<PAGE>
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, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from . . . . . . . . to . . . . . . . .
Commission File Number 0-19978
ALASKA AIRLINES, INC.
(Exact name of registrant as specified in its charter)
ALASKA 92-0009235
(State or other jurisdiction of (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
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
Common Stock, $1.00 Par Value
As of December 31, 1999, 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
(I)(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 I.
The registrant's parent, Alaska Air Group, Inc. (File No. 1-8957), files
reports with the Commission pursuant to the Securities Exchange Act of 1934, as
amended.
Exhibit Index begins on page 26.
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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 1999, Alaska
accounted for 81% of Alaska Air Group, Inc.'s total operating revenues.
Horizon, a Washington corporation, began service in 1981 and was acquired by
Alaska Air Group, Inc. in 1986. Horizon is a regional airline, that operates in
the Pacific Northwest, Northern California and Western Canada.
OPERATIONS
Alaska Airlines is an Alaska corporation that was organized in 1932 and
incorporated in 1937. Alaska serves 35 cities in six states (Alaska, Washington,
Oregon, California, Nevada and Arizona), one city in Canada and six 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 1999, Alaska carried
13.6 million passengers. Passenger traffic within Alaska and between Alaska and
the U.S. mainland accounted for 23% of Alaska's 1999 revenue passenger miles,
West Coast traffic (including Vancouver, Canada) accounted for 68% and the
Mexico markets 9%. 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, 1999, Alaska's operating fleet consisted of 89 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.
ALLIANCES WITH OTHER AIRLINES
Alaska and Horizon have marketing alliances with other airlines that allow
reciprocal frequent flyer mileage accrual and redemption privileges and
codesharing on certain flights as set forth below. 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 mileage
accrual/redemption opportunities, (b) gaining access to more connecting traffic
from other airlines, and (c) providing members of alliance partners' frequent
flyer programs an opportunity to travel on Alaska and Horizon while earning
mileage credit in the alliance partners' program.
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<TABLE>
<CAPTION>
CODESHARING-- CODESHARING--
FREQUENT ALASKA FLIGHT # OTHER AIRLINE FLIGHT #
FLYER ON FLIGHTS OPERATED ON FLIGHTS OPERATED
AGREEMENT BY OTHER AIRLINES BY ALASKA/HORIZON
----------- -------------------- -------------------
MAJOR U.S. OR
INTERNATIONAL AIRLINES
- ----------------------
<S> <C> <C> <C>
American Airlines Yes Yes No
British Airways Yes No No
Canadian Airlines Yes Yes Yes
Continental Airlines Yes Yes Yes
KLM Yes No Yes
Lan Chile Yes No Yes
Northwest Airlines Yes Yes Yes
Qantas Yes No Yes
TWA Yes No No
COMMUTER AIRLINES
- -----------------
American Eagle Yes* Yes No
Era Aviation Yes* Yes No
Harbor Airlines Yes* Yes No
Trans States Airlines Yes* Yes No
PenAir Yes* Yes No
Reeve Aleutian Airways Yes* Yes No
</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.
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. This report may contain forward-looking statements that are based on
the best information currently available to management. The forward-looking
statements are intended to be subject to the safe harbor protection provided by
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are indicated by phrases
such as "the Company believes", "we anticipate" or any other language indicating
a prediction of future events. Whether these statements are ultimately accurate
depends on a number of outside factors that the Company cannot predict or
control. The following discussion of business risks sets forth the principal
foreseeable risks and uncertainties that my materially affect these predictions.
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 2.2% 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
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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 13.6% of the Company's total operating expenses in 1999. 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 $3.1 million. The Company believes that operating fuel efficient
aircraft is an effective hedge against high fuel prices. The Company has in the
past hedged against its exposure to fluctuations in the price of jet fuel, but
has not done so in recent years. The Company expects to resume hedging in 2000.
UNIONIZED LABOR FORCE
Labor costs were 35% of the Company's total operating expenses in 1999. Wage
rates can have a significant impact on the Company's operating results. At
December 31, 1999, labor unions represented 86% 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.
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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
EMPLOYEES
Alaska had 10,040 active full-time and part-time employees at December 31, 1999.
Alaska's union contracts at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF
UNION EMPLOYEE GROUP EMPLOYEES CONTRACT STATUS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Air Line Pilots Pilots 1,214 Amendable 4/30/03
Association International
- ------------------------------------------------------------------------------------------------------------------------
Association of Flight attendants 1,814 Amendable 10/29/03
Flight Attendants
- ------------------------------------------------------------------------------------------------------------------------
International Rampservice 1,100 Amendable 1/10/04
Association of and stock clerks
Machinists and
Aerospace Workers
Clerical, office and 3,228 Amendable 10/29/02
passenger service
- ------------------------------------------------------------------------------------------------------------------------
Aircraft Mechanics Mechanics, inspectors 1,130 Amendable 12/25/02
Fraternal Association and cleaners
- ------------------------------------------------------------------------------------------------------------------------
Mexico Workers Mexico airport 81 Amendable 4/1/00
Association personnel
of Air Transport
- ------------------------------------------------------------------------------------------------------------------------
Transport Workers Dispatchers 18 Amendable 2/9/02
Union of America
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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. With advance notice,
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
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70% of the flight awards selected are subject to blackout dates and
capacity-controlled seating. Alaska's miles do not expire. As of the year-end
1998 and 1999, Alaska estimated that 1,101,000 and 1,129,000 round trip
flight awards were eligible for redemption by Mileage Plan members who have
mileage credits exceeding the 20,000 mile free round trip domestic ticket
award threshold. Of these eligible awards, Alaska estimated that 812,000 and
921,000, respectively, would ultimately be redeemed. For the years 1997, 1998
and 1999, approximately 185,000, 191,000 and 226,000 round trip flight awards
were redeemed and flown on Alaska and Horizon. These awards represent
approximately 3.2% for 1997, 3.1% for 1998, and 3.7% for 1999, 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, 1998 and 1999, the total
liability for miles outstanding and for estimated payments to partner airlines
was $28.0 million and $40.0 million, respectively.
ITEM 2. PROPERTIES
AIRCRAFT
The following table describes the aircraft operated and their average age at
December 31, 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
PASSENGER AVERAGE AGE
AIRCRAFT TYPE CAPACITY OWNED LEASED TOTAL IN YEARS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALASKA AIRLINES
Boeing 737-200C 111 7 1 8 19.4
Boeing 737-400 138 9 31 40 4.7
Boeing 737-700 120 6 -- 6 0.2
McDonnell Douglas MD-80 140 16 19 35 9.6
- -------------------------------------------------------------------------------------------------------------
38 51 89 7.6
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Nineteen of the 38 aircraft owned by Alaska as of December 31, 1999 are subject
to liens securing long-term debt. Alaska's leased B737-200C, B737-400 and MD-80
aircraft have lease expiration dates in 2000, between 2002 and 2016, and between
2000 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.
At December 31, 1999, all of Alaska's aircraft meet the Stage 3 noise
requirements under the Airport Noise and Capacity Act of 1990. However, special
noise ordinances restrict the timing of
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flights operated by Alaska and other airlines at Burbank, Orange County, San
Diego and San Jose. In addition, Orange County restricts the type of aircraft
and number of flights.
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 December 1998, search warrants and a grand jury subpoena (for the U.S.
District Court for the Northern District of California) were served on Alaska.
In addition, the Federal Aviation Administration (FAA) issued a letter of
investigation to Alaska relating to maintenance performed on an MD-80 aircraft.
In April 1999, the FAA issued a notice of proposed civil penalty for $44,000. In
July 1999, Alaska responded informally to the notice and the FAA has not taken
any further action. In November 1999, the grand jury issued a second subpoena on
Alaska. To the Company's knowledge, no charges have been filed as a result of
the grand jury investigation.
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
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have been volatile in the last three years. For Alaska Airlines, fuel prices,
decreased 4% in 1997, decreased 25% in 1998 and increased 23% in 1999.
In recent years, airlines have reduced their ticket distribution costs by
capping travel agent commissions, by decreasing commission rates from 10% to 5%,
by partially eliminating paper tickets and by selling tickets directly to
passengers via the Internet.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998 Net income in 1999 was $119.4 million, compared with
$116.5 million in 1998. The 1999 results (fourth quarter impact) included an
after-tax gain on sale of Equant N.V. of $2.2 million. The 1998 results included
an after-tax charge of $10.1 million for a litigation settlement. Operating
income was $176.3 million in 1999 compared to $194.0 million in 1998. Higher
fuel prices impacted operating income by approximately $35.0 million. Airline
financial and statistical data is shown following the financial statements. A
discussion of this data follows.
REVENUES
Capacity increased by 3.2% primarily due to additional flights in the Arizona,
Mexico and Southern California markets Traffic grew by 4.4%, resulting in a 0.8
point increase in passenger load factor. The Canada and Mexico markets
experienced the largest increases in load factor. Passenger yields were up 3.2%,
with virtually 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 4.0% increase in revenue per available seat mile
(ASM). Consequently, passenger revenues increased 7.7%.
Freight and mail revenues decreased 4.4%, due to lower average freight rates,
and lower mail volumes carried. Other-net revenues increased 12.5%, due to
increased revenue from travel partners in Alaska's frequent flyer program.
EXPENSES
Operating expenses grew by 9.6 % as a result of a 3.2% increase in capacity and
a 6.3% increase in cost per ASM. The increase in cost per ASM was partly due to
higher fuel prices in 1999. Excluding fuel, cost per ASM increased 4.1%.
Explanations of significant year-over-year changes in the components of
operating expenses are as follows:
- Wages and benefits increased 8.5% due to a 5.5% increase in the
number of employees combined with a 2.8% increase in average wages
and benefits per employee. Employees were added in all areas to
service the 4.3% increase in passengers carried. Average wage rates
increased due to annual increases in the current pilot's contract,
combined with the impact of new labor agreements signed in the second
half of 1999.
- Contracted services increased 14% due to greater use of temporary
employees (particularly in computer systems development), higher
rates for ground handling services and increased navigation fees in
Canada and Mexico.
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- Fuel expense increased 26%, due to a 23% increase in the price of
fuel combined with a 3% increase in fuel consumption.
- Maintenance expense increased 24%, exceeding the 3% increase in block
hours, due to increased airframe and engine overhaul expense, and
higher costs for landing gear repairs. In addition, a $2.7 million
credit related to brake repairs was recorded in 1998.
- Commission expense decreased 4% on an 8% increase in passenger
revenue. In 1999, 67% of ticket sales were made through travel
agents, versus 70% in 1998. In 1999, 6% of ticket sales were made
through Alaska's Internet web site versus 2% in 1998. In addition,
the commission rate paid to travel agents decreased from 8% to 5% for
sales made after October 18, 1999.
- Other selling expenses increased 9%, in line with the 8% increase in
passenger revenues.
- Depreciation increased 10%, primarily due to purchasing nine new
aircraft in 1999.
- Landing fees and other rentals increased 12%, higher than the 2%
increase in landings, due to rate increases at Seattle, Portland and
several other airports.
- Other expense increased 12%, partly due to recording a $2.7 million
property tax credit in 1998. Absent this tax credit, the increase
would have been 9%, higher than the 3% increase in capacity, due to
higher expenditures for personnel expenses, professional services,
operating supplies, passenger remuneration and recruiting. Insurance
costs decreased due to lower passenger liability rates.
NONOPERATING INCOME (EXPENSE) Net nonoperating items improved $23.6 million over
1998 due to a $16.5 million litigation settlement charge in 1998, $3.2 million
more capitalized interest and a $3.6 million gain on sale of Equant N.V. (a
telecommunication network company owned by many airlines) in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1998 DECEMBER 31, 1999 CHANGE
- ---------------------------------------------------------------------------------------------------------------------
(In millions, except debt-to-equity)
<S> <C> <C> <C>
Cash and marketable securities $ 306.3 $ 328.8 $ 22.5
Working capital (deficit) (85.7) (116.3) (30.6)
Long-term debt and
capital lease obligations 171.5 337.0 165.5
Shareholders' equity 549.5 668.9 119.4
Debt-to-equity 24%:76% 34%:66% NA
Debt-to-equity assuming aircraft
operating leases are capitalized
at seven times annualized rent 71%:29% 67%:33% NA
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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1999 FINANCIAL CHANGES The Company's cash and marketable securities portfolio
increased by $23 million during 1999. Operating activities provided $295 million
of cash in 1999. Additional cash was provided by the issuance of new debt ($232
million). Cash was used for $483 million of capital expenditures, including the
purchase of nine new Boeing 737 aircraft, two formerly leased Boeing 737s,
flight equipment deposits, an aircraft simulator and airframe and engine
overhauls, and for $27 million of debt repayment.
Like many 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 the fourth quarter of 1999, Alaska issued $232
million of 7.6% fixed rate debt secured by eight aircraft.
COMMITMENTS At December 31, 1999, the Company had firm orders for 23 aircraft
requiring aggregate payments of approximately $577 million, as set forth below.
In addition, Alaska has options to acquire 26 more B737s. Alaska expects to
finance the new planes with either leases, long-term debt or internally
generated cash.
<TABLE>
<CAPTION>
DELIVERY PERIOD - FIRM ORDERS
- --------------------------------------------------------------------------------------------------
AIRCRAFT 2000 2001 2002 TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Boeing B737-700 7 6 -- 13
Boeing B737-900 -- 5 5 10
- --------------------------------------------------------------------------------------------------
Total 7 11 5 23
===================================================================================================
Payments (Millions) $238 $238 $101 $577
===================================================================================================
</TABLE>
DEFERRED TAXES At December 31, 1998, net deferred tax liabilities were $141
million, which includes $145 million of net temporary differences offset by $4
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 implemented a project to ensure that its
systems will function properly in the year 2000 and thereafter. In fact,
virtually all systems have worked properly in the year 2000. In addition, the
Company has not experienced any year 2000 related problems with its significant
suppliers with which its systems interface or exchange data. The direct costs of
projects solely intended to correct year 2000 problems were approximately $2
million. Due to lower than normal passenger traffic, Alaska and canceled, in
advance, flights late in the day on December 31, 1999 and early in the day on
January 1, 2000. Lost operating profit on each day was estimated at $600,000.
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
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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.
AIRCRAFT ACCIDENT On January 31, 2000, Alaska Airlines flight 261 from Puerto
Vallarta enroute to San Francisco, went down in the water off the coast of
California near Point Mugu. The flight carried 83 passengers and five crew
members. There were no survivors. Consistent with industry standards, the
Company maintains insurance against aircraft accidents. Any aircraft accident,
even if fully insured, could cause a negative public perception of the Company
with adverse financial consequences. However, the Company believes this accident
will not result in a material adverse impact on the financial position or
results of operations of the Company.
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
<TABLE>
<CAPTION>
PAGE(S)
<S> <C>
Balance Sheet as of December 31, 1998 and 1999 12-13
Statement of Income for the years ended
December 31, 1997, 1998 and 1999 14
Statement of Shareholder's Equity for the years ended
December 31, 1997, 1998 and 1999 15
Statement of Cash Flows for the years ended December 31, 1997,
1998 and 1999 16
Notes to Financial Statements as of December 31, 1999 17-22
Report of Independent Public Accountants 24
(2) Financial Statement Schedule II, Valuation and Qualifying
Accounts, for the years ended December 31, 1997, 1998 and 1999 25
(3) Exhibits
See Exhibit Index on page 26.
(b) No reports on Form 8-K were filed during the fourth quarter of 1999.
</TABLE>
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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 25, 2000
-------------------------
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 25, 2000 on behalf of
the registrant and in the capacities indicated.
<TABLE>
<S> <C>
/s/ John F. Kelly Chairman, Chief Executive Officer, President and Director
-----------------------------
John F. Kelly
/s/ Bradley D. Tilden Vice President/Finance and Chief Financial Officer
-----------------------------
Bradley D. Tilden (Principal Accounting and Principal Financial Officer)
/s/ William S. Ayer Director
-----------------------------
William S. Ayer
/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/ Patricia Q. Stonesifer Director
-----------------------------
Patricia Q. Stonesifer
/s/ J. Kenneth Thompson Director
-----------------------------
J. Kenneth Thompson
</TABLE>
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BALANCE SHEET
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
ASSETS
- ------------------------------------------------------------------------- -----------------
<S> <C> <C>
As of December 31 (In Millions) 1998 1999
- ------------------------------------------------------------------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $29.1 $132.3
Marketable securities 277.2 196.5
Receivables from related companies 7.0 27.1
Receivables - less allowance for doubtful accounts
(1998 - $0.9; 1999 - $0.9) 66.0 70.9
Inventories and supplies 23.9 29.9
Prepaid expenses and other assets 103.5 120.5
- ------------------------------------------------------------------------- -----------------
TOTAL CURRENT ASSETS 506.7 577.2
- ------------------------------------------------------------------------- -----------------
PROPERTY AND EQUIPMENT
Flight equipment 926.0 1,286.2
Other property and equipment 243.2 280.1
Deposits for future flight equipment 130.4 163.8
- ------------------------------------------------------------------------- -----------------
1,299.6 1,730.1
Less accumulated depreciation & amortization 364.1 421.6
- ------------------------------------------------------------------------- -----------------
935.5 1,308.5
- ------------------------------------------------------------------------- -----------------
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 29.6 31.6
- ------------------------------------------------------------------------- -----------------
14.8 12.8
- ------------------------------------------------------------------------- -----------------
TOTAL PROPERTY AND EQUIPMENT - NET 950.3 1,321.3
- ------------------------------------------------------------------------- -----------------
INTANGIBLE ASSETS 14.0 13.5
- ------------------------------------------------------------------------- -----------------
OTHER ASSETS 77.8 69.2
- ------------------------------------------------------------------------- -----------------
TOTAL ASSETS $1,548.8 $1,981.2
- ------------------------------------------------------------------------- -----------------
- ------------------------------------------------------------------------- -----------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
BALANCE SHEET
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------------- -----------------
<S> <C> <C>
As of December 31
(In Millions Except Share Amounts) 1998 1999
- ------------------------------------------------------------------------- -----------------
CURRENT LIABILITIES
Accounts payable $63.8 $88.3
Payables to related companies 104.4 126.9
Accrued aircraft rent 62.1 68.3
Accrued wages, vacation and payroll taxes 68.9 70.7
Other accrued liabilities 88.3 89.6
Air traffic liability 177.7 183.2
Current portion of long-term debt and
capital lease obligations 27.2 66.5
- ------------------------------------------------------------------------- -----------------
TOTAL CURRENT LIABILITIES 592.4 693.5
- ------------------------------------------------------------------------- -----------------
LONG-TERM DEBT & CAPITAL LEASE OBLIGATIONS 171.5 337.0
- ------------------------------------------------------------------------- -----------------
OTHER LIABILITIES AND CREDITS
Deferred income taxes 98.2 143.3
Deferred income 38.1 34.2
Other liabilities 99.1 104.3
- ------------------------------------------------------------------------- -----------------
235.4 281.8
- ------------------------------------------------------------------------- -----------------
COMMITMENTS
- ------------------------------------------------------------------------- -----------------
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 323.7 443.1
- ------------------------------------------------------------------------- -----------------
549.5 668.9
- ------------------------------------------------------------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $1,548.8 $1,981.2
- ------------------------------------------------------------------------- -----------------
- ------------------------------------------------------------------------- -----------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
STATEMENT OF INCOME
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------- -------------- ---------------
Year Ended December 31
(In Millions) 1997 1998 1999
- --------------------------------------------------------------------- -------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES
Passenger $1,297.0 $1,410.4 $1,519.6
Freight and mail 82.9 83.7 80.0
Other - net 68.0 72.2 81.2
- --------------------------------------------------------------------- -------------- ---------------
TOTAL OPERATING REVENUES 1,447.9 1,566.3 1,680.8
- --------------------------------------------------------------------- -------------- ---------------
OPERATING EXPENSES
Wages and benefits 435.9 485.8 523.9
Contracted services 42.5 48.7 55.6
Aircraft fuel 199.7 162.3 205.2
Aircraft maintenance 67.4 77.6 96.0
Aircraft rent 148.5 158.9 157.2
Food and beverage service 46.7 49.1 49.1
Commissions 100.8 94.4 91.0
Other selling expenses 63.9 75.2 82.2
Depreciation and amortization 56.9 61.9 67.9
Loss (gain) on disposition of assets (1.2) 1.0 0.4
Landing fees and other rentals 53.1 59.4 66.5
Other 99.4 98.0 109.5
- --------------------------------------------------------------------- -------------- ---------------
TOTAL OPERATING EXPENSES 1,313.6 1,372.3 1,504.5
- --------------------------------------------------------------------- -------------- ---------------
OPERATING INCOME 134.3 194.0 176.3
- --------------------------------------------------------------------- -------------- ---------------
NONOPERATING INCOME (EXPENSE)
Interest income 12.2 23.2 21.7
Interest expense (25.0) (17.4) (16.3)
Interest capitalized 3.4 5.1 8.3
Other - net 2.5 (14.4) 6.4
- --------------------------------------------------------------------- -------------- ---------------
(6.9) (3.5) 20.1
- --------------------------------------------------------------------- -------------- ---------------
Income before income tax 127.4 190.5 196.4
Income tax expense 51.4 74.0 77.0
- --------------------------------------------------------------------- -------------- ---------------
NET INCOME $76.0 $116.5 $119.4
- --------------------------------------------------------------------- -------------- ---------------
- --------------------------------------------------------------------- -------------- ---------------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
STATEMENT OF SHAREHOLDER'S EQUITY
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, 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
1999 net income 119.4 119.4
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 $ - $225.8 $443.1 $668.9
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
STATEMENT OF CASH FLOWS
Alaska Airlines, Inc.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------ ---------------- -----------------
Year Ended December 31 (In Millions) 1997 1998 1999
- ------------------------------------------------------------------------------ ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $76.0 $116.5 $119.4
Adjustments to reconcile net income to cash:
Depreciation and amortization 56.9 61.9 67.9
Amortization of airframe and engine overhauls 29.6 34.7 43.5
Loss (gain) on sale of assets (1.2) 1.0 0.4
Increase in deferred income taxes 6.6 26.0 45.1
Decrease (increase) in accounts receivable 90.1 (3.2) (25.0)
Increase in other current assets (7.6) (14.2) (23.0)
Increase in air traffic liability 4.0 11.7 5.5
Increase in other current liabilities 66.2 35.6 56.3
Other-net 2.6 2.4 4.4
- ------------------------------------------------------------------------------ ---------------- -----------------
Net cash provided by operating activities 323.2 272.4 294.5
- ------------------------------------------------------------------------------ ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 4.5 0.6 0.3
Purchases of marketable securities (443.6) (323.4) (137.8)
Sales and maturities of marketable securities 385.9 156.3 218.5
Restricted deposits (3.2) (1.6) 5.6
Additions to flight equipment deposits (56.4) (143.4) (149.2)
Additions to property and equipment (236.6) (276.7) (333.6)
- ------------------------------------------------------------------------------ ---------------- -----------------
Net cash used in investing activities (349.4) (588.2) (396.2)
- ------------------------------------------------------------------------------ ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 56.4 - -
Repayment of short-term borrowings (103.4) - -
Proceeds from sale and leaseback transactions 124.2 288.0 -
Proceeds from issuance of long-term debt 28.0 - 232.0
Long-term debt and capital lease payments (25.9) (45.4) (27.1)
- ------------------------------------------------------------------------------ ---------------- -----------------
Net cash provided by financing activities 79.3 242.6 204.9
- ------------------------------------------------------------------------------ ---------------- -----------------
Net increase (decrease) in cash and cash equivalents 53.1 (73.2) 103.2
Cash and cash equivalents at beginning of year 49.2 102.3 29.1
- ------------------------------------------------------------------------------ ---------------- -----------------
Cash and cash equivalents at end of year $102.3 $29.1 $132.3
- ------------------------------------------------------------------------------ ---------------- -----------------
- ------------------------------------------------------------------------------ ---------------- -----------------
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $21.9 $13.1 $7.0
Income taxes 26.6 48.5 34.9
Noncash investing and financing activities:
1999 - A flight simulator was transferred to Alaska Air Group Leasing in
exchange for an $8.8 million note receivable and a $2.2 million
reduction in its payable to Alaska Air Group.
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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Alaska Airlines, Inc.
December 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Alaska Airlines, Inc. (Alaska or the Company), 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 Alaska Air Group Leasing
(AAGL) and Horizon Air Industries, Inc. (Horizon). Alaska is a major airline
serving Alaska; Vancouver, Canada; the U.S. West Coast and Mexico. It operates
an all jet fleet and its average passenger trip is 865 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 1999
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 $14.9 million and $19.0 million at December 31,
1998 and 1999, 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 of flight
equipment expendable and repairable parts is accrued based on estimated disposal
date and salvage value. Surplus inventories are carried at their net realizable
value. The allowance at December 31, 1998 and 1999 for all inventories was $15.6
million and $18.5 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:
<TABLE>
- -------------------------------------------------------------------------------
<S> <C>
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
- -------------------------------------------------------------------------------
</TABLE>
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.
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, 1998 and 1999 was $6.4 million and $6.9 million,
respectively.
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
17
<PAGE>
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, which is included with other accrued liabilities, is relieved as
travel awards are issued. The liability at December 31, 1998 and 1999 was
$28.0 million and $40.0 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.
LEASED AIRCRAFT RETURN COSTS
The costs associated with returning leased aircraft are accrued over the lease
period. As leased aircraft are retired, the costs are charged against the
established reserve. The reserve is part of other liabilities, and at December
31, 1998 and 1999 was $45.2 million and $43.2 million, respectively.
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.
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 $8.8 million, $15.5 million, and $14.6 million,
respectively, in 1997, 1998 and 1999.
CAPITALIZED INTEREST
Interest is capitalized on flight equipment purchase deposits and ground
facility progress payments as a cost of the related asset and is depreciated
over the estimated useful life of the asset.
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 1999.
18
<PAGE>
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):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Cost:
U.S. government securities $214.1 $146.7
Asset backed obligations 31.7 19.3
Other corporate obligations 31.4 30.5
- -------------------------------------------------------------------------------
$277.2 $196.5
===============================================================================
Fair value:
U.S. government securities $214.9 $146.2
Asset backed obligations 31.8 19.1
Other corporate obligations 31.3 29.9
- -------------------------------------------------------------------------------
$278.0 $195.2
===============================================================================
</TABLE>
There were no material unrealized holding gains or losses at December 31, 1998
or 1999.
Of the marketable securities on hand at December 31, 1999, 63% will mature
during 2000 and the remainder will mature during 2001. Based on specific
identification of securities sold, the following occurred in 1998 and 1999 (in
millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $156.3 $218.5
Gross realized gains 0.2 0.4
Gross realized losses -- 0.3
- -------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Restricted deposits $ 68.4 $ 62.8
Deferred costs and other 9.4 6.4
- -------------------------------------------------------------------------------
$77.8 $69.2
===============================================================================
</TABLE>
At December 31, 1999, Alaska owned approximately 80,000 depository
certificates convertible, subject to certain restrictions, into the common
stock of Equant N.V., a telecommunication network company. The certificates
had an estimated fair value of $7 million. Alaska's carrying value of the
certificates was de minimis.
NOTE 4. RELATED COMPANY TRANSACTIONS
During 1999, Alaska transferred a flight simulator to AAGL in exchange for an
$8.8 million note receivable from AAGL and a $2.2 million reduction in its
payable to Air Group. The loan has repayment terms of 12 years at 6.5% interest.
AAGL is leasing the simulator to Alaska for 12 years. At December 31, 1999, the
receivables from related companies included $8.8 million from AAGL, $5.2 million
from Air Group and $13.1 million from Horizon. At December 31, 1999, the
payables to related companies consisted primarily of a non-interest bearing
payable, which is due on demand, to Air Group.
NOTE 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
At December 31, 1998 and 1999, long-term debt and capital lease obligations were
as follows (in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
8.2%* fixed rate notes payable
due through 2015 $90.3 $309.5
5.5%* variable rate notes payable
due through 2009 85.2 73.5
- -------------------------------------------------------------------------------
Long-term debt 175.5 383.0
Capital lease obligations 23.2 20.5
Less current portion (27.2) (66.5)
- -------------------------------------------------------------------------------
$171.5 $337.0
===============================================================================
* weighted average for 1999
</TABLE>
At December 31, 1999, borrowings of $383.0 million are secured by flight
equipment and real property. During 1999, Alaska issued $232 million of debt
secured by flight equipment. The new debt has repayment terms of 12 to 16
years at fixed interest rates of approximately 7.6%.
At December 31, 1999, Alaska had a credit facility with commercial banks that
allows it to borrow up to $150 million until December
19
<PAGE>
2004. Borrowings under this facility bear interest at a rate that varies based
on LIBOR. At December 31, 1999, 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, 1999 the Company was in compliance with all loan provisions, and
under the most restrictive loan provisions, Alaska had $209 million of net worth
above the minimum.
At December 31, 1999, long-term debt principal payments for the next five years
were (in millions):
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
2000 $63.8
- --------------------------------------------------------------------------------
2001 $54.3
- --------------------------------------------------------------------------------
2002 $21.7
- --------------------------------------------------------------------------------
2003 $22.6
- --------------------------------------------------------------------------------
2004 $31.4
</TABLE>
NOTE 6. COMMITMENTS
LEASE COMMITMENTS
Lease contracts for 51 aircraft have remaining lease terms of one to 17 years.
The majority of airport and terminal facilities are also leased. Total rent
expense was $177.7 million, $193.6 million and $192.5 million, in 1997, 1998 and
1999, respectively. Future minimum lease payments under long-term operating
leases and capital leases as of December 31, 1999 are shown below (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Operating Leases Capital
Aircraft Facilities Leases
--------- ---------- -------
<S> <C> <C> <C>
2000 $137.5 $26.8 $ 4.1
2001 126.6 20.2 4.1
2002 128.7 11.2 4.1
2003 113.7 9.6 4.1
2004 89.6 8.1 8.5
Thereafter 792.6 84.8 0.4
- --------------------------------------------------------------
Total lease payments $1,388.7 $160.7 25.3
======== ======
Less amount representing interest (4.8)
- --------------------------------------------------------------
Present value of capital lease payments $20.5
==============================================================
</TABLE>
AIRCRAFT COMMITMENTS
The Company has firm orders for 23 Boeing 737 series aircraft to be delivered
between 2000 and 2002. The firm orders require payments of approximately $580
million between 2000 and 2002. As of December 31, 1999, deposits of $158 million
related to the firm orders had been made. In addition to the ordered aircraft,
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
consist primarily of marketable equity and fixed income securities. The
following table sets forth the status of the plans for 1998 and 1999 (in
millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1998 1999
- ---------------------------------------------------------------
<S> <C> <C>
PROJECTED BENEFIT OBLIGATION
Beginning of year $307.4 $371.8
Service cost 22.5 25.8
Interest cost 21.9 25.3
Amendments --- 9.8
Change in assumptions 27.1 (54.9)
Actuarial gain (0.4) (1.9)
Benefits paid (6.7) (6.6)
- ---------------------------------------------------------------
End of year $371.8 $369.3
- ---------------------------------------------------------------
PLAN ASSETS AT FAIR VALUE
Beginning of year $289.2 $373.0
Actual return on plan assets 54.4 27.8
Employer contributions 36.1 42.9
Benefits paid (6.7) (6.6)
- ---------------------------------------------------------------
End of year $373.0 $437.1
- ---------------------------------------------------------------
FUNDED STATUS 1.2 67.8
Unrecognized loss (gain) 7.2 (40.7)
Unrecognized transition asset (0.3) (0.1)
Unrecognized prior service cost 49.4 54.8
- ---------------------------------------------------------------
Prepaid pension cost $ 57.5 $ 81.8
===============================================================
</TABLE>
20
<PAGE>
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
WEIGHTED AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
<S> <C> <C>
Discount rate 6.75% 7.75%
Expected return on plan assets 10.0% 10.0%
Rate of compensation increase 5.5% 5.4%
</TABLE>
Net pension expense for the defined benefit plans included the following
components for 1997, 1998 and 1999 (in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1997 1998 1999
- ---------------------------------------------------------------
<S> <C> <C> <C>
Service cost $17.3 $22.4 $25.8
Interest cost 17.3 21.9 25.3
Expected return on assets (22.1) (28.7) (36.7)
Amortization of
prior service cost 0.2 3.8 4.4
Recognized actuarial loss 1.0 -- 0.1
Amortization of
transition asset (0.3) (0.2) (0.2)
- ---------------------------------------------------------------
Net pension expense $13.4 $19.2 $18.7
===============================================================
</TABLE>
Alaska and Horizon also maintain an unfunded, noncontributory benefit plan for
certain elected officers. The $23 million unfunded accrued pension cost for this
plan was accrued as of December 31, 1999.
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 $6.8 million,
$6.7 million and $8.0 million, respectively, in 1997, 1998 and 1999.
PROFIT SHARING PLANS
Alaska has an employee profit sharing plan. Profit sharing expense for 1997,
1998 and 1999 was $12.1 million, $19.7 million and $18.4 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, 1998 and 1999 was $20.1 million and $25.4
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 1999 was
approximately $129 million.
The components of income tax expense were as follows (in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
1997 1998 1999
- ---------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $42.6 $38.0 $20.8
State 1.9 7.7 6.7
- ---------------------------------------------------------------
Total current 44.5 45.7 27.5
- ---------------------------------------------------------------
Deferred tax expense:
Federal 2.5 27.0 46.3
State 4.4 1.3 3.2
- ---------------------------------------------------------------
Total deferred 6.9 28.3 49.5
- ---------------------------------------------------------------
Total tax expense $51.4 $74.0 $77.0
===============================================================
</TABLE>
21
<PAGE>
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):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1997 1998 1999
- -----------------------------------------------------------------
<S> <C> <C> <C>
Income before
income tax $127.4 $190.5 $196.4
=================================================================
Expected tax expense $44.6 $66.7 $68.7
Nondeductible expenses 2.0 2.0 1.6
State income tax 4.1 6.1 6.6
Other - net 0.7 (0.8) 0.1
- -----------------------------------------------------------------
Actual tax expense $51.4 $74.0 $77.0
=================================================================
Effective tax rate 40.3% 38.8% 39.2%
=================================================================
</TABLE>
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):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1998 1999
- -----------------------------------------------------------------
<S> <C> <C>
Excess of tax over book
depreciation $158.8 $190.1
Employee benefits --- 5.7
Other - net 3.5 3.3
- -----------------------------------------------------------------
Gross deferred tax liabilities 162.3 199.1
- -----------------------------------------------------------------
Loss carryforward (0.1) (0.1)
Alternative minimum tax (22.7) (3.5)
Capital leases (2.6) (3.4)
Ticket pricing adjustments (1.9) (1.6)
Frequent flyer program (10.5) (14.9)
Employee benefits (3.7) ---
Aircraft return provisions (15.2) (13.0)
Deferred gains (7.4) (12.7)
Capitalized interest (1.5) (0.9)
Inventory obsolescence (4.7) (7.6)
- -----------------------------------------------------------------
Gross deferred tax assets (70.3) (57.7)
- -----------------------------------------------------------------
Net deferred tax liabilities $92.0 $141.4
=================================================================
Current deferred tax asset $(6.2) $(1.9)
Noncurrent deferred tax liability 98.2 143.3
- -----------------------------------------------------------------
Net deferred tax liabilities $92.0 $141.4
=================================================================
</TABLE>
NOTE 9. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as follows
(in millions):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
December 31, 1998
- ----------------------------------------------------------------
Carrying Fair
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------
- ----------------------------------------------------------------
DECEMBER 31, 1999
- ----------------------------------------------------------------
Carrying Fair
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $132.3 $132.3
Marketable securities 196.5 195.2
Restricted deposits and
depository certificates 62.8 69.8
Long-term debt 383.0 383.0
- ----------------------------------------------------------------
</TABLE>
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 value of restricted deposits approximates the
carrying amount. The fair value of restricted depository certificates
convertible into the common stock of Equant N.V. is $7 million based on sales of
Equant N.V. stock in 1999. The fair value of long-term debt approximates
carrying value.
22
<PAGE>
ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
Quarter Ended December 31 Year Ended December 31
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<S> <C> <C> <C> <C> <C> <C>
% %
FINANCIAL DATA (IN MILLIONS): 1998 1999 Change 1998 1999 Change
----- ----- ------ ----- ----- ------
Operating Revenues:
Passenger $333.5 $362.5 8.7 $1,410.4 $1,519.6 7.7
Freight and mail 19.8 19.4 (2.0) 83.7 80.0 (4.4)
Other - net 19.4 22.3 14.9 72.2 81.2 12.5
------------------------ -------------------------
Total Operating Revenues 372.7 404.2 8.5 1,566.3 1,680.8 7.3
------------------------ -------------------------
Operating Expenses:
Wages and benefits 115.0 131.1 14.0 466.1 505.5 8.5
Employee profit sharing 3.7 2.3 (37.8) 19.7 18.4 (6.6)
Contracted services 11.8 14.9 26.3 48.7 55.6 14.2
Aircraft fuel 39.1 61.0 56.0 162.3 205.2 26.4
Aircraft maintenance 17.2 26.9 56.4 77.6 96.0 23.7
Aircraft rent 41.2 36.7 (10.9) 158.9 157.2 (1.1)
Food and beverage service 12.5 12.1 (3.2) 49.1 49.1 0.0
Commissions 22.5 17.8 (20.9) 94.4 91.0 (3.6)
Other selling expenses 18.9 20.5 8.5 75.2 82.2 9.3
Depreciation and amortization 15.9 18.7 17.6 61.9 67.9 9.7
Loss on sale of assets 0.6 0.0 NM 1.0 0.4 NM
Landing fees and other rentals 14.8 14.8 0.0 59.4 66.5 12.0
Other 24.9 28.6 14.9 98.0 109.5 11.7
------------------------ -------------------------
Total Operating Expenses 338.1 385.4 14.0 1,372.3 1,504.5 9.6
------------------------ -------------------------
Operating Income 34.6 18.8 (45.7) 194.0 176.3 (9.1)
------------------------ -------------------------
Interest income 6.8 5.4 23.2 21.7
Interest expense (4.0) (5.2) (17.4) (16.3)
Interest capitalized 1.5 2.5 5.1 8.3
Other - net (0.1) 3.4 (14.4) 6.4
------------------------ -------------------------
4.2 6.1 (3.5) 20.1
------------------------ -------------------------
Income Before Income Tax $38.8 $24.9 (35.8) $190.5 $196.4 3.1
======================== =========================
OPERATING STATISTICS:
Revenue passengers (000) 3,211 3,296 2.6 13,056 13,620 4.3
RPMs (000,000) 2,749 2,834 3.1 11,283 11,777 4.4
ASMs (000,000) 4,204 4,316 2.7 16,807 17,341 3.2
Passenger load factor 65.4% 65.7% 0.3 pts 67.1% 67.9% 0.8 pts
Breakeven load factor 58.0% 61.7% 3.7 pts 58.0% 59.1% 1.1 pts
Yield per passenger mile 12.13CENTS 12.79CENTS 5.4 12.50CENTS 12.90CENTS 3.2
Operating revenue per ASM 8.87CENTS 9.36CENTS 5.6 9.32CENTS 9.69CENTS 4.0
Operating expenses per ASM 8.04CENTS 8.93CENTS 11.0 8.17CENTS 8.68CENTS 6.3
Fuel cost per gallon 52.6CENTS 80.4CENTS 52.8 54.6CENTS 67.1CENTS 22.9
Fuel gallons (000,000) 74.3 75.9 2.2 297.4 306.0 2.9
Average number of employees 8,787 9,182 4.5 8,704 9,183 5.5
Aircraft utilization (block hours) 11.2 10.9 (2.7) 11.5 11.2 (2.6)
Operating fleet at period-end 84 89 6.0 84 89 6.0
NM = Not Meaningful
</TABLE>
23
<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, 1999 and 1998, and the related statements
of income, shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, 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, 2000
24
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
Alaska Airlines, Inc. Schedule II
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<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Additions
Beginning Charged (A) Ending
(In Millions) Balance to Expense Deductions Balance
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
========== ========== ============ ========
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $0.9 $1.2 $(1.1) $1.0
========== ========== ============ ========
Obsolescence allowance for flight
equipment spare parts $15.6 $4.2 $(1.4) $18.4
========== ========== ============ ========
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $45.2 $9.5 $(11.5) $43.2
========== ========== ============ ========
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Deduction from reserve for purpose for which reserve was created.
25
<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.
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<C> <S>
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
</TABLE>
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA
AIRLINES, INC. 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 132,300
<SECURITIES> 196,500
<RECEIVABLES> 98,900
<ALLOWANCES> 900
<INVENTORY> 29,900
<CURRENT-ASSETS> 577,200
<PP&E> 1,774,500
<DEPRECIATION> 453,200
<TOTAL-ASSETS> 1,981,200
<CURRENT-LIABILITIES> 693,500
<BONDS> 337,000
0
0
<COMMON> 1
<OTHER-SE> 668,899
<TOTAL-LIABILITY-AND-EQUITY> 1,981,200
<SALES> 1,680,800
<TOTAL-REVENUES> 1,680,800
<CGS> 1,504,500
<TOTAL-COSTS> 1,504,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,300
<INCOME-PRETAX> 196,400
<INCOME-TAX> 77,000
<INCOME-CONTINUING> 119,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119,400
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
