Property and Equipment - Net 881.5 950.3
Intangible Assets 14.5 14.0
Other Assets 79.4 77.8
Total Assets $1,370.7 $1,548.8
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
BALANCE SHEET
Alaska Airlines, Inc.
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
As of December 31 (In Millions) 1997 1998
<S> <C> <C>
Current Liabilities
Accounts payable $55.9 $63.8
Payables to related companies 50.7 104.4
Accrued aircraft rent 47.7 62.1
Accrued wages, vacation and payroll taxes 60.5 68.9
Other accrued liabilities 83.0 88.3
Air traffic liability 166.2 177.7
Note payable to related company 54.0 -
Current portion of long-term debt and
capital lease obligations 28.7 27.2
0.0 0.0
Total Current Liabilities 546.7 592.4
0.0 0.0
Long-Term Debt & Capital Lease Obligations 215.3 171.5
Other Liabilities and Credits
Deferred income taxes 72.2 98.2
Deferred income 15.4 38.1
Other liabilities 88.1 99.1
175.7 235.4
Commitments
Shareholder's Equity
Common stock, $1 par value
Authorized: 1,000 shares
Issued: 1997 and 1998 - 500 shares - -
Capital in excess of par value 225.8 225.8
Retained earnings 207.2 323.7
433.0 549.5
Total Liabilities and Shareholder's Equity $1,370.7 $1,548.8
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF INCOME
Alaska Airlines, Inc.
<CAPTION>
Year Ended December 31
(In Millions) 1996 1997 1998
<S> <C> <C> <C>
Operating Revenues
Passenger $1,146.8 $1,297.0 $1,410.4
Freight and mail 82.7 82.9 83.7
Other - net 67.8 68.0 72.2
Total Operating Revenues 1,297.3 1,447.9 1,566.3
Operating Expenses
Wages and benefits 384.5 435.9 485.8
Contracted services 36.9 42.5 48.7
Aircraft fuel 200.5 199.7 162.3
Aircraft maintenance 57.1 67.4 77.6
Aircraft rent 146.0 148.5 158.9
Food and beverage service 44.2 46.7 49.1
Commissions 88.7 100.8 94.4
Other selling expenses 64.3 63.9 75.2
Depreciation and amortization 55.9 56.9 61.9
Loss (gain) on disposition of assets (9.3) (1.2) 1.0
Landing fees and other rentals 49.9 53.1 59.4
Other 88.6 99.4 98.0
Total Operating Expenses 1,207.3 1,313.6 1,372.3
Operating Income 90.0 134.3 194.0
Nonoperating Income (Expense)
Interest income 11.5 12.2 23.2
Interest expense (29.7) (25.0) (17.4)
Interest capitalized 0.6 3.4 5.1
Other - net 2.1 2.5 (14.4)
(15.5) (6.9) (3.5)
Income before income tax 74.5 127.4 190.5
Income tax expense 28.9 51.4 74.0
Net Income $45.6 $76.0 $116.5
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, 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
1997 net income 76.0 76.0
Balances at December 31, 1997 - 225.8 207.2 433.0
1998 net income 116.5 116.5
Balances at December 31, 1998 $ - $225.8 $323.7 $549.5
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
Alaska Airlines, Inc.
<CAPTION>
Year Ended December 31 (In Millions) 1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $45.6 $76.0 $91.6
Adjustments to reconcile net income to cash:
Depreciation and amortization 55.9 56.9 46.0
Amortization of airframe and engine overhauls 28.9 29.6 25.5
Loss (gain) on sale of assets (9.3) (1.2) 0.3
Increase in deferred income taxes 8.2 6.6 30.8
Decrease (increase) in accounts receivable 14.2 90.1 (21.8)
Increase in other current assets (10.5) (7.6) 5.8
Increase in air traffic liability 38.3 4.0 26.9
Increase in other current liabilities 25.7 66.2 82.0
Other-net 6.0 2.6 1.1
Net cash provided by operating activities 203.0 323.2 288.2
Cash flows from investing activities:
Proceeds from disposition of assets 53.0 4.5 0.6
Purchases of marketable securities (53.5) (443.6) (159.0)
Sales and maturities of marketable securities 110.4 385.9 54.1
Restricted deposits 0.1 (3.2) (1.7)
Additions to flight equipment deposits (41.3) (56.4) (112.1)
Additions to property and equipment (188.6) (236.6) (233.0)
Net cash used in investing activities (119.9) (349.4) (451.1)
Cash flows from financing activities:
Proceeds from short-term borrowings 47.0 56.4 -
Repayment of short-term borrowings (65.9) (103.4) -
Loan repayments to Alaska Air Group (10.8) - -
Proceeds from sale and leaseback transactions 85.6 124.2 288.0
Proceeds from issuance of long-term debt - 28.0 -
Long-term debt and capital lease payments (115.4) (25.9) (35.4)
Net cash provided by (used in) financing activities (59.5) 79.3 252.6
Net increase in cash and cash equivalents 23.6 53.1 89.7
Cash and cash equivalents at beginning of year 25.6 49.2 102.3
Cash and cash equivalents at end of year $49.2 $102.3 $192.0
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $30.0 $21.9 $11.4
Income taxes 21.4 26.6 48.7
Noncash investing and financing activities:
1996 and 1997 - None
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
Alaska Airlines, Inc.
December 31, 1998
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 864 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 1998 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 balance 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 $9.0 million and $14.9 million at December 31, 1997 and
1998, 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, 1997 and 1998 for all inventories was $12.6 million and
$15.6 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.
Intangible Assets-Subsidiaries
The excess of the 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, 1996 and 1997 was $5.9
million and $6.4 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 award liability is relieved as travel awards are issued.
Contracted Services
Contracted services includes the expenses for aircraft ground handling,
security, temporary employees and other similar services.
Other Selling Expenses
Other selling expenses includes credit card commissions, computerized
reservations systems (CRS) charges, advertising and promotional costs.
The costs of advertising are expensed the first time the advertising
takes place. Advertising expense was $12.9 million, $8.8 million, and
$15.5 million, respectively, in 1996, 1997 and 1998.
Nonoperating Expense
During 1998, the Company settled a breach of contract lawsuit with
MarkAir, Inc., which resulted in a $16.5 million charge to other
nonoperating expense.
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 enters into foreign exchange forward contracts, generally
with maturities of less than one month, to manage risk associated with
net foreign currency transactions. Resulting gains and losses are
recognized currently in other operating expense. 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 periodically enters into
hedge agreements to reduce its exposure to fluctuations in the price of
jet fuel. A gain or loss is recorded if the fuel index average exceeds
the ceiling price or falls below the floor price. There were no
interest rate swaps or fuel hedges entered into in 1998.
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):
1997 1998
Cost:
U.S. government securities $75.1 $214.1
Asset backed obligations 35.0 31.7
Other corporate obligations -- 31.4
$110.1 $277.2
Fair value:
U.S. government securities $75.2 $214.9
Asset backed obligations 35.0 31.8
Other corporate obligations -- 31.3
$110.2 $278.0
There were no material unrealized holding gains or losses at December
31, 1997 or 1998.
Of the marketable securities on hand at December 31, 1998, 49% will
mature during 1999 and the remainder will mature during 2000. Based on
specific identification of securities sold, the following occurred in
1997 and 1998 (in millions):
1997 1998
Proceeds from sales $385.9 $156.3
Gross realized gains 0.1 0.2
Gross realized losses 0.1 --
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):
1997 1998
Restricted deposits $66.8 $68.4
Deferred costs and other 12.6 9.4
$79.4 $77.8
Deferred costs are amortized over the term of the related lease or
contract.
Note 4. Related Company Transactions
In May 1991, Air Group made a $95.2 million loan to Alaska. Alaska made
loan repayments of $3.6 million in 1996 and $10.8 million in 1997. In
February 1998, the remaining $54.0 million loan balance was exchanged
for a non-interest bearing payable, which is due on demand, to Air
Group. The weighted average interest rate on the loan was 7% in all
three years.
Note 5. Long-Term Debt and Capital Lease Obligations
At December 31, 1997 and 1998, long-term debt and capital lease
obligations were as follows (in millions):
1997 1998
8.5%* fixed rate notes payable
due through 2001 $103.5 $90.3
6.0%* variable rate notes payable
due through 2009 114.9 85.2
Long-term debt 218.4 175.5
Capital lease obligations 25.6 23.2
Less current portion (28.7) (27.2)
$215.3 $171.5
* weighted average for 1998
At December 31, 1998, borrowings of $175.5 million are secured by flight
equipment and real property. At December 31, 1998, Alaska had a $115
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. At December
31, 1998, no borrowings were outstanding under this credit facility.
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, 1998, the Company was in
compliance with all loan provisions, and under the most restrictive loan
provisions, Alaska had $175 million of net worth above the minimum.
At December 31, 1998, long-term debt principal payments for the next
five years were (in millions):
1999 $24.5
2000 $55.5
2001 $45.4
2002 $12.1
2003 $12.3
Note 6. Commitments
Lease Commitments
Lease contracts for 57 aircraft have remaining lease terms of one to 18
years. The majority of airport and terminal facilities are also leased.
Total rent expense was $173.3 million, $177.7 million and $193.6
million, in 1996, 1997 and 1998, respectively. Future minimum lease
payments under long-term operating leases and capital leases as of
December 31, 1998 are shown below (in millions):
Operating Leases Capital
Aircraft Facilities Leases
1999 $151.0 $23.9 $4.1
2000 141.2 21.8 4.1
2001 133.1 15.4 4.1
2002 134.3 9.4 4.1
2003 114.2 8.6 4.1
Thereafter 890.1 86.6 9.0
Total lease payments $1,563.9 $165.7 29.5
Less amount representing interest (6.3)
Present value of capital lease payments $23.2
Aircraft Commitments
The Company has firm orders for 25 Boeing 737 series aircraft to be
delivered between 1999 and 2002. The total amount of these commitments
is approximately $818 million. As of December 31, 1998, deposits
related to these deliveries were $126 million. In addition to the firm
orders, the Company holds purchase options on 26 Boeing 737s.
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. The following table sets forth the status of the
plans for 1997 and 1998 (in millions):
1997 1998
Projected benefit obligation
Beginning of year $230.7 $307.4
Service cost 17.3 22.5
Interest cost 17.3 21.9
Amendments 57.7 --
Change in assumptions (8.7) 27.1
Actuarial loss (gain) 1.7 (0.4)
Benefits paid (8.6) (6.7)
End of year $307.4 $371.8
Plan assets at fair value
Beginning of year $223.7 $289.2
Actual return
on plan assets 47.6 54.4
Employer contributions 26.5 36.1
Benefits paid (8.6) (6.7)
End of year $289.2 $373.0
Funded status (18.2) 1.2
Unrecognized loss (gain) (0.8) 7.2
Unrecognized
transition asset (0.5) (0.3)
Unrecognized
prior service cost 60.1 49.4
Prepaid pension cost $ 40.6 $ 57.5
Weighted average assumptions
as of December 31
Discount rate 7.25% 6.75%
Expected return
on plan assets 10.0% 10.0%
Rate of compensation
increase 3.2% 5.5%
Net pension expense for the defined benefit plans included the following
components for 1996, 1997 and 1998 (in millions):
1996 1997 1998
Service cost $ 15.9 $ 17.3 $ 22.4
Interest cost 15.4 17.3 21.9
Expected return
on assets (18.5) (22.1) (28.7)
Amortization of
prior service cost 0.3 0.2 3.8
Recognized
actuarial loss 1.4 1.0 --
Amortization of
transition asset (0.3) (0.3) (0.2)
Net pension expense $ 14.2 $ 13.4 $ 19.2
Alaska also maintains an unfunded, noncontributory benefit plan for
certain elected officers. The $21 million unfunded accrued pension cost
for this plan was accrued as of December 31, 1998.
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.
Total expense for the defined contribution plans was $5.7 million, $6.8
million and $6.7 million, respectively, in 1996, 1997 and 1998.
Profit Sharing Plans
Alaska has an employee profit sharing plan. Profit sharing expense for
1996, 1997 and 1998 was $0.9 million, $12.1 million and $19.7 million,
respectively.
Other Postretirement Benefits
The Company allows retirees to continue their medical, dental and vision
benefits by paying all or a portion of the active employee plan premium
until eligible for Medicare, currently 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 accumulated
postretirement benefit obligation (APBO) for this subsidy at December
31, 1997 and 1998 was $15.7 million and $15.7 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.
After consideration of temporary differences, taxable income for 1998
was approximately $195 million.
The components of income tax expense were as follows (in millions):
1996 1997 1998
Current tax expense:
Federal $19.9 $42.6 $38.0
State 0.9 1.9 7.7
Total current 20.8 44.5 45.7
Deferred tax expense:
Federal 6.9 2.5 27.0
State 1.2 4.4 1.3
Total deferred 8.1 6.9 28.3
Total tax expense $28.9 $51.4 $74.0
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):
1996 1997 1998
Income before
income tax $74.5 $127.4 $190.5
Expected tax expense $26.1 $44.6 $66.7
Nondeductible
expenses 1.9 2.0 2.0
State income tax 0.9 4.1 6.1
Other - net -- 0.7 (0.8)
Actual tax expense $28.9 $51.4 $74.0
Effective tax rate 38.8% 40.3% 38.8%
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):
1997 1998
Excess of tax over book
depreciation $157.0 $158.8
Other - net 1.4 3.5
Gross deferred
tax liabilities 158.4 162.3
Loss carryforward (0.5) (0.1)
Alternative minimum tax (50.2) (22.7)
Capital leases (4.5) (2.6)
Ticket pricing adjustments (1.1) (1.9)
Frequent flyer program (8.4) (10.5)
Employee benefits (6.2) (3.7)
Aircraft return provisions (14.5) (15.2)
Deferred gains (3.5) (7.4)
Capitalized interest (1.1) (1.5)
Inventory obsolescence (4.8) (4.7)
Gross deferred tax assets (94.8) (70.3)
Net deferred
tax liabilities $ 63.6 $ 92.0
Current deferred tax asset $ (8.6) $ (6.2)
Noncurrent deferred
tax liability 72.2 98.2
Net deferred
tax liabilities $ 63.6 $ 92.0
Note 9. Financial Instruments
The estimated fair values of the Company's financial instruments were as
follows (in millions):
December 31, 1997
Carrying Fair
Amount Value
Cash and cash equivalents $102.3 $102.3
Marketable securities 110.1 110.2
Restricted deposits 66.8 66.8
Long-term debt 218.4 218.4
December 31, 1998
Carrying Fair
Amount Value
Cash and cash equivalents $29.1 $29.1
Marketable securities 277.2 278.0
Restricted deposits 68.4 68.4
Long-term debt 175.5 175.5
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.
<PAGE>
<TABLE>
Alaska Airlines Financial and Statistical Data
<CAPTION>
Quarter Ended December 31 Year Ended December 31
Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $313.0 $333.5 6.5 $1,297.0 $1,410.4 8.7
Freight and mail 20.7 19.8 (4.3) 82.9 83.7 1.0
Other - net 16.2 19.4 19.8 68.0 72.2 6.2
Total Operating Revenues 349.9 372.7 6.5 1,447.9 1,566.3 8.2
Operating Expenses:
Wages and benefits 106.1 115.0 8.4 423.8 466.1 10.0
Employee profit sharing 2.4 3.7 54.2 12.1 19.7 62.8
Contracted services 11.6 11.8 1.7 42.5 48.7 14.6
Aircraft fuel 49.3 39.1 (20.7) 199.7 162.3 (18.7)
Aircraft maintenance 18.6 17.2 (7.5) 67.4 77.6 15.1
Aircraft rent 38.2 41.2 7.9 148.5 158.9 7.0
Food and beverage service 11.8 12.5 5.9 46.7 49.1 5.1
Commissions 22.9 22.5 (1.7) 100.8 94.4 (6.3)
Other selling expenses 11.7 18.9 61.5 63.9 75.2 17.7
Depreciation and amortization 14.9 15.9 6.7 56.9 61.9 8.8
Loss (gain) on sale of assets (0.9) 0.6 NM (1.2) 1.0 NM
Landing fees and other rentals 12.7 14.8 16.5 53.1 59.4 11.9
Other 26.2 24.9 (5.0) 99.4 98.0 (1.4)
Total Operating Expenses 325.5 338.1 3.9 1,313.6 1,372.3 4.5
Operating Income 24.4 34.6 41.8 134.3 194.0 44.5
Interest income 3.9 6.8 12.2 23.2
Interest expense (5.9) (4.0) (25.0) (17.4)
Interest capitalized 1.1 1.5 3.4 5.1
Other - net 0.1 (0.1) 2.5 (14.4)
(0.8) 4.2 (6.9) (3.5)
Income Before Income Tax $23.6 $38.8 64.4 $127.4 $190.5 49.5
Operating Statistics:
Revenue passengers (000) 2,958 3,211 8.5 12,284 13,056 6.3
RPMs (000,000) 2,490 2,749 10.4 10,386 11,283 8.6
ASMs (000,000) 3,847 4,204 9.3 15,436 16,807 8.9
Passenger load factor 64.7% 65.4% 0.7 pts 67.3% 67.1% (0.2)pts
Breakeven load factor 60.2% 58.0% (2.2)pts 60.5% 58.0% (2.5)pts
Yield per passenger mile 12.57c 12.13c (3.5) 12.49c 12.50c 0.1
Operating revenue per ASM 9.10c 8.87c (2.5) 9.38c 9.32c (0.6)
Operating expenses per ASM 8.46c 8.04c (5.0) 8.51c 8.17c (4.1)
Fuel cost per gallon 71.7c 52.6c (26.7) 72.6c 54.6c (24.8)
Fuel gallons (000,000) 68.8 74.3 8.0 275.2 297.4 8.1
Average number of employees 8,223 8,787 6.9 8,236 8,704 5.7
Aircraft utilization (block hours) 11.2 11.2 0.0 11.4 11.5 0.9
Operating fleet at period-end 78 84 7.7 78 84 7.7
NM = Not Meaningful
c=cents
</TABLE>
<PAGE>
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, 1998 and 1997, and the
related statements of income, shareholder's equity and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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 25, 1999
<PAGE>
<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, 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 $10.9 $2.2 $(1.0) $12.1
equipment spare parts
(b) Reserve recorded as other
long-term liabilities: $30.2 $7.6 $(2.8) $35.0
Leased aircraft return provision
Year Ended December 31, 1997
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.2 $1.0 $(1.0) $1.2
Obsolescence allowance for flight
equipment spare parts $12.1 $2.0 $(1.5) $12.6
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $35.0 $8.0 $(2.6) $40.4
Year Ended December 31, 1998
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.2 $1.1 $(1.4) $0.9
Obsolescence allowance for flight
equipment spare parts $12.6 $4.5 $(1.5) $15.6
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $40.4 $9.2 $(4.4) $45.2
(A) Deduction from reserve for purpose for which reserve was created.
</TABLE>
<PAGE>
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 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 and Letter Agreement #1 dated January
22, 1990 (Exhibit 10-14 to 1990 10-K)
#10.6 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)
10.7 Alaska Air Group, Inc. Supplementary Retirement Plan for Elected
Officers (Exhibit 10.7 to 1997 10-K)
10.8 1995 Elected Officers Supplementary Retirement Plan (Exhibit 10.8
to 1997 10-K)
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES, INC. 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 29100
<SECURITIES> 277200
<RECEIVABLES> 73900
<ALLOWANCES> 900
<INVENTORY> 23900
<CURRENT-ASSETS> 506700
<PP&E> 1344000
<DEPRECIATION> 393700
<TOTAL-ASSETS> 1548800
<CURRENT-LIABILITIES> 592400
<BONDS> 171500
0
0
<COMMON> 1
<OTHER-SE> 549499
<TOTAL-LIABILITY-AND-EQUITY> 1548800
<SALES> 1566300
<TOTAL-REVENUES> 1566300
<CGS> 1372300
<TOTAL-COSTS> 1372300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17400
<INCOME-PRETAX> 190500
<INCOME-TAX> 74000
<INCOME-CONTINUING> 116500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
