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 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
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 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of incorporation or organization) (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) 431-7040
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $1.00 Par Value New York Stock Exchange
Rights to Purchase Series A
Participating Preferred Stock New York Stock Exchange
7-3/4% Convertible Subordinated
Debentures Due 2010 Unlisted
6-7/8% Convertible Subordinated
Debentures Due 2014 New York Stock Exchange
7-1/4% Convertible Subordinated
Notes Due 2006 New York Stock Exchange
10.21% Series B Cumulative Redeemable
Preferred Stock Due 1997 Unlisted
As of December 31, 1994, common shares outstanding totaled 13,400,090. The
aggregate market value of the common shares of Alaska Air Group, Inc. held by
nonaffiliates, 13,213,789 shares, was approximately $198 million (based on the
closing price of these shares, $15.00, on the New York Stock Exchange on such
date).
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Title of Document Part Hereof Into Which Document to be
Incorporated
Definitive Proxy Statement Relating to Part III
1995 Annual Meeting of Shareholders
Exhibit Index begins on page 33.
PART I
ITEM 1.BUSINESS
General
Alaska Air Group, Inc. (Air Group or the Company) is a holding company
incorporated in Delaware in 1985. Its two principal subsidiaries are Alaska
Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). Both
subsidiaries operate as airlines. However, each subsidiary's business plan,
competition and economic risks differ substantially. Alaska is a major airline,
operates an all jet fleet, and its average passenger trip length is 850 miles.
Horizon is a regional airline, operates jet and turboprop aircraft, and its
average passenger trip is 210 miles. Business segment information is reported in
the Notes to Consolidated Financial Statements. The Company's executive offices
are located at 19300 Pacific Highway South, Seattle, Washington 98188.
The business of the Company is somewhat seasonal. Quarterly operating income
tends to peak during the third quarter.
Alaska
Alaska Airlines is an Alaska corporation, organized in 1937. Alaska serves 36
airports in six states (Alaska, Washington, Oregon, California, Nevada and
Arizona), three cities in Mexico and three cities in Russia. In each year since
1973, Alaska has carried more passengers between Alaska and the U.S. mainland
than any other airline. Alaska Airlines also serves four smaller cities in
California, four in Washington, and many small communities in Alaska through
subcontracts with local carriers.
In 1994, Alaska carried 9.0 million passengers. Passenger traffic within Alaska
and between Alaska and the U.S. mainland accounted for 25% of Alaska's total
revenue passenger miles, while West Coast traffic accounted for 65% and the
Mexico markets 10%. Based on passenger enplanements, Alaska's leading airports
are Seattle, Portland, Anchorage and Los Angeles. Based on revenues, its
leading nonstop routes were Seattle-Anchorage, Seattle-Los Angeles and Seattle-
San Francisco.
Alaska's operating fleet at December 31, 1994 consisted of 72 jet aircraft.
Horizon
Horizon, a Washington corporation, began service in 1981 and was acquired by Air
Group in 1986. It is the largest regional airline in the Pacific Northwest, and
serves 36 airports in six states (Washington, Oregon, Montana, Idaho, Utah and
California) and two cities in Canada. In 1994, Horizon carried 3.5 million
passengers. Based on passenger enplanements, Horizon's leading airports are
Seattle, Portland, Spokane and Boise. Based on revenues, its leading nonstop
routes were Seattle-Spokane, Seattle-Portland, Seattle-Boise, Seattle-Vancouver,
B.C. and Portland-Boise. At December 31, 1994, Horizon's operating fleet
consisted of ten jet and 55 turboprop aircraft.
Horizon flights are listed under the Alaska Airlines designator code in airline
computer reservation systems. Certain Horizon flights are dual-designated in
these reservation systems as Northwest Airlines and Alaska Airlines. Currently,
32% of Horizon's passengers connect to either Alaska or Northwest.
Airline Regulation
United States Department of Transportation (DOT) - The DOT has the authority to
regulate certain airline economic functions including financial and statistical
reporting, consumer protection, computerized reservations systems and essential
air transportation. The DOT is also charged with determining which U.S.
carriers will receive the authority to provide service to international
destinations. International operating authority is subject to bilateral
agreements between the United States and the respective countries. The
countries establish the number of carriers to provide service, approve the
carriers selected to provide such service and the size of aircraft to be used.
The DOT reviews the carriers authorized under bilateral agreements every five
years. Horizon's authority to operate the Seattle-Vancouver, Seattle-Victoria
and the Portland-Vancouver routes is to be reviewed in August 1997, March 1999
and July 1995, respectively. Alaska's authority to serve its various Mexico
destinations are to be reviewed during 1995 and 1996. The bilateral agreement
with Russia will be reviewed in December 1995. The Company expects to be
granted authority to continue to operate its international routes. During
January 1995, Alaska applied to the DOT to serve Oakland and San Diego from
Vancouver.
Federal Aviation Administration (FAA) - The FAA, an agency within the DOT, has
jurisdiction to regulate aviation safety generally, including: the licensing of
pilots and maintenance personnel; the establishment of minimum standards for
training and maintenance; and technical standards of flight, communications and
ground equipment. All aircraft must have and maintain certificates of
airworthiness issued by the FAA. Alaska and Horizon aircraft, maintenance
facilities and procedures are subject to inspection by the FAA. The FAA has the
authority 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.
Labor Relations - 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 arising under
collective bargaining agreements.
Environmental - 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 five Los Angeles area airports plus San Diego, Palm Springs, San
Francisco and Seattle.
In 1990, Congress passed the Airport Noise and Capacity Act of 1990 (Act). The
Act addressed the need to establish a national aviation noise policy and limit
the ability of airports and local communities to implement procedures that would
interfere with interstate commerce or the national air transportation system.
The Act also called for the phase out of Stage II airplanes (generally older
aircraft not meeting certain noise emission standards) in the contiguous 48
states by December 31, 1999. The Stage II phase-out provisions of the Act do
not apply to aircraft operated solely within the state of Alaska. To implement
the phase out within the contiguous 48 states, the FAA has proposed regulations
and a timetable. Alaska believes that its current fleet plan will enable it to
comply with the FAA's proposed regulations.
Competition
Competition in the air transportation industry is intense. Currently, any
domestic air carrier deemed fit by the DOT is allowed to operate scheduled
passenger service in the United States. Together, Alaska and Horizon carry less
than 2% of all U.S. passenger traffic.
Alaska and Horizon compete in the West Coast, Arizona and Nevada markets with
American, America West, Delta, MarkAir, Reno Air, Shuttle by United, Southwest
Airlines, United and United Express. Alaska also competes primarily with
United, Northwest, Delta and MarkAir in the Lower 48-to-Alaska market. Some of
these competitors are substantially larger than Alaska and Horizon, have greater
financial resources and have more extensive route systems. Due to its shorthaul
markets, Horizon is subject to competition from surface transportation,
particularly the private automobile.
Alaska and Horizon integrate their flight schedules to provide the best possible
service between any two points served by their systems. Both airlines
distinguish themselves from competitors by providing a higher level of customer
service. The airlines' excellent service in the form of attention to customer
needs, high-quality food and beverage service, more legroom, well-maintained
aircraft and other amenities has been recognized by independent studies and
surveys of air travelers. Alaska and Horizon offer competitive fares.
Most large U.S. carriers have developed, independently or in partnership with
others, large computerized reservation systems (CRS). Due to contractual
requirements imposed by CRSs, most travel agencies contract with a single CRS to
sell tickets. Airlines, including Alaska and Horizon, 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. Alaska is exploring alternatives to existing
distribution methods. American Airlines, owner of the SABRE CRS, has filed suit
against Alaska to prevent Alaska from reducing its level of display purchased
from SABRE without also doing so in all other CRSs. At Alaska's request, the
DOT is seeking comment from interested parties on the subject.
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, 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. Once selected, awards can be changed, subject to a
change fee. Over 90% of the flight awards selected are subject to blackout
dates and capacity-controlled seating. Currently, miles earned must be redeemed
within three years, otherwise they expire.
As of the year end 1994 and 1993, Alaska estimates that 662,000 and 698,000
roundtrip flight awards could have been redeemed by Mileage Plan members who
have mileage credits exceeding the free ticket threshold. At December 31, 1994,
fewer than 27% of these flight awards were issued and outstanding. Effective
January 31, 1995, the threshold for a free round trip domestic award will be
increased from 15,000 miles to 20,000 miles.
For the years 1994, 1993 and 1992, approximately 226,000, 188,000 and 174,000
round trip flight awards were redeemed and flown on Alaska and Horizon. These
awards represent approximately 5% of the total passenger miles flown for each
period.
Alaska maintains a liability for its Mileage Plan obligation which is based on
its total miles outstanding, less an estimate for miles which 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
from non-airline partners is also deferred. At December 31, 1994 and 1993, the
total liability for miles outstanding was $17.4 million and $14.7 million,
respectively.
<TABLE>
Selected Quarterly Consolidated Financial Information (Unaudited)
Selected financial data for each quarter of 1994 and 1993 is as follows (in
millions, except per share):
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1994 1993 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $280.4 $250.2 $330.5 $277.5 $386.8 $323.4 $318.0 $277.2
Operating income (2.9) (16.8) 24.5 2.1 52.3 20.7 1.2 (22.7)
Net income (loss) (6.3) (15.0) 9.7 (3.6) 24.3 8.0 (5.1) (20.3)
Earnings (loss) per share:
Primary (.47) (1.25) .72 (.33) 1.81 .60 (.38) (1.52)
Fully diluted * * .61 * 1.36 .53 * *
* Anti-dilutive
</TABLE>
Results for 4th Quarter 1993 include an after-tax special charge of $9.8 million
to recognize the lower value of the Boeing 727 fleet and the acceleration of its
retirement. The fully diluted earnings per share amounts for the second and
third quarters differ from those previously reported. The Company changed the
earnings per share calculation to properly reflect the dilution of the
investment options that remain outstanding after the 1993 repurchase of
convertible preferred stock. The total of the amounts shown as quarterly
earnings per share may differ from the amount shown on the Consolidated
Statement of Income because the annual computation is made separately and is
based upon average number of shares and equivalent shares outstanding for the
year.
Employees
Alaska had 6,901 active full-time and part-time employees at December 31, 1994,
of which approximately 87% are represented by labor unions.
The unions and the number of Alaska employees represented by each as of December
31, 1994 and the amendable dates of existing contracts are outlined below:
Number of
Union Employee Group Employees Contract Status
International
Association Mechanic, Rampservice 1,558 Amendable 9/1/97
of Machinists and and related
Aerospace Workers classifications
Clerical, Office and 2,154 Amendable 9/30/92
Passenger Service (In negotiation)
Air Line Pilots Pilots 874 Amendable 12/1/97
Association International
Association of Flight Attendants 1,335 Amendable 3/14/99
Flight Attendants
Mexico Workers Mexico Airport 80 Amendable 4/1/95
Association Personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 4/24/96
Horizon had 2,951 active full-time and part-time employees at December 31, 1994,
of which approximately 20% are represented by labor unions.
The unions and the number of Horizon employees represented by each as of
December 31, 1994 and the amendable dates of existing contracts are outlined
below:
Number of
Union Employee Group Employees Contract Status
Transport Workers Mechanics and 275 Amendable 1/1/95
Union of America related classifications (New contract is
waiting to be ratified)
Dispatchers 16 In negotiation
Association of Flight Attendants 249 Amendable 6/15/96
Flight Attendants
Canadian Brotherhood Station personnel 53 Amendable 7/10/95
of Railway, Transport in British Columbia
and General Workers
The Company's labor contracts currently in negotiation are not expected, when
finalized, to have a material adverse impact on results of operations.
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated and their average age at
December 31, 1994.
Passenger Average Age
Aircraft Type Capacity Owned Leased Total in Years
Alaska Airlines
Boeing 737-200C 111 4 4 8 14
Boeing 737-400 140 3 19 22 2
McDonnell Douglas MD-80 140 16 26 42 6
23 49 72 6
Horizon
Fairchild Metroliner III 18 5 18 23 9
Dornier 328 30 _ 9 9 1
de Havilland Dash 8 37 _ 23 23 7
Fokker F-28 62 _ 10 10 21
5 60 65 9
Part II, Item 7., "Management's Discussion and Analysis of Results of Operations
and Financial Condition," discusses future orders and options for additional
aircraft.
Sixteen of the 23 aircraft owned by Alaska as of December 31, 1994 are subject
to liens securing long-term debt. The leased McDonnell Douglas MD-80 aircraft
have expiration dates of 1995 to 2013. The B737-400 leases have expiration
dates of 2002 to 2004. Horizon's leased Fairchild Metroliner III, de Havilland
Dash 8, Fokker F-28 and Dornier 328 aircraft have expiration dates of 1995 to
2001, 1995 to 2006, 1996 to 1997, and 2008 to 2009, respectively. Alaska and
Horizon have 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 Consolidated
Financial Statements.
Ground Facilities and Services
Alaska and Horizon lease ticket counters, gates, cargo and baggage, office space
and other support areas at the majority of the airports they serve. Alaska also
owns terminal buildings at various Alaska cities and Horizon owns its terminal
at the Portland International Airport.
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 reservation and office facility; a
four-story office building; 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: its Anchorage regional headquarters
building and Phoenix reservations center; a leased two-bay maintenance facility
in Oakland; and a leased hangar/office facility in Anchorage.
Horizon owns its Seattle corporate headquarters building and leases a
maintenance facility at the Portland airport.
ITEM 3.LEGAL PROCEEDINGS
In October 1991, Alaska gave notice of termination of its code sharing and
frequent flyer relationship with MarkAir, an airline based in the state of
Alaska. Both companies have filed suit against one another in connection with
that termination alleging breach of contract and other causes of action under
state law. In addition, MarkAir claimed that the termination was in violation
of Federal Antitrust Laws. MarkAir filed for protection under Chapter 11 of the
U.S. Bankruptcy Code in June 1992. In December 1993, MarkAir agreed to dismiss
all antitrust claims against the Company. In 1994, the U.S. District Court
which had jurisdiction over the case approved the settlement. Discovery
continues in a related Alaska state court case pertaining to breach of contract
and other state law claims. The Company believes the ultimate resolution of
this legal proceeding will not result in a material adverse impact on the
financial position or results of operations of the Company.
In December 1992, the U.S. Department of Justice filed suit against most major
domestic airlines, including the Company, alleging that they have violated the
antitrust laws by conspiring to fix prices for domestic airline tickets in
violation of Section 1 of the Sherman Act. During 1994, six of the airlines,
including the Company, entered into consent decrees with the U.S. Department of
Justice. The agreement requires no refunds or monetary cost to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Alaska Air Group, Inc., their positions and their
respective ages (as of March 1, 1995) are as follows:
Officer
Continuously
Name Position Age Since
John F. Kelly Chairman, President and Chief 50 1981
Executive Officer of Alaska
Air Group, Inc. and Alaska
Airlines, Inc.
Marjorie E. Laws Vice President/Corporate Affairs 54 1983
and Corporate Secretary of Alaska
Air Group, Inc. and Alaska
Airlines, Inc.
Steven G. Hamilton
Vice President/Legal and General 55 1988
Counsel of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Harry G. Lehr Senior Vice President/Planning 54 1986
and Finance of Alaska Air Group,
Inc., and Alaska Airlines, Inc.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1994, there were 13,400,090 shares of common stock issued and
outstanding and 6,183 shareholders of record. The Company also held 3,153,589
treasury shares at a cost of $71.8 million. In December 1992, the Company
suspended the quarterly dividend on the common stock due to the 1992 net loss
and the difficult economic environment. Air Group's common stock is listed on
the New York Stock Exchange (symbol: ALK).
The following table shows the trading range of Alaska Air Group common stock on
the New York Stock Exchange for 1994 and 1993.
1994 1993
High Low High Low
First Quarter 18-7/8 13-5/8 18 15-5/8
Second Quarter 16-1/8 13-3/4 17-7/8 14-1/4
Third Quarter 17-7/8 14-3/8 15 12-1/4
Fourth Quarter 18 13-1/8 17-3/8 12-1/2
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Year Ended December 31 1994 1993 1992 1991 1990
FINANCIAL DATA (a) (In Millions, Except Per Share)
Operating Revenues
Passenger $1,170.2 $1,002.0 $1,000.6 $999.9 $953.2
Freight, mail and other 145.4 126.3 114.8 104.1 93.8
Total Operating Revenues 1,315.6 1,128.3 1,115.4 1,104.0 1,047.0
Operating Expenses 1,240.6 1,145.1 1,210.2 1,069.4 1,018.6
Operating Income (Loss) 75.0 (16.8) (94.8) 34.6 28.4
Interest expense, net of
interest capitalized (46.6) (37.2) (37.1) (31.9) (11.2)
Interest income 7.8 7.1 7.4 11.7 7.3
Other - net 4.8 1.1 (1.2) 1.8 3.4
Income (loss) before
income tax expense
and accounting change 41.0 (45.8) (125.7) 16.2 27.9
Income (loss) before
accounting change 22.5 (30.9) (80.3) 10.3 17.2
Net Income (Loss) $ 22.5 $(30.9) $(84.8) $10.3 $17.2
Per Common Share Data:
Average primary
shares outstanding 13.4 13.3 13.3 13.4 13.7
Primary earnings per share
before accounting change $1.68 $(2.51) $(6.53) $.27 $.82
Primary earnings per share(a)1.68 (2.51) (6.87) .27 .82
Fully diluted
earnings per share(a) 1.62 (b) (b) (b) (b)
Cash dividends per share _ _ .15 .20 .20
Book value per share $14.27 $12.51 $14.76 $21.50 $21.23
Balance Sheet Data:
Working capital (deficit) $(147.1) $(61.3) $(85.2) $(10.9) $(128.3)
Property and equipment,net 859.3 690.6 790.9 819.8 700.4
Total assets 1,315.8 1,135.0 1,208.4 1,225.4 1,021.4
Long-term debt and capital
lease obligations 589.9 525.4 487.8 500.0 281.8
Redeemable preferred stock _ _ 61.2 60.9 60.7
Shareholders' equity $191.3 $166.8 $196.7 $284.4 $279.8
Return on average equity(c) 12.6% (18.4%) (38.0%) 1.3% 3.6%
Ratio of earnings
to fixed charges(d) 1.36 .51 (.37) .97 1.13
AIRLINE OPERATING DATA
Revenue passengers (000) 12,439 9,189 8,629 7,889 7,274
Revenue passenger
miles (000,000) 8,320 6,074 6,023 5,353 4,851
Available seat
miles (000,000) 13,247 10,412 10,522 9,575 9,099
Revenue passenger
load factor 62.8% 58.3% 57.2% 55.9% 53.3%
Breakeven passenger
load factor 60.0% 60.3% 63.7% 55.1% 51.8%
Yield per passenger mile 14.1c 16.5c 16.6c 18.7c 19.6c
Operating expenses per
available seat mile 9.4c 11.0c 11.5c 11.2c 11.2c
Average number
of employees(e) 9,043 8,458 8,666 8,081 7,653
c=cents
(a)For 1992, primary earnings per share includes ($.34) for the $4.6 million
cumulative effect of the postretirement benefits accounting change as of
January 1, 1992.
(b) Anti-dilutive.
(c) For the 1990-1993 calculations, net income (loss) was reduced for preferred
stock dividends and shareholders' equity excluded redeemable preferred
stock.
(d) For 1993, 1992 and 1991, earnings are inadequate to cover fixed charges by
$50 million, $142.1 million and $2.4 million, respectively.
(e) Full-time equivalents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Industry Conditions
During 1994, the character of competition changed on the West Coast due to the
December 1993 purchase of Morris Air by Southwest Airlines, and the October
start-up of Shuttle by United. Low air fares are now a permanent part of the
fare structure on the West Coast.
The Company has responded to the changing industry environment by aggressively
matching competitors' air fares, increasing flight frequency, and improving
utilization of aircraft, facilities, equipment and people.
Results of Operations
1994 COMPARED WITH 1993 Consolidated net income in 1994 was $22.5 million, or
$1.68 per share (primary) and $1.62 per share (fully diluted), compared with a
net loss of $30.9 million, or $2.51 per share, in 1993. The fully diluted
calculation is based on 19.6 million shares, which gives effect to the 1993
repurchase of the convertible preferred stock. The results for 1993 include an
after-tax special charge of $9.8 million to recognize the lower value of the
Boeing 727 fleet and the acceleration of its retirement. Without such charge,
the 1993 net loss would have been $21.1 million, or $1.77 per share.
Operating income was $75.0 million compared to an operating loss of $16.8
million for 1993. The improved operating results reflect higher operating
revenues, and the effects of cost reductions and productivity improvements.
Operating revenues increased 17% to $1.316 billion. Passenger revenues, which
accounted for 89% of total operating revenues, increased 17% on a 37% increase
in passenger traffic. Traffic gains were due to a 27% increase in system
capacity, lower fares that stimulated traffic throughout most of the system, and
improvements in market share. The load factor increased from 58.3% in 1993 to
62.8%. Yields declined 15% to 14.1 cents in 1994. The static value of a one
cent movement in yield is approximately $80 million per year. However, in a
dynamic, price-sensitive business, a one cent increase will not necessarily
result in a revenue improvement of this magnitude.
Freight and mail revenues increased $7.5 million or 9% due to a military charter
contract in the state of Alaska, increased freight volumes, and increased
freight rates, offset by lower mail volumes. The lower mail volumes resulted
from Alaska's decision to not bid on certain U.S. mail contracts so that
capacity could be made available for higher yielding freight.
Other-net revenues rose by $11.6 million or 27% due to increased revenues from
Alaska's frequent flyer program, maintenance contracts and inflight liquor
sales.
Operating Expenses Operating expenses increased 8% to $1.241 billion on a
capacity increase of 27%. For the separate airlines, Alaska's operating
expenses increased 7% to $998.7 million on a 28% increase in capacity, and
Horizon's operating expenses increased 14% to $244.0 million on an 18% increase
in capacity. A discussion of operating expenses for the two airlines follows.
Alaska Airlines The table below shows the major operating expense elements on a
unit-cost basis for Alaska in 1994 and 1993.
Alaska Airlines Operating Expenses Per ASM (In Cents)
%
1994 1993 Change Change
Wages and benefits 2.67 3.16 (.49) (16)
Aircraft fuel 1.08 1.31 (.23) (18)
Aircraft maintenance .34 .46 (.12) (26)
Aircraft rent 1.13 1.35 (.22) (16)
Commissions .61 .68 (.07) (10)
Depreciation & amortization .39 .52 (.13) (25)
Special charges _ .16 (.16) NM
Other 2.05 2.24 (.19) (8)
Alaska Airlines Total 8.27 9.88 (1.61) (16)
Alaska's lower unit costs were due to an extensive cost reduction effort and
better utilization of aircraft, facilities, equipment and people, as well as a
2% increase in average seats per aircraft. Average daily aircraft utilization
increased 26% from 8.2 block hours to 10.3 block hours. Wages and benefits per
ASM decreased 16% primarily due to improved productivity The number of
equivalent employees increased 5% while capacity increased 28% and traffic
increased 38%. Effective May 1, 1994, Alaska and the Association of Flight
Attendants began a new five-year contract, which is modeled after the contract
used at Southwest Airlines and which provides flight attendants the opportunity
to earn increased wages through increased flying. It also provides a lower
starting rate of pay, more flexible work rules and reduced pension expenses.
Fuel expense per ASM decreased 18% due to a 10% decrease in the price of fuel
and the continued transition to more fuel efficient aircraft. The average cost
per gallon declined 6.9 cents to 59.9 cents in 1994. Lower fuel prices reduced
fuel expense by $15.1 million. Currently, a 1 cent change in fuel prices
affects annual fuel costs by approximately $2.2 million.
Maintenance expense per ASM decreased 26% due to the replacement of older
aircraft and due to significant improvements in maintenance programs, techniques
and efficiency. With an average age of less than six years at December 31,
1994, Alaska's fleet is believed to be one of the youngest among U.S. jet
airlines.
Aircraft rent per ASM decreased 16% primarily due to a substantial increase in
utilization, offset by higher rents for new aircraft.
Depreciation and amortization expense per ASM decreased 25% due to the
retirement of the 727 fleet and increased utilization of the remaining aircraft.
Other expense per ASM decreased 8% due to lower unit costs for advertising,
food, building rentals and personnel expenses.
Horizon Air The table below shows the major operating expense elements on a
unit-cost basis for Horizon for 1994 and 1993.
Horizon Air Operating Expenses Per ASM (In Cents)
%
1994 1993 Change Change
Wages and benefits 6.75 7.07 (.32) (5)
Aircraft fuel 1.84 1.93 (.09) (5)
Aircraft maintenance 2.33 2.41 (.08) (3)
Aircraft rent 2.73 2.79 (.06) (2)
Commissions 1.56 1.65 (.09) (5)
Depreciation & amortization .75 .94 (.19) (20)
Other 4.99 4.96 .03 1
Horizon Air Total 20.95 21.75 (.80) (4)
Horizon's cost per ASM declined 4% to 20.95 cents due to the acquisition of
higher capacity aircraft and cost reduction efforts.
Other Income (Expense) Other Income (Expense) increased $5.0 million to $34.0
million. Interest expense was $9.3 million higher in 1994 due to higher
interest rates on variable debt and higher average debt balances. Other-net
income increased $4.1 million due to gains on the early retirement of debt and
vendor credits.
1993 COMPARED WITH 1992 The consolidated net loss for 1993 was $30.9 million,
or $2.51 per share, compared with a net loss of $84.8 million, or $6.87 per
share, in 1992. The results include an after-tax charge of $9.8 million in 1993
and $16.6 million in 1992 for the early retirement of the 727 fleet. In
addition, 1992 includes a $4.6 million charge related to a change in accounting
for postretirement benefits. The operating loss for 1993 was $16.8 million,
compared to an operating loss of $94.8 million for 1992. The improved operating
results reflect lower operating expenses.
Operating revenues in 1993 were $1.128 billion, 1% greater than the $1.115
billion posted in 1992. Passenger revenues were approximately even with 1992
due to a 1% increase in traffic, offset by a 1% decline in yields. Freight and
mail revenues increased $6.7 million or 9% due to increased freight and mail
rates and increased service in Alaska. Other-net revenues rose $4.9 million or
13% due to increased revenues from Alaska's frequent flyer program.
Operating expenses decreased 5% to $1.145 billion. The decrease was primarily
due to a cost reduction program initiated during the first quarter 1993.
Operating expenses per ASM declined 4% from 11.5 cents to 11.0 cents. Fuel
expense per ASM decreased 12% due to the use of more fuel-efficient aircraft and
a 3% decrease in the cost of fuel. Maintenance expense per ASM declined 22% due
to the replacement of older aircraft. Aircraft rent and depreciation expense
per ASM rose 19% due to the addition of new aircraft. Other expenses per ASM
decreased 12% due to lower expenditures for food, advertising, promotion,
supplies and personnel expenses.
Other Income (Expense) was $29.0 million in 1993 compared to $30.9 million in
1992. The decrease was primarily due to lower interest rates on debt, offset by
less capitalized interest.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
December 31, 1994 December 31, 1993 Change
(In millions, except ratios and per share amounts)
Cash and marketable securities $104.9 $ 101.1 $ 3.8
Working capital (deficit) (147.1) (61.3) (85.8)
Total assets 1,315.8 1,135.0 180.8
Long-term debt 589.9 525.4 64.5
Shareholders' equity 191.3 166.8 24.5
Book value per common share $14.27 $ 12.51 $ 1.76
Debt/equity ratio 76%:24% 76%:24% NA
1994 FINANCIAL CHANGES The Company's cash and marketable securities portfolio
increased by $4 million during 1994. Operating activities provided $144 million
of cash in 1994. Additional cash was provided by $104 million in new long-term
debt and $25 million in short-term borrowings. Cash was used for the purchase
of four new MD-83 aircraft, one previously leased B737-400, one used B737-200C
aircraft, and other capital expenditures ($189 million), the repayment of debt
($71 million), and the repayment of short-term borrowings ($20 million).
Like many airlines, the Company has a working capital deficit. The deficit
increased during 1994 due to the cash purchase of two aircraft and an increase
in current portion of capital lease obligations. 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 1994, four MD-83 aircraft were financed under
ten-year loan agreements which bear interest at rates which vary based on
LIBOR. The principal amount financed was $104 million. In addition, capital
lease obligations increased $57.9 million due to changes in the lease
agreements for two B737-400 aircraft that were previously classified as
operating leases.
During early 1995, Alaska's lines of credit (which totalled $70 million) were
replaced with a $75 million credit facility with commercial banks. Advances
under the new facility may either be for up to a 364-day term, or up to a
maximum maturity of three years. Borrowings may be used for aircraft
acquisitions and other corporate purposes and they bear interest at a rate which
varies based on LIBOR.
Commitments During 1994, Alaska took delivery of six new B737-400 aircraft
under operating leases and restructured all 20 of its B737-400 aircraft leases.
As part of the restructuring, Alaska purchased one of the 20 aircraft in 1994,
agreed to purchase one each in 1995 and 1996, and received options to purchase
up to four more of the 20 between 1997 and 1999. The fixed term of the leases
was increased from eight years to ten years. As a result of the restructuring,
Alaska expects to save more than $6 million per year over the term of the
leases. Also during 1994, Alaska further restructured its aircraft orders with
McDonnell Douglas, replacing an order for ten MD-90s plus options with an order
for four MD-83s. This restructuring will reduce future capital spending by $360
million.
During 1994, Horizon took delivery of seven new Dornier 328 aircraft under 15-
year operating leases, and five used Fokker F-28 aircraft under three-year
operating leases.
At December 31, 1994, the Company had firm orders for 17 aircraft with a total
cost of approximately $293 million as set forth below.
Delivery Period - Firm Orders
Aircraft 1995 1996 1997 1998 Total
Dornier 328 1 2 2 6 11
McDonnell Douglas MD-80 2 2 2 6
Total 3 4 4 6 17
Cost (Millions) $78 $85 $85 $45 $293
Operating leases have been completed for the Dornier 328 orders. The Company
expects to finance the other aircraft through new long-term debt and internally
generated cash.
The Company accrues the costs associated with returning leased aircraft over the
lease period. At December 31, 1994, $26 million was reserved for leased
aircraft returns.
Deferred Taxes At December 31, 1994, net deferred tax liabilities were $19
million, which includes $82 million of net temporary differences, offset by $38
million of net operating loss (NOL) carryforwards and $25 million of Alternative
Minimum Tax (AMT) credit carryforwards. The Company believes that all of its
deferred tax assets, including the NOL and AMT credit carryforwards, will be
realized through the reversal of existing temporary differences or tax planning
strategies such as the sale of aircraft.
1993 FINANCIAL CHANGES Cash and marketable securities increased by $18 million
in 1993. Operations generated $49 million, proceeds from aircraft financing
were $84 million, and short-term borrowings added $20 million. Cash was used
for the repayment of debt ($79 million), the repurchase of preferred stock ($33
million), and capital expenditures ($30 million). During 1993, the Company
repurchased all of its outstanding redeemable preferred stock for $60 million,
saving the Company more than $4 million annually after taxes. The seller
provided a $27 million loan to assist with the stock purchase.
1992 FINANCIAL CHANGES Despite the $84.8 million net loss, operating activities
provided $20 million of cash in 1992. During 1992, capital spending totaled
$278 million for six MD-83 and two B737-400 aircraft, other equipment and
deposits for future flight equipment. These capital expenditures were financed
through debt ($47 million), sale/leasebacks ($215 million) and internally
generated cash.
EFFECT OF INFLATION Inflation and specific price changes do not have a
significant effect on the Company's operating revenues, operating expenses and
operating income, because such revenues and expenses generally reflect current
price levels.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors," incorporated herein by reference from the
definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be
held on May 16, 1995. See "Executive Officers of the Registrant" in Part I
following Item 4 for information relating to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Executive Compensation," incorporated herein by reference from the
definitive Proxy Statement for Air Group's Annual Meeting of Shareholders to be
held on May 16, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Security Ownership of Certain Beneficial Owners and Management,"
incorporated herein by reference from the definitive Proxy Statement for Air
Group's Annual Meeting of Shareholders to be held on May 16, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Transactions with Management and Others," incorporated herein by reference
from the definitive Proxy Statement for Air Group's Annual Meeting of
Shareholders to be held on May 16, 1995.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) Consolidated Financial Statements: Page(s)
Selected Quarterly Consolidated Financial Information (Unaudited) 4
Consolidated Balance Sheet as of December 31, 1994 and 1993 18-19
Consolidated Statement of Income for the years ended
December 31, 1994, 1993 and 1992 20
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1994, 1993 and 1992 21
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1993 and 1992 22
Notes to Consolidated Financial Statements 23-30
Report of Independent Public Accountants 31
Consolidated Financial Statement Schedule II,
Valuation and Qualifying Accounts,
for the years ended December 31, 1994, 1993 and 1992 32
See Exhibit Index on page 33.
(b) Alaska Air Group did not file any reports on Form 8-K during the fourth
quarter of 1994.
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 AIR GROUP, INC.
By: /s/ John F. Kelly Date: February 9, 1995
John F. Kelly, Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on February 9, 1995 on behalf of
the registrant and in the capacities indicated.
/s/ John F. Kelly Chairman, Chief Executive Officer,
President and Director
John F. Kelly
/s/ Harry G. Lehr Senior Vice President/Planning and Finance
Harry G. Lehr (Principal Financial Officer)
/s/ Bradley D. Tilden Controller
Bradley D. Tilden (Principal Accounting Officer)
/s/ William H. Clapp Director
William H. Clapp
/s/ Ronald F. Cosgrave Director
Ronald F. Cosgrave
/s/ Mary Jane Fate Director
Mary Jane Fate
/s/ Bruce R. Kennedy Director
Bruce R. Kennedy
/s/ R. Marc Langland Director
R. Marc Langland
/s/ Bruce R. McCaw Director
Bruce R. McCaw
/s/ Byron I. Mallott Director
Byron I. Mallott
/s/ Robert L. Parker, Jr. Director
Robert L. Parker, Jr.
/s/ Richard A. Wien Director
Richard A. Wien
<TABLE>
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
<CAPTION>
ASSETS
As of December 31 (In Thousands) 1994 1993
<S> <C> <C>
Current Assets
Cash and cash equivalents $11,605 $27,179
Marketable securities 93,337 73,970
Receivables - less allowance for doubtful accounts
(1994 - $2,285; 1993 - $2,621) 70,055 75,274
Inventories and supplies 40,250 41,269
Prepaid expenses and other assets 57,396 56,498
Total Current Assets 272,643 274,190
Property and Equipment
Flight equipment 776,551 614,717
Other property and equipment 208,502 217,967
Deposits for future flight equipment 52,885 79,765
1,037,938 912,449
Less accumulated depreciation and amortization 260,001 247,145
777,937 665,304
Capital leases
Flight and other equipment 103,076 44,381
Less accumulated amortization 21,676 19,079
81,400 25,302
Total Property and Equipment - Net 859,337 690,606
Intangible Assets - Subsidiaries 65,671 67,711
Other Assets 118,120 102,447
Total Assets $1,315,771 $1,134,954
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
As of December 31 (In Thousands) 1994 1993
Current Liabilities
Accounts payable $48,592 $45,582
Accrued aircraft rent 43,762 39,119
Other accrued liabilities 59,591 46,679
Accrued wages, vacation pay and payroll taxes 47,364 40,192
Short-term borrowings
(Interest rate: 1994 - 6.0%; 1993 - 4.25%) 25,000 20,000
Air traffic liability 123,433 108,360
Current portion of long-term debt and
capital lease obligations 72,005 35,575
Total Current Liabilities 419,747 335,507
Long-Term Debt and Capital Lease Obligations 589,904 525,418
Other Liabilities and Credits
Deferred income taxes 28,585 20,998
Deferred income 23,018 25,827
Other liabilities 63,239 60,371
114,842 107,196
Commitments
Shareholders' Equity
Preferred stock, $1 par value
Authorized: 5,000,000 shares - -
Common stock, $1 par value
Authorized: 30,000,000 shares
Issued: 1994 - 16,553,679 shares
1993 - 16,495,210 shares 16,554 16,495
Capital in excess of par value 152,756 152,017
Treasury stock,at cost:1994-3,153,589 shares
1993 - 3,153,589 shares (71,807) (71,807)
Deferred compensation (4,697) (5,813)
Retained earnings 98,472 75,941
191,278 166,833
Total Liabilities and Shareholders' Equity $1,315,771 $1,134,954
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
<CAPTION>
Year Ended December 31
(In Thousands except Per Share Amounts) 1994 1993 1992
<S> <C> <C> <C>
Operating Revenues
Passenger $1,170,201 $1,001,975 $1,000,618
Freight and mail 91,545 84,048 77,311
Other - net 53,874 42,306 37,449
Total Operating Revenues 1,315,620 1,128,329 1,115,378
Operating Expenses
Wages and benefits 401,700 368,152 370,567
Aircraft fuel 152,320 142,572 162,768
Aircraft maintenance 68,306 67,438 87,687
Aircraft rent 168,516 154,879 123,732
Commissions 91,850 80,108 86,335
Depreciation and amortization 56,591 58,407 56,757
Special charges - 15,000 26,000
Other 301,339 258,546 296,373
Total Operating Expenses 1,240,622 1,145,102 1,210,219
Operating Income (Loss) 74,998 (16,773) (94,841)
Other Income (Expense)
Interest income 7,779 7,088 7,374
Interest expense (46,960) (37,624) (43,223)
Interest capitalized 353 446 6,102
Loss on sale of assets (1,016) (649) (2,339)
Other - net 5,807 1,700 1,221
(34,037) (29,039) (30,865)
Income (loss) before income tax
expense (credit) and accounting change 40,961 (45,812) (125,706)
Income tax expense (credit) 18,430 (14,894) (45,436)
Income (loss) before accounting change 22,531 (30,918) (80,270)
Cumulative effect of accounting change - - (4,567)
Net Income (Loss) $22,531 $(30,918) $(84,837)
Primary Per Share Amounts:
Earnings (loss) before accounting change $1.68 $(2.51) $(6.53)
Cumulative effect of accounting change - - (.34)
Net earnings (loss) per common share $1.68 $(2.51) $(6.87)
Fully Diluted Earnings Per Share $1.62 * *
Shares used for computation:
Primary 13,378 13,340 13,309
Fully diluted 19,598 * *
* Anti-dilutive
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
<CAPTION>
Common Stock
Capital in Treasury Deferred
$1 Par Excess of Stock Compen- Retained
(In Thousands) Value Par Value at Cost sation Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991 $16,384 $150,478 ($71,807) ($14,515) $203,907 $284,447
Net loss for 1992 (84,837) (84,837)
Cash dividends on common
stock ($.15 per share) (1,998) (1,998)
Preferred stock dividends
and accretion (6,688) (6,688)
Stock issued under stock plans 99 1,367 1,466
Employee Stock Ownership Plans
shares allocated 4,334 4,334
Balances at December 31, 1992 16,483 151,845 (71,807) (10,181) 110,384 196,724
Net loss for 1993 (30,918) (30,918)
Preferred stock dividends and
early redemption premium (3,525) (3,525)
Stock issued under stock plans 12 172 184
Employee Stock Ownership Plans
shares allocated 4,368 4,368
Balances at December 31, 1993 16,495 152,017 (71,807) (5,813) 75,941 166,833
Net income for 1994 22,531 22,531
Stock issued under stock plans 59 739 798
Employee Stock Ownership Plans
shares allocated 1,116 1,116
Balances at December 31, 1994 $16,554 $152,756 ($71,807) ($4,697) $98,472 $191,278
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
<CAPTION>
Year Ended December 31 (In Thousands) 1994 1993 1992
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $27,179 $6,880 $19,086
Cash flows from operating activities:
Income (loss) before accounting change 22,531 (30,918) (80,270)
Adjustments to reconcile income to cash:
Depreciation and amortization 56,591 58,407 56,757
Amortization of airframe and engine overhauls 20,954 29,402 34,265
Special charges - 15,000 26,000
Loss (gain) on disposition of assets and debt retired (1,072) (315) 2,339
Increase (decrease) in deferred income taxes 7,587 (8,113) (25,797)
Decrease (increase) in accounts receivable 5,219 9,135 (23,118)
Decrease (increase) in other current assets 121 (15,122) (7,370)
Increase in air traffic liability 15,073 11,569 19,500
Increase in other current liabilities 27,737 1,085 19,826
Interest on zero coupon notes 9,946 9,881 9,203
Leased aircraft return payments and other-net (20,554) (31,554) (11,101)
Net cash provided by operating activities 144,133 48,457 20,234
Cash flows from investing activities:
Proceeds from disposition of assets 6,504 7,193 793
Purchases of marketable securities (76,129) (150,636) (111,768)
Sales and maturities of marketable securities 56,762 153,217 118,966
Restricted deposits (5,955) (4,045) (3,007)
Flight equipment deposits returned 5,460 2,685 3,321
Additions to flight equipment deposits (1,085) (764) (16,873)
Additions to property and equipment (187,543) (29,605) (261,073)
Payments received on loans to ESOPs 1,313 4,128 4,747
Net cash used in investing activities (200,673) (17,827) (264,894)
Cash flows from financing activities:
Proceeds from short-term borrowings 25,000 20,000 96,303
Repayment of short-term borrowings (20,000) - (96,303)
Proceeds from sale and leaseback transactions - 36,500 214,590
Proceeds from issuance of long-term debt 104,000 47,200 84,700
Long-term debt and capital lease payments (70,920) (79,375) (59,904)
Proceeds from issuance of common stock 798 184 1,466
Repurchase of preferred stock - (33,375) -
Cash dividends - (2,429) (8,398)
Gain on debt retirement 2,088 964 -
Net cash provided by (used in) financing activities 40,966 (10,331) 232,454
Net increase (decrease) in cash and cash equivalents (15,574) 20,299 (12,206)
Cash and cash equivalents at end of year $11,605 $27,179 $6,880
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $44,786 $33,622 $38,952
Income taxes (refunds) 2,204 (18,554) (2,168)
Noncash investing and financing activities:
1994 - Capital lease obligations of $57.9 million were incurred due to changes in lease agreements.
1993 - The preferred stock was repurchased in exchange for a $27 million note
payable and a $33.4 million cash payment.
1992 - None
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 1994
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Alaska Air Group,
Inc. (Company or Air Group) and its subsidiaries, the principal subsidiaries
being Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon).
All significant intercompany transactions are eliminated.
Both subsidiaries operate as airlines. However, each subsidiary's business
plan, competition and economic risks differ substantially due to the passenger
capacity and range of aircraft operated. Alaska is a major airline, operates an
all jet fleet and its average passenger trip is 850 miles. Horizon is a
regional airline, operates both jet and turboprop aircraft, and its average
passenger trip is 210 miles. See Note 10 for business segment information.
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.
Inventories and Supplies
Expendable and repairable aircraft parts, as well as materials and supplies, are
stated at average cost. For repairable parts, 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 are carried at net
realizable value. The allowance at December 31, 1994 and 1993 for all
inventories was $12.1 million and $8.3 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 8-20 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.
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. Interest capitalization is
suspended when there is a substantial delay in aircraft deliveries.
Intangible Assets-Subsidiaries
The excess of 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, 1994 and 1993 was $17 million and $15 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 transportation service is
provided. Tickets sold but not yet used are included in 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 a liability and reported as expense 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 incremental cost liability and deferred partner revenues are
relieved as travel awards are used.
Income Taxes
In January 1992, Statement of Financial Accounting Standards No. 109 (FAS 109),
"Accounting for Income Taxes," was adopted. FAS 109 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.
Earnings Per Share
Primary earnings per share is calculated by dividing net income after reduction
for preferred stock dividends by the average number of common shares and
dilutive common stock equivalents outstanding. Common stock equivalents result
from the assumed exercise of stock options. Fully diluted earnings per share
gives effect to the conversion of convertible debt (after elimination of related
interest expense, net of income tax effect).
Derivative Financial Instruments
The differential to be paid or received on interest rate swap agreements is
accrued as interest rates change and is recognized currently in the income
statement. The Company enters into hedge agreements to reduce its exposure to
fluctuations in the price of jet fuel. A gain or loss is recorded quarterly if
the fuel index average exceeds the ceiling price or falls below the floor price.
Reclassifications
Certain reclassifications have been made in prior years' financial statements to
conform to the 1994 presentation.
Note 2. Marketable Securities
Marketable securities are investments that are readily convertible to cash, but
whose original maturity dates exceed three months. They are classified as
available for sale and consisted of the following at December 31 (in thousands):
1994 1993
Cost:
U.S. govt securities $78,045 $66,744
Other 15,292 7,226
$93,337 $73,970
Fair value:
U.S. govt securities $76,558 $66,665
Other 15,069 7,224
$91,627 $73,889
Gross unrealized holding gains:
U.S. govt securities $ _ $71
Other _ 3
$ _ $74
Gross unrealized holding losses:
U.S. govt securities $1,487 $150
Other 223 5
$1,710 $155
Of the marketable securities on hand at December 31, 1994, 55% will mature
during 1995 and the remainder will mature during 1996.
Based on specific identification of securities sold, the following occurred in
1994 (in thousands):
Proceeds from sales $56,762
Gross realized gains $ 40
Gross realized losses $ 499
The above gains and losses are included in 1994 interest income of $7.8 million.
Note 3. Other Assets
Other assets consisted of the following at December 31 (in thousands):
1994 1993
Restricted deposits $66,858 $60,903
Leasehold rights 14,075 16,923
Deferred costs 15,942 16,938
Receivables 21,245 7,683
$118,120 $102,447
Leasehold rights and deferred costs are amortized over the term of the related
lease or contract. At December 31, 1994, deferred costs include $6.2 million
of capitalized training costs associated with the B737-400 aircraft. These
costs are being amortized over a five-year period which began in April 1992.
Note 4. Long-Term Debt and Capital Lease Obligations
At December 31, 1994 and 1993, long-term debt and capital lease obligations
were as follows (in thousands):
1994 1993
7.4%* notes payable due
through 2009 $375,908 $308,700
7-3/4% convertible subordinated
debentures due 2005-2010 14,354 14,638
6-7/8% convertible subordinated
debentures due 2004-2014 54,041 60,181
7-1/4% zero coupon,
convertible subordinated
notes due 2006 129,369 143,754
Long-term debt 573,672 527,273
Capital lease obligations 88,237 33,720
Less current portion (72,005) (35,575)
$589,904 $525,418
* weighted average for 1994
At December 31, 1994, borrowings of $362.4 million are secured by flight
equipment and real property.
During 1994, the Company repurchased $6.4 million of its 7-3/4% and 6-7/8%
convertible subordinated debentures for a $1.1 million pretax gain. The
remaining 7-3/4% and 6-7/8% debentures are convertible into common stock at
$28.25 and $33.60 per share, respectively, subject to adjustments in certain
events. Also, during 1994, the Company repurchased 55,922 of its 7-1/4% notes,
which had a book value of $24.3 million, for a $1.0 million pretax gain. Each
of the remaining notes can be converted into 12.4 shares of common stock.
Holders of these notes have a put option to require the Company to purchase
each note on April 18, 1996 at their then accreted value of $490.58. The
Company may elect to pay in cash or shares of common stock or in any
combination thereof.
At December 31, 1994, Alaska had $70 million in lines of credit, none of which
were being used, with commercial banks. In early 1995, these credit agreements
were replaced with a $75 million credit facility with commercial banks.
Advances under the new facility may either be for up to a 364-day term, or up to
a maximum maturity of three years. Borrowings may be used for aircraft
acquisitions or other corporate purposes, and they bear interest at a rate which
varies based on LIBOR.
Certain Alaska loan agreements contain provisions that require maintenance of
specific levels of net worth, leverage and fixed charge coverage, and limit
dividends, investments, lease obligations, sales of assets and additional
indebtedness. At December 31, 1994, the Company was in compliance with all loan
provisions, and under the most restrictive loan provisions, Alaska had $28.5
million of net worth above the minimum.
During 1994, four MD-83 aircraft were financed with $104 million in ten-year
loans at variable interest rates based on LIBOR. In addition, capital lease
obligations increased $57.9 million due to changes in the lease agreements for
two B737-400 aircraft that were previously classified as operating leases.
At December 31, 1994, long-term debt principal payments for the next five years
were (in thousands):
1995 $ 40,762
1996* $ 37,621
1997 $ 34,795
1998 $ 35,736
1999 $ 35,967
* Excludes the effect of a put option on the 7-1/4% notes.
Note 5. Commitments
Lease Commitments
Lease contracts for 109 aircraft have remaining lease terms of one to 18
years. The majority of airport and terminal facilities are also leased.
Total rent expense was $196.9 million, $180.4 million and $149.7 million,
in 1994, 1993 and 1992, respectively. Future minimum lease payments under
capital leases and long-term operating leases as of December 31, 1994 are
shown below (in thousands):
Capital
Leases Operating Leases Total
Real
Aircraft Property
1995 $38,200 $170,871 $14,190 $223,261
1996 33,560 157,983 12,207 203,750
1997 4,140 143,159 10,971 158,270
1998 4,138 134,285 10,556 148,979
1999 4,136 128,775 10,444 143,355
Thereafter 19,068 676,998 36,304 732,370
Total lease
payments 103,242 $1,412,071 $94,672 $1,609,985
Less amount
representing
interest 15,005
Present value
of capital
lease
payments $88,237
Aircraft Commitments
The Company has firm orders for 11 Dornier 328s to be delivered between
1995 and 1998, and six MD-83s to be delivered between 1995 and 1997. The
total amount of these commitments is approximately $293 million. As of
December 31, 1994, deposits related to the future equipment deliveries were
$43.2 million. The manufacturer has agreed to provide lease financing for
all of the Dornier 328s. In addition to the ordered aircraft, the Company
holds purchase options on 40 Dornier 328s.
Note 6. Stock Plans
Air Group has three stock option plans, which provide for the purchase of
Air Group common stock at its market price on the date of grant by certain
officers and key employees of Air Group and its subsidiaries. Under the
plans, the incentive and nonqualified stock options granted have terms of
up to approximately ten years. Up to half of the options provide for stock
appreciation rights.
Changes in the number of shares subject to option are summarized as
follows:
1994 1993 1992
Outstanding, beginning
of year 861,362 770,420 885,720
Granted(a) 330,200 172,200 43,100
Exercised (58,469) (12,600) (98,400)
Canceled (88,950) (68,658) (60,000)
Outstanding, end
of year 1,044,143 861,362 770,420
Exercisable, end
of year(b) 644,843 542,012 450,845
Available for granting
in future periods 409,000 701,867 805,409
Average price of options:
Exercised during the
year $13.65 $14.65 $14.89
Outstanding at year-
end $17.15 $17.06 $17.32
(a) The average price of the options granted in 1994 was $16.53
(b) Options exercisable at year end 1994 expire between June 1995 and
June 2004.
In addition, 2,273,700 shares of common stock are subject to
nontransferable investment options held by management employees, for which
the Company received $3.1 million, which is included with other liabilities
on the Balance Sheet. These options are subject to mandatory redemption at
$3.1 million in February 1997, and they allow the holder to purchase common
stock at $27 per share until that date.
Note 7. Employee Benefit Plans
Pension Plans
Four defined benefit and five defined contribution retirement plans cover
various employee groups of Alaska and Horizon. 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
costs are funded as required by the Employee Retirement Income Security Act
of 1974 (ERISA).
The defined benefit plan assets are primarily invested in common stocks and
fixed income securities. Plan assets exceeded the accumulated benefit
obligation at December 31, 1994 and 1993. The following table sets forth
the funded status of the plans at December 31, 1994 and 1993 (in
thousands):
1994 1993
Benefit obligation -
Vested $ 114,861 $126,341
Nonvested 15,820 12,687
Accumulated benefit
obligation $ 130,681 $139,028
Plan assets at fair value $ 144,102 $145,974
Projected benefit obligation 147,200 159,529
Plan assets less projected
benefit obligation (3,098) (13,555)
Unrecognized transition asset (1,374) (1,658)
Unrecognized prior service cost 3,521 1,576
Unrecognized loss 15,839 26,684
Prepaid pension cost $ 14,888 $13,047
The weighted average discount rate used to determine the projected benefit
obligation was 9.0% and 7.9% as of December 31, 1994 and 1993,
respectively. The calculation also assumed a 5.2% weighted average rate of
increase for future compensation levels for 1994 and 1993. The expected
long-term rate of return on plan assets used in 1994 and 1993 was 10%.
Net pension expense for the defined benefit plans included the following
components for 1994, 1993 and 1992 (in thousands):
1994 1993 1992
Service cost (benefits
earned during the
period) $12,351 $10,041 $8,395
Interest cost on projected
benefit obligation 11,859 10,449 8,883
Actual return on assets (2,061) (14,123) (9,079)
Net amortization and
deferral (10,810) 2,244 (2,171)
Net pension
expense $ 11,339 $8,611 $6,028
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 has recorded deferred compensation to
reflect the value of the shares not yet allocated to eligible employees'
accounts. As these shares are allocated to employees, compensation expense
is recorded and deferred compensation is reduced.
Alaska and Horizon also maintain an unfunded, noncontributory benefit plan
for certain elected officers. The present value of unfunded benefits for
this plan was accrued as of December 31, 1994 and 1993.
Total expense for all pension plans was $22.5 million, $19.8 million and
$18.8 million, respectively, in 1994, 1993 and 1992.
Profit Sharing Plans
Alaska and Horizon have employee profit sharing plans. Profit sharing
expense for 1994, 1993 and 1992 was $3.6 million, $2.3 million and $1.6
million, respectively.
Other Postretirement Benefits
The Company allows retirees to continue their medical, dental and vision
benefits by paying the respective active employee plan premium until 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.
Effective January 1, 1992, Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," was adopted. The new standard requires that the cost of
postretirement employee benefits other than pensions be recognized during
an employee's active service period. Prior to 1992, the cost of these
benefits was expensed as claims were incurred. The cumulative effect of
the accounting change for years prior to January 1, 1992 was an after-tax
charge of $4.6 million.
The following table sets forth the status of the postretirement benefit
obligation at December 31, 1994 and 1993 (in thousands):
1994 1993
Accumulated postretirement benefit
obligation (APBO):
Retirees $ 913 $309
Active plan participants
eligible for retirement 1,675 2,193
Active plan participants
not eligible for retirement 4,933 6,391
Unrecognized prior service cost (326) (381)
Unrecognized actuarial gain 3,244 980
Accrued postretirement
benefit cost $ 10,439 $9,492
The Company's APBO is unfunded. Net annual postretirement benefit costs
for 1994, 1993 and 1992 include the following components (in thousands):
1994 1993 1992
Service cost - benefits
attributed to service
during the period $682 $655 $855
Interest on APBO 596 591 643
Net amortization and
deferral (12) (38) _
Net postretirement
benefit cost $1,266 $1,208 $1,498
An 8.5% health care cost trend rate was assumed for 1995. The rate was
assumed to decrease by 1/2% annually to 5.5% for 2001 and remain at that
level thereafter. Increasing the rate by 1 percentage point in each year
would increase the APBO as of December 31, 1994 by $1.1 million and the net
periodic postretirement benefit cost for 1994 by $228,000. The weighted-
average discount rates used in determining the APBO for 1994 and 1993 were
9.0% and 7.9%, respectively.
Note 8. Special Charges
Results for 1993 and 1992 include special charges of $15 million and $26
million, respectively, to recognize an impairment of the value of the
Boeing B727 fleet. The special charges include reserves for future excess
lease costs and the write-down of capitalized overhauls and spare parts to
net realizable value.
Note 9. Income Taxes
The components of income tax expense (credit) were as follows (in
thousands):
1994 1993 1992
Current tax expense (credit):
Federal $8,044 $(4,907) $(21,057)
State 72 (253) (1,714)
Total current 8,116 (5,160) (22,771)
Deferred tax expense (credit):
Federal 8,032 (8,164) (19,451)
State 2,282 (1,570) (3,214)
Total deferred 10,314 (9,734) (22,665)
Total before accounting
change 18,430 (14,894) (45,436)
Deferred income tax
credit cumulative effect
of FAS 106 _ _ (2,613)
Total tax expense(credit) $18,430 $(14,894) $(48,049)
The actual income tax expense (credit) reported differs from the "expected"
tax expense (credit) (computed by applying the federal corporate tax rate
of 35% for 1994 and 1993 and 34% for 1992) as follows (in thousands):
1994 1993 1992
Income (loss) before
income tax $40,961 $(45,812) $(125,706)
Expected tax
expense (credit) $14,336 $(16,035) $(42,740)
Nondeductible expense 2,386 1,210 1,068
Federal rate change _ 1,016 _
Tax-exempt interest
income _ (170)
State income tax 1,531 (1,185) (3,252)
Other - net 177 100 (342)
Actual tax expense
(credit) $18,430 $(14,894) $(45,436)
Effective tax rate 45.0% 32.5% 36.1%
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 thousands):
1994 1993
Excess of tax over book
depreciation $117,085 $95,499
Training expense 2,218 3,167
Other - net 1,252 358
Gross deferred tax liabilities 120,555 99,024
Loss carryforward (38,275) (43,798)
Alternative minimum tax (24,502) (16,346)
Capital leases (4,507) (3,615)
Pricing adjustment (1,190) (1,083)
Frequent flyer program (6,518) (5,576)
Employee benefits (11,812) (9,567)
Aircraft maintenance (7,681) (8,231)
Gain on sale of assets (5,456) (2,125)
Capitalized interest (1,617) _
Gross deferred tax assets (101,558) (90,341)
Net deferred tax liabilities $18,997 $8,683
Current deferred tax asset $(9,588) $(12,315)
Noncurrent deferred
tax liability 28,585 20,998
Net deferred tax liabilities $18,997 $8,683
The book income and temporary differences for 1994 resulted in taxable
income of $12 million, which was offset by net operating losses generated
in prior years.
Note 10. Business Segment Information
Financial information for Alaska and Horizon follows (in thousands):
1994 1993 1992
Operating revenues:
Alaska $ 1,061,594 $ 906,806 $ 908,286
Horizon $ 256,905 $ 223,333 $ 208,149
Operating income (loss):
Alaska $ 62,872 $ (24,313) $ (101,013)
Horizon $ 12,922 $ 8,757 $ 7,305
Total assets:
Alaska $ 1,244,985 $ 1,037,546 $ 1,088,090
Horizon $ 152,263 $ 141,940 $ 147,076
Depreciation and
amortization
expense:
Alaska $ 47,684 $ 48,953 $ 47,140
Horizon $ 8,681 $ 9,276 $ 9,564
Capital expenditures:
Alaska $ 173,093 $ 21,116 $ 258,556
Horizon $ 15,535 $ 8,800 $ 16,389
Note 11. Financial Instruments
The estimated fair values of the Company's financial instruments were as
follows (in thousands):
December 31, 1994
Carrying Fair
Amount Value
Cash and cash equivalents $11,605 $11,605
Marketable securities 93,337 91,627
Restricted deposits 66,858 66,858
Long-term receivables 21,245 21,245
Long-term debt 573,672 549,000
December 31, 1993
Carrying Fair
Amount Value
Cash and cash equivalents $27,179 $27,179
Marketable securities 73,970 73,889
Restricted deposits 60,903 75,000
Long-term receivables 7,683 7,683
Long-term debt 527,273 521,000
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 receivables approximate the carrying
amounts. The fair value of publicly traded long-term debt is based on
quoted market prices, and the fair value of other debt approximates
carrying value.
During 1993, the Company entered into an interest rate swap agreement to
reduce the interest expense on a portion of its fixed rate debt. The
agreement, which expires in 1996, effectively changes the Company's
interest rate on the debt from a fixed rate to a floating rate based on
LIBOR. Variable interest payments are paid to a financial institution semi-
annually based on a notional principal amount of $201 million. In 1996,
the Company will receive a $33.2 million payment from the financial
institution. At December 31, 1994, $18.3 million of this amount is shown
as a receivable in other assets. The Company is exposed to higher
interest payments if LIBOR increases and is exposed to credit loss in the
event of nonperformance by the financial institution. Through December
31, 1994, this swap has resulted in a $1.1 million reduction in interest
expense.
The Company enters into hedge agreements to reduce its exposure to
fluctuations in the price of jet fuel. The agreements establish a ceiling
price and floor price, and they provide for quarterly measurements of the
average price of fuel, as determined by an index. The Company records a
gain or loss if a quarterly average exceeds the ceiling or falls below the
floor. The fuel hedges had no material effect on 1994 operating results.
At December 31, 1994, the Company had a fuel hedge agreement in place with
a ceiling price of 65 cents covering approximately 50% of the expected fuel
usage through July 1995, and a floor price of 44 cents covering
approximately 50% of the expected fuel usage through July 1995. At
December 31, 1994, the fuel index was at 50 cents.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Alaska Air Group, Inc.:
We have audited the accompanying consolidated balance sheet of Alaska Air
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1993, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1994. 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 Air Group, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1994, 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 part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
January 25, 1995
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
Alaska Air Group, Inc.
<CAPTION>
Schedule II
Additions
Charged
Beginning to (A) Ending
(In Thousands) Balance Expense Deductions Balance
<S> <C> <C> <C> <C>
Year Ended December 31, 1992
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2,556 $1,237 $(579) $3,214
Obsolesence allowance for flight
equipment spare parts $3,765 $2,578 $ - $6,343
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $21,529 $32,230 $(13,956) $39,803
Year Ended December 31, 1993
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $3,214 $912 $(1,505) $2,621
Obsolesence allowance for flight
equipment spare parts $6,343 $1,994 $0 $8,337
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $39,803 $22,324 $(31,394) $30,733
Year Ended December 31, 1994
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2,621 $944 $(1,280) $2,285
Obsolesence allowance for flight
equipment spare parts $8,337 $4,401 $(663) $12,075
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $30,733 $9,007 $(14,180) $25,560
(A) Deduction from reserve for purpose for which reserve was created.
</TABLE>
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.(i) Certificate of Incorporation of Alaska Air Group, Inc. as amended
through May 20, 1987 (Exhibit 3-01 to 1987 10-K).
3.(ii) Bylaws of Alaska Air Group, Inc., as amended through September
14, 1993 (Exhibit 3.(ii) to 1993 10K)
4.1 Indenture dated June 15, 1985, between Alaska Airlines, Inc. and
Bankamerica Trust Company of New York, including form of
Debenture (Exhibit 4-02 to Registration Statement No. 2-98555).
4.2 Rights Agreement dated as of December 2, 1986 between Alaska Air
Group, Inc. and The First National Bank of Boston, as Rights
Agent (Exhibit No. 1 to Form 8A filed December 12, 1986).
10.1 Lease and Assignment of Sublease Agreement dated February 1, 1979
between Alaska Airlines, Inc. and the Alaska Industrial
Development Authority (Exhibit 10-15 to Registration Statement
No. 2-70742).
10.2 Lease and Assignment and Sublease Agreement dated April 1, 1978
between Alaska Airlines, Inc. and the Alaska Industrial
Development Authority (Exhibit 10-16 to Registration Statement
No. 2-70742).
10.3 Alaska Air Group, Inc. 1975 Stock Option Plan, as amended through
May 7, 1991.
10.4 Management Incentive Plan (1992 Alaska Air Group, Inc. Proxy
Statement).
10.5 Loan Agreement dated as of December 1, 1984, between Alaska
Airlines, Inc. and the Industrial Development Corporation of the
Port of Seattle (Exhibit 10-38 to 1984 10-K).
10.6 Alaska Air Group, Inc. 1984 Stock Option Plan, as amended through
May 7, 1992.
10.7 Supplemental retirement plan arrangement between Horizon Air
Industries, Inc. and John F. Kelly (1992 Alaska Air Group, Inc.
Proxy Statement).
10.8 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended through
May 19, 1992 (Registration Statement No. 33-523242).
10.9 Purchase Agreement between McDonnell Douglas Corporation and
Alaska Airlines, Inc. DAC 88-36-D, dated October 14, 1988
(Exhibit 10-17 to 1988 10-K).
10.10 Capital Performance Plan (Exhibit 4.3 to Registration Statement
33-33087).
#10.11 Purchase Agreement dated March 30, 1990 between McDonnell Douglas
Corporation and Alaska Airlines, Inc. for the purchase of up to
40 MD90-30 aircraft (Exhibit 10-13 to 1990 10-K)
#10.12 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 for 19 additional B737-400 aircraft
and Letter Agreement #1 dated January 22, 1990 (Exhibit 10-14 to
1990 10-K)
#10.13 Purchase Agreement dated as of May 15, 1991, between Horizon Air
Industries, Inc. and Dornier Luftfahrt GmbH for the purchase of
up to 60 Dornier 328 aircraft (Exhibit 10-19 to May 30, 1991 8-
K).
#10.14 Amendment dated as of June 25, 1993 to the Purchase Agreement
dated as of May 15, 1991, between Horizon Air Industries, Inc.
and Dornier Luftfahrt GmbH for the purchase of up to 60 Dornier
328 aircraft (Exhibit 10-19a to Second Quarter 1993 10-Q).
*11 Computation of Earnings Per Common Share.
*12 Calculation of Ratio of Earnings to Fixed Charges and Preferred
Dividends.
21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10-K).
*23 Consent of Arthur Andersen & Co.
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.
<TABLE>
Alaska Air Group, Inc. EXHIBIT 11
Computation of Earnings Per Common Share
(In thousands, except per share)
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Primary -
Income (loss) before accounting change $22,531 ($30,918) ($80,270)
Deduct dividends on preferred shares - (2,429) (6,400)
Deduct preferred stock accretion - (96) (288)
------ ------ ------
Income (loss) before accounting change
applicable to common shares 22,531 (33,443) (86,958)
Cumulative effect of accounting change - - (4,567)
------ ------ ------
Income (loss) applicable to common shares $22,531 ($33,443) ($91,525)
====== ====== ======
Average number of shares outstanding 13,367 13,340 13,309
Assumed exercise of stock options reduced
by the number of shares purchased with
the proceeds from exercise of such options 11 - -
------ ------ ------
Common shares outstanding as adjusted 13,378 13,340 13,309
====== ====== ======
Earnings (loss) per common share:
Income (loss) before accounting change $1.68 ($2.51) ($6.53)
Cumulative effect of accounting change - - (0.34)
------ ------ ------
Net income (loss) $1.68 ($2.51) ($6.87)
====== ====== ======
Fully Diluted -
Income (loss) before accounting change $22,531 ($30,918) ($80,270)
After tax interest on convertible securities 9,252 10,008 9,573
------ ------ ------
Income (loss) before accounting change
applicable to common shares 31,783 (20,910) (70,697)
Cumulative effect of accounting change - - (4,567)
------ ------ ------
Income (loss) applicable to common shares $31,783 ($20,910) ($75,264)
====== ====== ======
Average number of shares outstanding 13,367 13,340 13,309
Assumed exercise of stock options 11 12 84
Assumed conversion of 7.75% debentures 512 518 518
Assumed conversion of 6.875% debentures 1,678 1,865 1,983
Assumed conversion of 7.25% zero coupon notes 4,030 4,277 4,277
Assumed conversion of preferred shares 0 0 2,315
------ ------ ------
Average shares as adjusted 19,598 20,012 22,486
====== ====== ======
Earnings (loss) per common share:
Income (loss) before accounting change $1.62 ($0.94) ($3.14)
Cumulative effect of accounting change - - (0.21)
------ ------ ------
Net income (loss) $1.62 ($1.04) ($3.35)
====== ====== ======
* Anti-dilutive * *
</TABLE>
<TABLE>
Alaska Air Group, Inc. EXHIBIT 12
Calculation of Ratio of Earnings to Fixed Charges
and Preferred Dividends
(In thousands, except ratios)
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income tax
expense and accounting change $40,961 ($45,812) ($125,706) $16,207 $27,918
Less: Capitalized interest (353) (446) (6,102) (8,301) (9,024)
Add:
Interest on indebtedness 46,960 37,624 43,223 40,180 20,266
Amortization of debt expense 1,368 690 643 519 440
Portion of rent under long-term
operating leases representative
of an interest factor 65,618 60,136 49,889 41,327 38,346
------- ------- ------- ------- -------
Total Earnings Available for Fixed
Charges and Preferred Dividends $154,554 $52,192 ($38,053) $89,932 $77,946
======= ======= ======= ======= =======
Fixed Charges and Preferred Dividends:
Preferred dividends - $2,429 $6,400 $6,383 $5,753
Times, ratio of income before
income tax expense to net income NA 1.48 1.57 1.57 1.63
------ ------ ------ ------ ------
Preferred dividends on pretax basis NA 3,595 10,048 10,021 9,377
Amortization of preferred stock
issuance costs - 96 288 288 264
Interest 46,960 37,624 43,223 40,180 20,266
Amortization of debt expense 1,368 690 643 519 440
Portion of rent under long-term
operating leases representative
of an interest factor 65,618 60,136 49,889 41,327 38,346
------- ------- ------- ------- -------
Total Fixed Charges and
Preferred Dividends $113,946 $102,141 $104,091 $92,335 $68,693
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges
and Preferred Dividends 1.36 0.51 (0.37) 0.97 1.13
======= ======= ======= ======= =======
Coverage deficiency - $49,949 $142,144 $2,403 -
======= ======= ======= ======= =======
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated January 25, 1995 included in this Form 10-
K, into the Company's previously filed Registration Statements, File
Numbers 2-96973, 33-22358, and 33-33087.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
February 15, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR
GROUP INC 1994 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
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