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, 1996
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
6-1/2% Convertible Senior
Debentures Due 2005 New York Stock Exchange
6-7/8% Convertible Subordinated
Debentures Due 2014 New York Stock Exchange
10.21% Series B Cumulative
Redeemable
Preferred Stock Due 1997 Unlisted
As of December 31, 1996, common shares outstanding totaled 14,474,731.
The aggregate market value of the common shares of Alaska Air Group, Inc.
held by nonaffiliates, 14,386,495 shares, was approximately $302 million
(based on the closing price of these shares, $21.00, 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. ( X )
DOCUMENTS TO BE INCORPORATED BY REFERENCE
Title of Document Part Hereof Into Which Document to be
Incorporated
Definitive Proxy Statement Relating to Part III
1997 Annual Meeting of Shareholders
Exhibit Index begins on page 34.
PART I
ITEM 1. BUSINESS
GENERAL INFORMATION
Alaska Air Group, Inc. (Air Group or the Company) is a holding company
which was 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 833 miles. Horizon is a regional
airline, operates jet and turboprop aircraft, and its average passenger
trip is 231 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 which 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,
four cities in Mexico and four cities in Russia. In each year since 1973,
Alaska has carried more passengers between Alaska and the U.S. mainland
than any other airline. In 1996, Alaska carried 11.8 million passengers.
Passenger traffic within Alaska and between Alaska and the U.S. mainland
accounted for 26% of Alaska's 1996 revenue passenger miles, West Coast
traffic accounted for 66%, the Mexico markets 8% and Russia less than 1%.
Based on passenger enplanements, Alaska's leading airports are Seattle,
Portland, Anchorage and Los Angeles. Based on revenues, its leading
nonstop routes are Seattle-Anchorage, Seattle-Los Angeles and Seattle-San
Diego. At December 31, 1996, Alaska's operating fleet consisted of 74 jet
aircraft. The majority of Alaska flights and certain Northwest flights are
dual-designated in airline computer reservation systems as Alaska Airlines
and Northwest Airlines in order to facilitate feed traffic between the two
airlines. Alaska Airlines also serves three smaller cities in California,
two in Washington, and many small communities in Alaska through code share
marketing agreements with local carriers.
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 35 cities in five states (Washington, Oregon,
Montana, Idaho, and California) and four cities in Canada. In 1996,
Horizon carried 3.8 million passengers. Based on passenger enplanements,
Horizon's leading airports are Seattle, Portland, Spokane and Boise. Based
on revenues, its leading nonstop routes are Seattle-Portland, Seattle-
Spokane and Seattle-Boise. At December 31, 1996, Horizon's operating fleet
consisted of 15 jet and 47 turboprop aircraft. Horizon flights are listed
under the Alaska Airlines designator code in airline computer reservation
systems. Most Horizon flights are also dual-designated in these
reservation systems as Northwest Airlines and Alaska Airlines. Currently,
30% of Horizon's passengers connect to either Alaska or Northwest.
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
advance seat assignments, a first class section, attention to customer
needs, high-quality food and beverage service, well-maintained aircraft and
other amenities has been recognized by independent studies and surveys of
air travelers. Alaska and Horizon offer competitive fares.
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,
adverse weather, government regulation and general economic conditions.
Competition
Competition in the air transportation industry is intense. Any domestic
air carrier deemed fit by the DOT is allowed to operate scheduled passenger
service in the United States. Together, Alaska and Horizon carry 2.3% of
all U.S. domestic passenger traffic. Alaska's and Horizon's primary
competitors in the West Coast, Arizona and Nevada markets are America West,
Delta, Reno Air, Shuttle by United, Southwest Airlines, United and United
Express. Alaska also competes with America West, Continental, Delta, Reno
Air and United in the Lower 48-to-Alaska market, and with Aeromexico,
America West, Delta and Mexicana in its Mexico markets. 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 also subject to competition from surface
transportation, particularly the private automobile.
Most major 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.
Fuel
Fuel costs represented 16% of the Company's total operating expenses in
1996. 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.
Unionized Labor Force
Labor costs represented 32% of the Company's total operating expenses in
1996. Wage rates can have a significant impact on the Company's operating
results. At December 31, 1996, labor unions represented 87% of Alaska's
and 27% of Horizon'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 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 highly leveraged, which increases the
volatility of its 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.
Weather
Unusually adverse weather, as occurred during December 1996 in the Pacific
Northwest, can significantly reduce flight operations, resulting in lost
revenues and added expenses.
Government Regulation
The Company, like other airlines, 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.
OTHER INFORMATION
Frequent Flyer Program
All major airlines have developed frequent flyer programs as a way of
increasing passenger loyalty. Alaska's Mileage Plan allows members to earn
mileage by flying on Alaska, Horizon and other participating airlines, and
by using the services of non-airline partners which include a credit card,
telephone companies, hotels and car rental agencies. Alaska is paid by
non-airline partners for the miles it credits to member accounts. Alaska
has the ability to change the Mileage Plan terms, conditions, partners,
mileage credits and award levels.
Mileage can be redeemed for free or discounted travel and for other travel
industry awards. Upon accumulating the necessary mileage, members notify
Alaska of their award selection Over 70% of the flight awards selected are
subject to blackout dates and capacity-controlled seating. Effective in
January 1996, all miles will accumulate indefinitely. As of the year end
1995 and 1996, Alaska estimates that 481,000 and 504,000 round trip flight
awards could have been redeemed by Mileage Plan members who have mileage
credits exceeding the 20,000 mile free round trip domestic ticket award
threshold. At December 31, 1996, fewer than 6% of these flight awards were
issued and outstanding. For the years 1994, 1995 and 1996, approximately
226,000, 242,000 and 173,000 round trip flight awards were redeemed and
flown on Alaska and Horizon. These awards represent approximately 5% for
1994, 7% for 1995, and 4% for 1996, 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 received from non-airline partners is
also deferred. At December 31, 1995 and 1996, the total liability for
miles outstanding was $17.5 million and $17.3 million, respectively.
Employees
Alaska had 8,406 active full-time and part-time employees at December 31,
1996. The following is a summary of Alaska's union contracts as of
December 31, 1996:
Number of
Union Employee Group Employees Contract Status
International Mechanic, Rampservice 1,776 Amendable 9/1/97
Association of and related
Machinists and classifications
Aerospace Workers
Clerical, Office and 2,995 Amendable 5/20/99
Passenger Service
Air Line Pilots Pilots 1,043 Amendable 12/1/97
Association International
Association of Flight Attendants 1,452 Amendable 3/14/99
Flight Attendants
Mexico Workers Mexico Airport 63 Amendable 4/1/97
Association Personnel
of Air Transport
Transport Workers Dispatchers 16 Amendable 2/9/02
Union of America
Horizon had 3,011 active full-time and part-time employees at December 31,
1996. The following is a summary of Horizon's union contracts as of
December 31, 1996:
Number of
Union Employee Group Employees Contract Status
Transport Workers Mechanics and 435 Amendable 4/24/98
Union of America related classifications
Dispatchers 29 Amendable 5/10/97
Association of Flight Attendants 312 Amendable 6/15/96
Flight Attendants Mediation requested
National Automobile, Station personnel 31 Amendable 12/21/97
Aerospace, Trans- in Canada
portation and General Workers
International Routes
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. Beginning in February 1997, under the U.S.-Canada "open skies"
agreement, all U.S. and Canadian carriers will be able to operate between
U.S. and Canadian cities (except for Toronto), subject to availability of
landing slots. Alaska's authorities to serve its various Mexico and Russia
destinations are to be reviewed during 1997-2002 and 1998-2001,
respectively. The Company expects to be granted authority to continue to
operate its international routes.
Selected Quarterly Consolidated Financial Information (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1995 1996 1995 1996 1995 1996 1995 1996
(in millions, except per share)
Operating
revenues $294.6 $351.4 $362.2 $416.7 $419.6 $464.9 $341.1 $359.2
Operating
income (loss) (18.3) (5.2) 23.8 39.6 61.9 63.0 8.3 (8.4)
Net income (loss) (16.3) (7.2) 7.0 18.0 27.4 32.8 (.8) (5.6)
Earnings (loss) per share:
Primary (1.22) (0.52) 0.52 1.24 2.01 2.25 (0.06) (0.38)
Fully diluted * * 0.48 0.88 1.30 1.53 * *
* Anti-dilutive
The amounts shown for operating income for the second, third and fourth
quarters of 1995 and for the first and second quarters of 1996 differ from
those previously reported due to the reclassification (in accordance with
new Financial Accounting Standard 121) of gain or loss on sale of assets
from nonoperating to operating income. 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.
ITEM 2. PROPERTIES
Aircraft
The following table describes the aircraft operated and their average age
at December 31, 1996.
Passenger Average Age
Aircraft Type Capacity Owned Leased Total in Years
Alaska Airlines
Boeing 737-200C 111 6 2 8 16.4
Boeing 737-400 140 3 21 24 3.4
McDonnell Douglas MD-80 140 14 28 42 7.6
23 51 74 7.2
Horizon
Fairchild Metroliner III 18 -- 14 14 10.0
Dornier 328 31 -- 10 10 2.0
de Havilland Dash 8 37 -- 23 23 8.5
Fokker F-28 62-69 4 11 15 19.8
4 58 62 10.5
Part II, Item 7, "Management's Discussion and Analysis of Results of
Operations and Financial Condition," discusses future orders and options
for additional aircraft.
Eleven of the 23 aircraft owned by Alaska as of December 31, 1996 are
subject to liens securing long-term debt. Alaska's leased B737-200C, B737-
400 and MD-80 aircraft have lease expiration dates between 1997 and 1999,
2002 and 2014, and 1997 and 2013, respectively. Horizon's leased Fairchild
Metroliner III, Dornier 328, de Havilland Dash 8 and Fokker F-28 aircraft
have expiration dates between 1997 and 2001, 2008 and 2011, 1999 and 2006,
and 1997 and 2001, respectively. However, as part of its fleet
standardization plan, Horizon expects to return to the lessors all of the
leased Dorniers during 1997 and all of the Metroliners by the end of 1998.
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.
Special noise ordinances or agreements restrict the type of aircraft, the
timing and the number of flights operated by Alaska and other air carriers
at four Los Angeles area airports plus San Diego, Palm Springs, San
Francisco and Seattle. Alaska's only Stage II aircraft (under the Airport
Noise and Capacity Act of 1990) are eight Boeing 737-200Cs, and the Company
plans to modify these aircraft in 1997-1999 to meet applicable noise
requirements.
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.
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. A new $8 million air cargo facility is under construction in
Anchorage and is expected to be completed in mid-1998.
Horizon owns its Seattle corporate headquarters building and leases
maintenance facilities at the Portland and Boise airports.
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. In June 1992, MarkAir filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. In December
1993, MarkAir dismissed all antitrust claims against the Company.
Discovery continues in a related Alaska state court case pertaining to
breach of contract and other state law claims.
In August 1996, Horizon gave notice of termination of its aircraft leases
and purchase agreement with Dornier, a German aircraft manufacturer,
because Dornier failed to meet certain contractual conditions. In late
1996, after attempts to renegotiate the agreement and resolve the problems
failed, Horizon exercised its right to terminate the agreements and
returned two of the 12 leased aircraft. Horizon intends to return the
remaining 10 aircraft during 1997. Dornier disputes Horizon's right to
return the aircraft. The purchase agreement requires the arbitration of
disputes. Horizon has filed its petition for arbitration, and Dornier has
filed an answer.
The Company believes the ultimate resolution of the above legal proceedings
will not result in a material adverse impact on the financial position or
results of operations of 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, 1997) are as follows:
Name Position Age Officer Since
John F. Kelly Chairman, President and Chief 52 1981
Executive Officer of Alaska
Air Group, Inc. and Alaska
Airlines, Inc.
Harry G. Lehr Senior Vice President/Finance 55 1986
of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Steven G. Hamilton Vice President/Legal and General 56 1988
Counsel of Alaska Air Group, Inc.
and Alaska Airlines, Inc.
Keith Loveless Corporate Secretary and Associate 40 1996
General Counsel of Alaska Air
Group, Inc. and Alaska Airlines, Inc.
The above officers have been employed as officers of Air Group or its
subsidiary, Alaska Airlines, for more than five years except for Keith
Loveless, who was elected as Corporate Secretary in 1996. Mr. Loveless
joined the Alaska Airlines legal department in 1986 and will continue to
hold his current position as associate general counsel of Alaska Airlines,
a post he has held since 1993.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1996, there were 14,474,731 shares of common stock
issued and outstanding and 5,232 shareholders of record. The Company also
held 2,748,550 treasury shares at a cost of $62.6 million. The Company has
not paid dividends on the common stock since 1992. 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 1995 and 1996.
1995 1996
High Low High Low
First Quarter 16-3/4 13-1/2 27-3/4 15-7/8
Second Quarter 18-3/8 14-1/2 30-3/4 24-1/4
Third Quarter 21-3/8 14-3/8 28-1/8 19-1/8
Fourth Quarter 18-7/8 13-5/8 25-1/8 20-5/8
<TABLE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<CAPTION>
1992 1993 1994 1995 1996
Consolidated Financial Data:
Year Ended December 31 (in millions, except per share amounts):
<S> <C> <C> <C> <C> <C>
Operating Revenues $1,115.4 $1,128.3 $1,315.6 $1,417.5 $1,592.2
Operating Expenses 1,210.2 1,145.1 1,241.6 1,341.8 1,503.2
Operating Income (Loss) (94.8) (16.8) 74.0 75.7 89.0
Nonoperating expense, net (a) (30.9) (29.0) (33.0) (41.7) (24.7)
Income (loss) before income tax
and accounting change (125.7) (45.8) 41.0 34.0 64.3
Net Income (Loss) $(84.8) $(30.9) $22.5 $17.3 $38.0
Average primary shares outstanding 13.3 13.3 13.4 13.5 14.3
Primary earnings (loss) per share (b) $(6.87) $(2.51) $1.68 $1.28 $2.65
Fully diluted earnings (loss) per share (c) (c) 1.62 1.26 2.05
Cash dividends per share 0 -- -- -- --
At End of Period (in millions, except ratio):
Total assets $1,208.4 $1,135.0 $1,315.8 $1,313.4 $1,311.4
Long-term debt and capital leases 487.8 525.4 589.9 522.4 404.1
Redeemable preferred stock 61.2 -- -- -- --
Shareholders' equity 196.7 166.8 191.3 212.5 272.5
Ratio of earnings to fixed charges (d) (d) 1.36 1.28 1.57
Alaska Airlines Operating Data:
Revenue passengers (000) 6,249 6,438 8,958 10,140 11,805
Revenue passenger miles (RPM) (000,000) 5,537 5,514 7,587 8,584 9,831
Available seat miles (ASM) (000,000) 9,617 9,426 12,082 13,885 14,904
Revenue passenger load factor 57.6% 58.5% 62.8% 61.8% 66.0%
Yield per passenger mile 14.50c 14.32c 12.20c 11.59c 11.67c
Operating revenues per ASM 9.44c 9.62c 8.79c 8.23c 8.70c
Operating expenses per ASM 10.49c 9.88c 8.27c 7.71c 8.10c
Average full-time equivalent employees 6,514 6,191 6,486 6,993 7,652
Horizon Air Operating Data:
Revenue passengers (000) 2,381 2,752 3,482 3,796 3,753
Revenue passenger miles (RPM) (000,000) 486 560 733 841 867
Available seat miles (ASM) (000,000) 905 986 1,165 1,414 1,462
Revenue passenger load factor 53.7% 56.8% 62.9% 59.5% 59.3%
Yield per passenger mile 40.69c 37.93c 33.35c 31.48c 33.14c
Operating revenues per ASM 23.00c 22.65c 22.06c 19.77c 20.61c
Operating expenses per ASM 22.19c 21.76c 20.95c 19.47c 20.60c
Average full-time equivalent employees 2,152 2,267 2,557 2,864 2,891
(a) Includes capitalized interest of $6.1 million, $.4 million, $.4 million, $.2 million and $1.0 million
for 1992, 1993, 1994, 1995, and 1996, respectively.
(b) For 1992, primary earnings per share includes ($.34) for the $4.6 million cumulative
effect of the postretirement benefits accounting change as of January 1, 1992.
(c) Anti-dilutive.
(d) For 1992 and1993, earnings are inadequate to cover fixed charges
by $142.1 million and $50.0 million, respectively.
c = cents
</TABLE>
<TABLE>
Alaska Airlines Financial and Statistical Data
<CAPTION>
Quarter Ended December 31 Year Ended December 31
% %
Financial Data (in millions): 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $254.8 $237.3 7.4 $1,146.8 $994.7 15.3
Freight and mail 19.3 20.5 (5.9) 82.7 84.1 (1.7)
Other - net 18.4 16.0 15.0 67.8 63.5 6.8
Total Operating Revenues 292.5 273.8 6.8 1,297.3 1,142.3 13.6
Operating Expenses:
Wages and benefits 96.8 83.9 15.4 383.6 342.2 12.1
Employee profit sharing (6.7) 0.0 NM 0.9 0.0 NM
Aircraft fuel 51.5 42.1 22.3 200.5 153.6 30.5
Aircraft maintenance 16.3 9.9 64.6 57.1 45.2 26.3
Aircraft rent 37.6 35.1 7.1 146.0 137.7 6.0
Commissions 19.7 18.1 8.8 88.7 75.3 17.8
Depreciation and amortization 13.6 14.3 (4.9) 55.9 58.2 (4.0)
Loss (gain) on sale of assets (5.7) (1.3) NM (9.3) 0.1 NM
Landing fees and other rentals 12.4 10.4 19.2 49.9 45.5 9.7
Other 58.0 52.8 9.8 234.0 212.2 10.3
Total Operating Expenses 293.5 265.3 10.6 1,207.3 1,070.0 12.8
Operating Income (Loss) (1.0) 8.5 NM 90.0 72.3 24.5
Interest income 3.1 3.2 11.5 10.3
Interest expense (6.1) (9.6) (29.7) (40.3)
Interest capitalized 0.6 0.0 0.6 0.0
Other - net 1.3 0.4 2.1 1.6
(1.1) (6.0) (15.5) (28.4)
Income Before Income Tax $(2.1) $2.5 $74.5 $43.9
Operating Statistics:
Revenue passengers (000) 2,804 2,592 8.2 11,805 10,140 16.4
RPMs (000,000) 2,307 2,119 8.9 9,831 8,584 14.5
ASMs (000,000) 3,495 3,373 3.6 14,904 13,885 7.3
Passenger load factor 66.0% 62.8% 3.2 pts 66.0% 61.8% 4.2 pts
Breakeven load factor 69.3% 63.4% 5.9 pts 62.4% 59.4% 3.0 pts
Yield per passenger mile 11.04c 11.20c (1.4) 11.67c 11.59c 0.7
Operating revenue per ASM 8.37c 8.12c 3.1 8.70c 8.23c 5.8
Operating expenses per ASM 8.40c 7.87c 6.8 8.10c 7.71c 5.1
Fuel cost per gallon 80.7c 69.5c 16.0 75.2c 62.9c 19.6
Average number of employees 7,923 7,141 11.0 7,652 6,993 9.4
Aircraft utilization (block hours) 10.8 10.4 3.9 11.3 10.8 4.4
Operating fleet at period-end 74 74 0.0 74 74 0.0
NM = Not Meaningful
c = cents
</TABLE>
<TABLE>
Horizon Air Financial and Statistical Data
<CAPTION>
Quarter Ended December 31 Year Ended December 31
% %
Financial Data (in millions): 1996 1995 Change 1996 1995 Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $64.7 $64.6 0.2 $287.3 $264.6 8.6
Freight and mail 2.8 2.9 (3.4) 11.2 11.1 0.9
Other - net 0.7 1.2 (41.7) 2.8 3.8 (26.3)
Total Operating Revenues 68.2 68.7 (0.7) 301.3 279.5 7.8
Operating Expenses:
Wages and benefits 23.3 21.4 8.9 92.5 85.7 7.9
Employee profit sharing (0.7) 0.0 NM 0.0 0.0 NM
Aircraft fuel 9.3 7.6 22.4 33.7 27.6 22.1
Aircraft maintenance 10.8 8.2 31.7 41.7 34.0 22.6
Aircraft rent 9.0 8.6 4.7 35.3 34.4 2.6
Commissions 4.4 4.4 0.0 19.2 18.9 1.6
Depreciation and amortization 2.9 3.1 (6.5) 11.4 9.9 15.2
Loss (gain) on sale of assets (0.6) 0.0 NM 0.2 0.0 NM
Landing fees and other rentals 3.2 2.8 14.3 12.9 12.6 2.4
Other 13.7 12.6 8.7 54.3 52.2 4.0
Total Operating Expenses 75.3 68.7 9.6 301.2 275.3 9.4
Operating Income (Loss) (7.1) 0.0 NM 0.1 4.2 (97.6)
Interest income 0.2 0.4 0.3 0.4
Interest expense (0.3) 0.0 (0.9) (0.6)
Interest capitalized 0.3 0.2 0.4 0.2
Other - net 0.1 (0.0) 0.4 (0.0)
0.3 0.6 0.2 0.0
Income (Loss) Before Income Tax $(6.8) $0.6 $0.3 $4.2
Operating Statistics:
Revenue passengers (000) 903 928 (2.6) 3,753 3,796 (1.1)
RPMs (000,000) 211 209 0.7 867 841 3.1
ASMs (000,000) 365 344 6.2 1,462 1,414 3.4
Passenger load factor 57.8% 60.9% (3.1)pts 59.3% 59.5% (0.2)pts
Breakeven load factor 65.4% 60.7% 4.7 pts 59.3% 58.5% 0.8 pts
Yield per passenger mile 30.71c 30.87c (0.5) 33.14c 31.48c 5.3
Operating revenue per ASM 18.70c 19.97c (6.4) 20.61c 19.77c 4.2
Operating expenses per ASM 20.64c 19.97c 3.4 20.60c 19.47c 5.8
Fuel cost per gallon 84.4c 74.9c 12.7 78.9c 66.9c 18.0
Average number of employees 2,947 2,803 5.1 2,891 2,864 0.9
Aircraft utilization (block hours) 7.3 7.4 (1.6) 7.7 7.9 (3.1)
Operating fleet at period-end 62 67 (7.5) 62 67 (7.5)
NM = Not Meaningful
c = cents
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Industry Conditions
During the last several years the character of competition has changed on
the West Coast due to the purchase of Morris Air by Southwest Airlines and
the start-up of Shuttle by United. Low air fares are now a permanent part
of the fare structure on the West Coast. During 1995, MarkAir (a
significant competitor in the Alaska marketplace since 1992) ceased
operations and Reno Air began flying to Alaska. During 1996, America West
began flying to Alaska and United ceased flying from Seattle to Alaska.
The U.S. 10% passenger ticket tax, the 6.25% cargo waybill tax and the $6
per passenger international departure tax expired on December 31, 1995, and
were all reinstated effective August 27, 1996. These taxes expired on
December 31, 1996. Management believes that some form of these taxes will
likely be reinstated in 1997 and that it is unlikely that any reinstatement
will be retroactive. The seven largest U.S. airlines have proposed a user
fee to replace the 10% passenger ticket tax. The U.S. General Accounting
Office has determined that the proposed user fee would benefit the seven
largest airlines at the expense of smaller airlines. The Company is
opposed to the proposed user fee because it would effectively transfer
hundreds of millions of dollars of operating costs to smaller airlines,
such as Alaska and Horizon.
During 1996, fuel prices increased significantly for the Company and most
of its competitors (approximately 20% or 12 cents per gallon for Alaska
Airlines).
RESULTS OF OPERATIONS
1996 Compared with 1995 Consolidated net income in 1996 was $38.0 million,
or $2.65 per share (primary) and $2.05 per share (fully diluted), compared
with net income of $17.3 million, or $1.28 per share (primary) and $1.26
per share (fully diluted) in 1995. Consolidated operating income was $89.0
million in 1996 compared to $75.7 million in 1995. Alaska's operating
income improved by $17.7 million, but it was offset by lower operating
results at Horizon. A discussion of operating results for the two airlines
follows.
Alaska Airlines Operating income increased 24.5% to $90.0 million,
resulting in a 6.9% operating margin as compared to a 6.3% margin in 1995.
Operating income increased in each of the first three quarters, but
decreased in the fourth quarter as a result of higher fuel prices, canceled
flights due to extreme weather during the last week of December, and
matching of competitor's lower fares. 1996 operating revenue per available
seat mile (RASM) increased 5.8% to 8.70 cents while operating expenses per
available seat mile increased 5.1% to 8.10 cents.
The increase in RASM was primarily due to a 4.2 point improvement in system
passenger load factor. The Pacific Northwest to the Bay Area and to
Southern California markets (which compose half of the system) experienced
a 6.8 point increase in load factor. Changes in passenger yield varied
from a 3.4% increase in the first quarter to a 1.4% decrease in the fourth
quarter, resulting in a slight increase of 0.7% for the full year.
Increased yield in the first half of 1996 is believed to be due in part to
the absence of the 10% passenger transportation tax. Decreased yield in
the second half of 1996 was due to lower fares in the Seattle-Anchorage and
Mexico markets.
Freight and mail revenues decreased 1.7% reflecting increased competition
in the Alaska markets. Other-net revenues rose 6.8% primarily due to
increased revenues from partners in Alaska's frequent flyer program.
The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis in 1995 and 1996.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1995 1996 Change % Change
Wages and benefits 2.46 2.57 .11 4
Employee profit sharing -- .01 .01 NM
Aircraft fuel 1.11 1.35 .24 22
Aircraft maintenance .33 .38 .05 15
Aircraft rent .99 .98 (.01) (1)
Commissions .54 .59 .05 9
Depreciation & amortization .42 .38 (.04) (10)
Loss (gain) on sale of assets -- (.06) (.06) NM
Landing fees and other rentals .33 .33 -- --
Other 1.53 1.57 .04 3
Alaska Airlines Total 7.71 8.10 .39 5
NM = Not Meaningful
Alaska's higher unit costs were largely due to higher fuel prices and
heavier passenger loads. Significant unit cost changes are discussed
below.
Revenue passengers increased 16.4%. Employees increased 9% primarily due
to increases in reservation and customer service employees. Wages and
benefits per employee (excluding profit sharing) increased 2.5% due to
annual wage increases and a higher cost of fringe benefits, offset by lower
wages for new hires. The net effect was that wages and benefits increased
more than ASMs, resulting in a 4% increase in cost per ASM.
Fuel expense per ASM increased 22%, due to a 20% increase in the price of
fuel. Approximately one fourth of the 12.3 cent fuel price increase was
due to a 4.3 cent Federal excise tax on domestic fuel consumption that
began October 1, 1995. Currently, a 1 cent change in fuel prices affects
annual fuel costs by approximately $2.7 million.
Maintenance expense per ASM increased 15% primarily due to higher
amortization of major airframe and engine overhaul costs. Commission
expense per ASM increased 9% because passenger revenues, upon which
commissions are paid, increased more than ASM growth. Commission expense
as a percentage of passenger revenue was 7.7% in 1996 versus 7.6% in 1995.
Depreciation and amortization expense per ASM decreased 10% primarily due
to the sale (and leaseback) of two aircraft in early 1996 and a 4% increase
in aircraft utilization.
The gain on sale of assets in 1996 is primarily due to the sale of three
jet aircraft. A new accounting standard requires that gains or losses on
long-lived assets be included in operating income.
Horizon Air Operating income decreased 98% to $0.1 million, resulting in a
0.0% operating margin as compared to a 1.5% margin in 1995. The decrease
was primarily attributable to the fourth quarter, which was negatively
impacted by adverse weather, increased competition, higher than normal
maintenance expense and costs associated with transitioning to a simplified
fleet. For 1996, operating revenue per available seat mile (RASM)
increased 4.2% to 20.61 cents while operating expenses per available seat
mile increased 5.8% to 20.60 cents.
The increase in RASM was primarily due to a 5.3% increase in passenger
yield. Changes in passenger yield varied from an 8.9% increase in the
second quarter to a 0.5% decrease in the fourth quarter, resulting in a
5.3% increase for the full year. Increased yields in the first three
quarters of 1996 are believed to be due in part to the absence of the 10%
passenger transportation tax. Yields were also favorably impacted by
reduced flying in the lower-yield Seattle-Spokane and Portland-Spokane
markets. The system passenger load factor decreased 0.2 points due to a
shift in flying from high load factor markets like Seattle-Spokane to low
load factor new markets like Seattle-Edmonton.
Freight and mail revenues increased 0.9% due to increased capacity, while
other-net revenues decreased 26.3% due to reductions in revenues from
providing services to other airlines.
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon in 1995 and 1996.
Horizon Air Operating Expenses Per ASM (In Cents)
1995 1996 Change % Change
Wages and benefits 6.06 6.33 .27 4
Aircraft fuel 1.95 2.30 .35 18
Aircraft maintenance 2.41 2.85 .44 18
Aircraft rent 2.44 2.41 (.03) (1)
Commissions 1.34 1.31 (.03) (2)
Depreciation & amortization .70 .78 .08 11
Loss on sale of assets -- .01 .01 NM
Landing fees and other rentals .89 .88 (.01) (1)
Other 3.68 3.73 .05 1
Horizon Air Total 19.47 20.60 1.13 6
NM = Not Meaningful
Horizon's unit costs increased 6% primarily due to: (a) higher wage rates
and fringe benefits costs; (b) 18% higher fuel prices; (c) increased
maintenance expense on Dash 8 aircraft; and (d) higher overhaul expense on
leased aircraft that will be returned to lessors earlier than originally
planned.
Consolidated Other Income (Expense) Non-operating expense decreased from
$41.7 million to $24.7 million primarily due to lower interest rates on
variable debt and smaller average debt balances. In addition, 1995
included a $2.2 million write-off of capitalized debt issuance costs for
the 7-1/4% zero coupon notes that were redeemed in August 1995.
1995 Compared with 1994 Consolidated net income in 1995 was $17.3 million,
or $1.28 per share (primary) and $1.26 per share (fully diluted), compared
with net income of $22.5 million, or $1.68 per share (primary) and $1.62
per share (fully diluted) in 1994. Consolidated operating income was $75.7
million compared to $74.0 million in 1994. Alaska's operating income
improved by $10.4 million, but it was offset by significantly lower
operating results at Horizon
Alaska Airlines Operating income increased 16.8% to $72.3 million,
resulting in a 6.3% operating margin as compared to a 5.8% margin in 1994.
Operating revenue per available seat mile (RASM) decreased 6.4% to 8.23
cents while operating expenses per available seat mile decreased 6.8% to
7.71 cents. The decrease in RASM was primarily due to a 5.0% decrease in
passenger yield, reflecting increased competition on the West Coast. Lower
unit costs were due to improved employee productivity and a 5% increase in
average daily aircraft utilization.
Horizon Air Operating income decreased 67.1% to $4.2 million, resulting in
a 1.5% operating margin as compared to a 5.0% margin in 1994. Operating
revenue per available seat mile (RASM) decreased 10.4% to 19.77 cents while
operating expenses per available seat mile decreased 7.1% to 19.47 cents.
The decrease in RASM was due to a 5.6% decrease in passenger yield
(reflecting increased competition and longer passenger trips), and a 3.4
point drop in passenger load factor. Lower unit costs were due to greater
use of higher capacity aircraft, no employee profit sharing in 1995 and
cost reduction efforts.
Consolidated Other Income (Expense) Non-operating expense increased from
$33.0 million to $41.7 million primarily due to higher interest rates on
variable debt and larger average debt balances. In addition, 1995 included
more debt issuance expense, fewer vendor credits and lower gains on debt
retirements than in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
Dec. 31, 1995 Dec. 31, 1996 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $135.1 $101.8 $ (33.3)
Working capital (deficit) (106.4) (185.6) (79.2)
Long-term debt
and capital lease obligations 522.4 404.1 (118.3)
Shareholders' equity 212.5 272.5 60.0
Book value per common share $15.67 $ 18.83 $ 3.16
Debt-to-equity 71%:29% 60%:40% NA
1996 Financial Changes The Company's cash and marketable securities
portfolio decreased by $33 million during 1996. Operating activities
provided $223 million of cash in 1996. Additional cash was provided by the
sale and leaseback of three B737-400 aircraft ($86 million), the sale of
three MD-80 aircraft ($52 million) and proceeds received from the issuance
of common stock ($21 million). Cash was used for the purchase of two new
MD-83 aircraft, two used B737-400 aircraft, two previously leased B737-
200Cs, airframe and engine overhauls and other capital expenditures ($209
million), and aircraft purchase deposits ($61 million). Cash was also used
to repay net short-term borrowings ($19 million), and $134 million of long-
term debt (including $100 million repaid early).
Like most airlines, the Company has a working capital deficit. The
existence of a working capital deficit has not in the past impaired the
Company's ability to meet its obligations as they become due and it is not
expected to do so in the future.
Shareholders' equity increased by $60 million primarily due to net income
of $38 million and the issuance of $21 million of common stock under stock
plans. These factors, combined with the early repayment of debt, increased
equity to 40% of capital, an improvement of 11 percentage points.
Financing Arrangements During 1996, Alaska sold and leased back three
B737-400 aircraft for approximately 18 years, and replaced its $75 million
credit facility with a $125 million credit facility with substantially the
same terms and conditions.
Commitments During 1996, Alaska's lease commitments increased
approximately $141 million due to the sale and leaseback of three B737-400
aircraft. In addition, Alaska ordered 12 Boeing 737-400 aircraft along
with an option to acquire 12 more. The value of the firm commitments,
based on the manufacturer's list price, is about $540 million. The new
B737-400s will be phased in over the next three years, with the first plane
scheduled to enter the fleet in June 1997. The new planes are intended to
replace 12 older McDonnell Douglas MD-80s. During 1996 Alaska sold three
MD-80s and plans to return three more to lessors in 1997. Horizon ordered
25 de Havilland Dash 8-200 aircraft along with an option to acquire 45
more. The value of the firm commitments, based on the manufacturer's list
price, is about $270 million. Alaska and Horizon expect to finance the new
planes with either leases, long-term debt or internally generated cash.
At December 31, 1996, the Company had firm orders for 40 aircraft with a
total cost of approximately $925 million as set forth below.
Delivery Period - Firm Orders
Aircraft 1997 1998 1999 Total
Boeing B737-400 4 7 2 13
McDonnell Douglas MD-83 2 -- -- 2
de Havilland Dash 8-200 13 12 -- 25
Total 19 19 2 40
Cost (Millions) $390 $445 $90 $925
The Company accrues the costs associated with returning leased aircraft
over the lease period. As leased aircraft are retired, the costs are
charged against the established reserve. At December 31, 1996, $39 million
was reserved for leased aircraft returns.
Deferred Taxes At December 31, 1996, net deferred tax liabilities were $39
million, which includes $101 million of net temporary differences, offset
by $18 million of net operating loss (NOL) carryforwards and $44 million of
Alternative Minimum Tax (AMT) credits. The Company believes that all of
its deferred tax assets, including the NOL and AMT credits, will be
realized through the reversal of existing temporary differences or tax
planning strategies such as the sale of aircraft.
1995 Financial Changes The Company's cash and marketable securities
portfolio increased by $30 million during 1995. Operating activities
provided $126 million of cash in 1995. Additional cash was provided by
flight equipment deposits returned ($11 million), net short-term borrowings
($41 million), the sale and leaseback of two B737-400 aircraft ($56
million) and new long-term debt proceeds ($129 million). Cash was used for
the purchase of one previously leased B737-400 aircraft, airframe and
engine overhauls and other capital expenditures ($103 million) and the
repayment of debt and capital lease obligations ($237 million). Included
in the above numbers are the June 1995 issuance of $132.3 million of 6-1/2%
convertible senior debentures due 2005, and the August 1995 redemption of
the 7-1/4% zero coupon, convertible subordinated notes for $127.7 million
1994 Financial Changes Cash and marketable securities increased by $4
million in 1994. Operations generated $144 million, proceeds from
financing four new MD-83 aircraft were $104 million, and net short-term
borrowings added $5 million. Cash was used for the repayment of debt ($71
million) and capital expenditures ($189 million). During 1994, Alaska
restructured its 20 B737-400 aircraft leases. 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. As part of the restructuring, Alaska purchased one
of the leased 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. 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. 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.
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 20, 1997. 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 20, 1997.
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 20, 1997.
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 20, 1997.
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) 5
Consolidated Balance Sheet as of December 31, 1995 and 1996 20-21
Consolidated Statement of Income for the years ended
December 31, 1994, 1995 and 1996 22
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996 23
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 24
Notes to Consolidated Financial Statements 25-31
Report of Independent Public Accountants 32
Consolidated Financial Statement Schedule II, Valuation and Qualifying
Accounts, for the years ended December 31, 1994, 1995 and 1996 33
See Exhibit Index on page 34.
(b) Alaska Air Group did not file any reports on Form 8-K during the fourth
quarter of 1996.
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 10, 1997
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 10, 1997
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/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/ Byron I. Mallott Director
Byron I. Mallott
/s/ Robert L. Parker, Jr. Director
Robert L. Parker, Jr.
/s/ John V. Rindlaub. Director
John V. Rindlaub.
/s/ Richard A. Wien Director
Richard A. Wien
<TABLE>
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
<CAPTION>
ASSETS
As of December 31 (In Millions) 1995 1996
<S> <C> <C>
Current Assets
Cash and cash equivalents $25.8 $49.4
Marketable securities 109.3 52.4
Receivables - less allowance for doubtful
accounts (1995 - $1.6; 1996 - $1.3) 88.5 69.7
Inventories and supplies 44.8 47.8
Prepaid expenses and other assets 70.0 80.9
Total Current Assets 338.4 300.2
Property and Equipment
Flight equipment 845.9 815.9
Other property and equipment 219.1 270.4
Deposits for future flight equipment 40.7 84.5
1,105.7 1,170.8
Less accumulated depreciation and amortization 312.8 326.3
792.9 844.5
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 23.3 25.5
21.1 18.9
Total Property and Equipment - Net 814.0 863.4
Intangible Assets - Subsidiaries 63.6 61.6
Other Assets 97.4 86.2
Total Assets $1,313.4 $1,311.4
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
As of December 31 (In Millions) 1995 1996
<S> <C> <C>
Current Liabilities
Accounts payable $69.2 $65.4
Accrued aircraft rent 44.1 52.8
Accrued wages, vacation and payroll taxes 45.8 51.5
Other accrued liabilities 55.7 82.0
Short-term borrowings
(Interest rate: 1995 - 6.2%; 1996 - 5.6%) 65.9 47.0
Air traffic liability 124.4 163.0
Current portion of long-term debt and
capital lease obligations 39.7 24.1
Total Current Liabilities 444.8 485.8
Long-Term Debt and Capital Lease Obligations 522.4 404.1
Other Liabilities and Credits
Deferred income taxes 41.0 49.5
Deferred income 20.0 18.1
Other liabilities 72.7 81.4
133.7 149.0
Commitments
Shareholders' Equity
Preferred stock, $1 par value
Authorized: 5,000,000 shares - -
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1995 - 16,718,684 shares
1996 - 17,223,281 shares 16.7 17.2
Capital in excess of par value 155.4 166.8
Treasury stock, at cost: 1995 - 3,153,608 shares
1996 - 2,748,550 shares (71.8) (62.6)
Deferred compensation (3.6) (2.7)
Retained earnings 115.8 153.8
212.5 272.5
Total Liabilities and Shareholders' Equity $1,313.4 $1,311.4
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
<CAPTION>
Year Ended December 31
(In Millions except Per share Amounts) 1994 1995 1996
<S> <C> <C> <C>
Operating Revenues
Passenger $1,170.2 $1,258.2 $1,427.7
Freight and mail 91.5 95.2 93.9
Other - net 53.9 64.1 70.6
Total Operating Revenues 1,315.6 1,417.5 1,592.2
Operating Expenses
Wages and benefits 401.7 427.8 477.0
Aircraft fuel 152.3 181.2 234.2
Aircraft maintenance 68.3 79.2 98.7
Aircraft rent 168.5 172.1 181.2
Commissions 91.9 93.1 101.5
Depreciation and amortization 56.6 68.3 67.5
Loss (gain) on sale of assets 1.0 0.2 (9.1)
Landing fees and other rentals 59.0 57.7 62.4
Other 242.3 262.2 289.8
Total Operating Expenses 1,241.6 1,341.8 1,503.2
Operating Income 74.0 75.7 89.0
Other Income (Expense)
Interest income 7.8 10.4 11.1
Interest expense (47.0) (51.5) (38.4)
Interest capitalized 0.4 0.2 1.0
Other - net 5.8 (0.8) 1.6
(33.0) (41.7) (24.7)
Income before income tax 41.0 34.0 64.3
Income tax expense 18.5 16.7 26.3
Net Income $22.5 $17.3 $38.0
Primary Earnings Per Share $1.68 $1.28 $2.65
Fully Diluted Earnings Per Share $1.62 $1.26 $2.05
Shares used for computation:
Primary 13.4 13.5 14.3
Fully diluted 19.6 20.8 22.5
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
<CAPTION>
Capital in Treasury Deferred
Common Excess of Stock Compen- Retained
(In Millions) Stock Par Value at Cost sation Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $16.5 $152.0 $(71.8) $(5.8) $75.9 $166.8
1994 net income 22.6 22.6
Stock issued under stock plans 0.1 0.8 0.9
Employee Stock Ownership Plan
shares allocated 1.0 1.0
Balances at December 31, 1994 16.6 152.8 (71.8) (4.8) 98.5 191.3
1995 net income 17.3 17.3
Stock issued under stock plans 0.1 2.6 2.7
Employee Stock Ownership Plan
shares allocated 1.2 1.2
Balances at December 31, 1995 16.7 155.4 (71.8) (3.6) 115.8 212.5
1996 net income 38.0 38.0
Stock issued under stock plans 0.5 9.7 10.2
Treasury stock purchase
(4,466 shares) (0.1) (0.1)
Treasury stock sold
(409,524 shares) 1.7 9.3 11.0
Employee Stock Ownership Plan
shares allocated 0.9 0.9
Balances at December 31, 1996 $17.2 $166.8 $(62.6) $(2.7) $153.8 $272.5
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
<CAPTION>
Year Ended December 31 (In Millions) 1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $22.5 $17.3 $38.0
Adjustments to reconcile net income to cash:
Depreciation and amortization 56.6 68.3 67.5
Amortization of airframe and engine overhauls 21.0 24.3 34.6
Loss (gain) on disposition of assets and debt retirement (1.1) 1.9 (9.1)
Increase in deferred income taxes 7.6 12.4 8.5
Decrease (increase) in accounts receivable 5.2 (18.5) 18.8
Decrease (increase) in other current assets 0.1 (17.2) (13.9)
Increase in air traffic liability 15.1 1.0 38.6
Increase in other current liabilities 27.7 15.5 36.9
Other-net (10.6) 20.5 3.0
Net cash provided by operating activities 144.1 125.5 222.9
Cash flows from investing activities:
Proceeds from disposition of assets 6.5 3.8 58.1
Purchases of marketable securities (76.1) (169.4) (53.5)
Sales and maturities of marketable securities 56.8 153.5 110.4
Flight equipment deposits returned 5.5 10.8 1.1
Additions to flight equipment deposits (1.1) (0.5) (60.5)
Additions to property and equipment (187.5) (102.8) (209.3)
Restricted deposits and other (4.8) 3.9 0.5
Net cash used in investing activities (200.7) (100.7) (153.2)
Cash flows from financing activities:
Proceeds from short-term borrowings 25.0 69.9 47.0
Repayment of short-term borrowings (20.0) (29.0) (65.9)
Proceeds from sale and leaseback transactions - 56.0 85.6
Proceeds from issuance of long-term debt 104.0 128.8 -
Long-term debt and capital lease payments (70.9) (237.4) (133.9)
Proceeds from issuance of common stock 0.8 2.8 10.2
Proceeds from sale of treasury stock - - 10.9
Gain (loss) on debt retirement 2.1 (1.7) -
Net cash provided by (used in) financing activities 41.0 (10.6) (46.1)
Net increase (decrease) in cash and cash equivalents (15.6) 14.2 23.6
Cash and cash equivalents at beginning of year 27.2 11.6 25.8
Cash and cash equivalents at end of year $11.6 $25.8 $49.4
Supplemental disclosure of cash paid during the year for:
Interest (net of amount capitalized) $44.8 $52.6 $43.5
Income taxes 2.2 5.0 20.6
Noncash investing and financing activities:
1994 - Capital lease obligations of $57.9 million were incurred due to changes in lease agreements.
1995 and 1996 - None
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 1996
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. 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 1996 presentation.
Alaska and Horizon operate as airlines. However, each airline's business
plan, competition and economic risks differ substantially due to the
passenger capacity and range of aircraft operated. Alaska is a major
airline serving Alaska, the West Coast, Mexico and Eastern Russia. It
operates an all jet fleet and its average passenger trip is 833 miles.
Horizon is a regional airline serving the Pacific Northwest, Northern
California and Western Canada. It operates both jet and turboprop
aircraft, and its average passenger trip is 231 miles. See Note 9 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. The Company reduces its cash on hand 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 $14.3
million and $12.5 million at December 31, 1995 and 1996, respectively.
Inventories and Supplies
Expendable and repairable aircraft parts, as well as other materials and
supplies, are stated at average cost. An allowance for obsolescence is
accrued on a straight-line basis over the estimated useful lives of the
aircraft. Inventories related to the retired B727 fleet and other surplus
items are carried at their net realizable value. The allowance at December
31, 1995 and 1996 for all inventories was $13.5 million and $16.1 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. The Company periodically reviews long-lived assets for
impairment.
Capitalized Interest
Interest is capitalized on flight equipment purchase deposits and ground
facilities progress payments as a cost of the related asset and is
depreciated over the estimated useful life of the asset. 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, 1995 and 1996 was $19.1 million
and $21.1 million, respectively.
Deferred Income
Deferred income results from the sale and leaseback of aircraft, the
receipt of manufacturer or vendor credits, and from the sale of foreign tax
benefits. This income is recognized over the term of the applicable
agreements.
Passenger Revenues
Passenger revenues are considered earned at the time service is provided.
Tickets sold but not yet used are reported as air traffic liability.
Frequent Flyer Awards
Alaska operates a frequent flyer award program that provides travel awards
to members based on accumulated mileage. The estimated incremental cost of
providing free travel is recognized as an expense and accrued as a
liability as miles are accumulated. Alaska also defers recognition of
income on a portion of the payments it receives from travel partners
associated with its frequent flyer program. The frequent flyer liability
is relieved as travel awards are issued.
Advertising
The costs of advertising are expensed the first time the advertising takes
place. Advertising expense was $13.0 million, $15.2 million, and $15.6
million, respectively, in 1994, 1995 and 1996.
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.
Earnings Per Share
Primary earnings per share is calculated by dividing net income 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).
Stock Options
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for stock options. See Note 6 for more information.
Derivative Financial Instruments
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 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.
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):
1995 1996
Cost:
U.S. govt securities $102.8 $48.4
Other 6.5 4.0
$109.3 $52.4
Fair value:
U.S. govt securities $103.1 $48.2
Other 6.6 4.0
$109.7 $52.2
There were no material unrealized holding gains or losses at December 31,
1995 or 1996.
Of the marketable securities on hand at December 31, 1996, 87% will mature
during 1997 and the remainder will mature during 1998. Based on specific
identification of securities sold, the following occurred in 1995 and 1996
(in millions):
1995 1996
Proceeds from sales $153.5 $110.4
Gross realized gains .3 .3
Gross realized losses .5 .1
Realized gains and losses are reported as a component of interest income.
Note 3. Other Assets
Other assets consisted of the following at December 31 (in millions):
1995 1996
Restricted deposits $64.2 $64.6
Leasehold rights 11.2 8.4
Deferred costs and other 22.0 13.2
$97.4 $86.2
Leasehold rights and deferred costs are amortized over the term of the
related lease or contract.
Note 4. Long-term Debt and Capital Lease Obligations
At December 31, 1995 and 1996, long-term debt and capital lease
obligations were as follows (in millions):
1995 1996
7.5%* notes payable due
through 2009 $335.1 $214.1
6-1/2% convertible senior
debentures due 2005 132.3 132.3
7-3/4% convertible subordinated
debentures due 2006-2010 10.8 --
6-7/8% convertible subordinated
debentures due 2004-2014 54.0 54.0
Long-term debt 532.2 400.4
Capital lease obligations 29.9 27.8
Less current portion (39.7) (24.1)
$522.4 $404.1
* weighted average for 1996
At December 31, 1996, borrowings of $214.1 million are secured by flight
equipment and real property. The 6-1/2% and 6-7/8% debentures are
convertible into common stock at $21.50 and $33.60 per share, respectively,
subject to adjustments in certain events.
At December 31, 1996, Alaska had a $125 million credit facility with
commercial banks. Advances under this facility may be for up to a maximum
maturity of four years. Borrowings may be used for aircraft acquisitions
or other corporate purposes, and they bear interest at a rate which varies
based on LIBOR.
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, 1996, the Company was in compliance with all
loan provisions, and under the most restrictive loan provisions, Alaska had
$79.2 million of net worth above the minimum.
At December 31, 1996, long-term debt principal payments for the next five
years were (in millions):
1997 $21.9
1998 $22.9
1999 $22.8
2000 $53.9
2001 $44.2
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, $201.9 million and $214.7 million,
in 1994, 1995 and 1996, respectively. Future minimum lease payments under
long-term operating leases and capital leases as of December 31, 1996 are
shown below (in millions):
Operating Leases Capital
Aircraft Facilities Leases
1997 $ 169.5 $14.9 $4.1
1998 155.2 14.5 4.1
1999 144.3 14.4 4.1
2000 135.1 12.7 4.1
2001 119.7 8.5 4.1
Thereafter 655.8 32.6 11.0
Total lease payments $1,379.6 $97.6 31.5
Less amount representing interest (3.7)
Present value of capital lease payments $27.8
Aircraft Commitments
The Company has firm orders for 13 B737-400s to be delivered between 1997
and 1999, two MD-83s to be delivered in 1997 and 25 Dash 8-200s to be
delivered in 1997 and 1998. The total amount of these commitments is
approximately $925 million. As of December 31, 1996, deposits related to
the future equipment deliveries were $73.0 million. In addition to the
ordered aircraft, the Company holds purchase options on 12 B737-400s and 45
Dash 8-200s.
Note 6. Stock Plans
Air Group has three stock option plans, which provide for the purchase of
Air Group common stock at a stipulated price on the date of grant by
certain officers and key employees of Air Group and its subsidiaries.
Under the 1984 Plan, options for 564,300 shares were granted. Under the
1988 Plan, options for 1,717,900 shares were granted. Under the 1996 Plan,
options for 275,100 shares have been granted and, at December 31, 1996,
394,900 shares were available for grant. Under all plans, the incentive
and nonqualified stock options granted have terms of up to approximately
ten years. Grantees are 25% vested after one year, 50% after two years,
75% after three years and 100% after four years.
Air Group follows APB Opinion 25 and related Interpretations in accounting
for stock options. Accordingly, no compensation cost has been recognized
for these plans. Had compensation cost for the Company's stock options
been determined in accordance with Financial Accounting Standard 123, net
income and earnings per share (EPS) would have been reduced to the pro
forma amounts indicated below. The reductions in future years are likely
to be larger than shown below because options vest over four years and new
grants are typically made each year.
1995 1996
Net income (in millions):
As reported $17.3 $38.0
Pro forma 17.1 37.4
Primary EPS:
As reported $1.28 $2.65
Pro forma 1.26 2.61
Fully diluted EPS:
As reported $1.26 $2.05
Pro forma 1.25 2.03
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used
for grants in 1995 and 1996, respectively: dividend yield of 0% and 0%;
volatility of 37% and 36%; risk-free interest rates of 6.46% and 6.33%; and
expected lives of 5 and 5 years. Using these assumptions, the weighted
average fair value of options granted was $6.69 and $9.58 in 1995 and 1996,
respectively.
Changes in the number of shares subject to option, with their weighted
average exercise prices, are summarized below:
Shares Price
Outstanding, Dec. 31, 1993 861,362 $17.06
Granted 330,200 16.53
Exercised (58,469) 13.65
Canceled (88,950) 17.40
Outstanding, Dec. 31, 1994 1,044,143 $17.15
Granted 425,500 15.37
Exercised (165,005) 16.11
Canceled (143,050) 17.80
Outstanding, Dec. 31, 1995 1,161,588 $16.56
Granted 379,900 22.51
Exercised (504,138) 17.05
Canceled (45,525) 17.13
Outstanding, Dec. 31, 1996 991,825 $18.57
At December 31, 1996, the outstanding options had weighted average exercise
prices ranging from $14.63 to $24.25, and a weighted average remaining
contractual life of 8.1 years.
The number of shares exercisable at year-end with their weighted average
exercise prices, are summarized below:
Shares Price
December 31, 1994 644,843 $17.37
December 31, 1995 596,338 17.24
December 31, 1996 243,675 16.70
In addition, 1,863,593 shares of common stock are subject to
nontransferable investment options held by management employees. The
Company received $2.5 million for these options, which is included with
other accrued liabilities on the Balance Sheet. These options are subject
to mandatory redemption at $2.5 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
plans are funded as required by the Employee Retirement Income Security Act
of 1974 (ERISA).
The defined benefit plan assets are primarily common stocks and fixed
income securities. Plan assets exceeded the accumulated benefit obligation
at December 31, 1995 and 1996. The following table sets forth the funded
status of the plans at December 31, 1995 and 1996 (in millions):
1995 1996
Benefit obligation -
Vested $155.8 $180.9
Nonvested 22.0 22.1
Accumulated benefit
obligation $177.8 $203.0
Plan assets at fair value $184.4 $223.7
Projected benefit obligation 199.9 230.7
Plan assets less projected
benefit obligation (15.5) (7.0)
Unrecognized transition asset (1.1) (.8)
Unrecognized prior service cost 2.8 2.6
Unrecognized loss 32.6 32.6
Prepaid pension cost $18.8 $ 27.4
The weighted average discount rate used to determine the projected benefit
obligation was 7.5% and 7.5% as of December 31, 1995 and 1996,
respectively. The calculation assumed a weighted average rate of increase
for future compensation levels of 5.1% and 5.1% for 1995 and 1996,
respectively. The expected long-term rate of return on plan assets used in
1995 and 1996 was 10%.
Net pension expense for the defined benefit plans included the following
components for 1994, 1995 and 1996 (in millions):
1994 1995 1996
Service cost (benefits earned
during the period) $ 12.4 $ 11.4 $15.9
Interest cost on projected
benefit obligation 11.9 12.9 15.4
Actual return on assets (2.1) (37.0) (23.6)
Net amortization
and deferral (10.9) 23.3 6.5
Net pension expense $ 11.3 $ 10.6 $14.2
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, 1995 and 1996.
Total expense for all pension plans was $22.5 million, $22.2 million and
$26.5 million, respectively, in 1994, 1995 and 1996.
Profit Sharing Plans
Alaska and Horizon have employee profit sharing plans. Profit sharing
expense for 1994, 1995 and 1996 was $3.6 million, $-0- and $0.9 million,
respectively.
Other Postretirement Benefits
The Company allows retirees to continue their medical, dental and vision
benefits by paying the 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. The accrued
postretirement benefit obligation (APBO) for this subsidy at December 31,
1995 and 1996 was $12.1 million and $13.5 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
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):
1995 1996
Excess of tax over book
depreciation $140.6 $146.7
Training expense 1.5 .8
Other - net 5.8 1.2
Gross deferred tax liabilities 147.9 148.7
Loss carryforward (42.1) (17.8)
Alternative minimum tax (29.3) (44.1)
Capital leases (3.1) (4.5)
Ticket pricing adjustments (1.2) (1.0)
Frequent flyer program (6.6) (6.6)
Employee benefits (9.2) (10.2)
Aircraft return provisions (16.3) (13.9)
Gain on sale of assets (2.3) (3.1)
Capitalized interest (1.6) (1.5)
Inventory obsolescence (5.8) (7.1)
Gross deferred tax assets (117.5) (109.8)
Net deferred tax liabilities $ 30.4 $ 38.9
Current deferred tax asset $ (10.6) $ (10.6)
Noncurrent deferred tax liability 41.0 49.5
Net deferred tax liabilities $ 30.4 $ 38.9
After consideration of temporary differences, taxable income for 1996 was
approximately $63 million, which was offset by net operating losses
generated in prior years. Federal loss carryforwards can be used through
year 2008.
The components of income tax expense were as follows (in millions):
1994 1995 1996
Current tax expense:
Federal $ 8.0 $ 5.0 $ 17.5
State .1 .3 .9
Total current 8.1 5.3 18.4
Deferred tax expense:
Federal 8.0 9.2 6.7
State 2.4 2.2 1.2
Total deferred 10.4 11.4 7.9
Total tax expense $18.5 $16.7 $26.3
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):
1994 1995 1996
Income before
income tax $41.0 $34.0 $64.3
Expected tax expense $14.3 $11.9 $22.5
Nondeductible expenses 2.4 3.0 2.8
State income tax 1.5 1.8 1.0
Other - net .3 -- --
Actual tax expense $18.5 $16.7 $26.3
Effective tax rate 45.1% 49.1% 40.9%
Note 9. Business Segment Information
Financial information for Alaska and Horizon follows (in millions):
1994 1995 1996
Operating revenues:
Alaska $1,061.6 $1,142.3 $1,297.3
Horizon 256.9 279.5 301.3
Operating income:
Alaska 62.9 72.3 90.0
Horizon 12.9 4.2 0.1
Total assets:
Alaska 1,245.0 1,266.5 1,247.9
Horizon 152.3 154.9 173.3
Depreciation and amortization expense:
Alaska 47.7 58.2 55.9
Horizon 8.7 9.9 11.4
Capital expenditures:
Alaska 173.1 87.9 229.9
Horizon 15.5 15.4 39.9
Note 10. Financial Instruments
The estimated fair values of the Company's financial instruments were as
follows (in millions):
December 31, 1995
Carrying Fair
Amount Value
Cash and cash equivalents $ 25.8 $ 25.8
Marketable securities 109.3 109.7
Restricted deposits 64.2 64.2
Long-term debt 532.2 521.9
December 31, 1996
Carrying Fair
Amount Value
Cash and cash equivalents $ 49.4 $ 49.4
Marketable securities 52.4 52.2
Restricted deposits 64.6 64.6
Long-term debt 400.4 421.7
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 publicly
traded long-term debt is based on quoted market prices, and the fair value
of other debt approximates carrying value.
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,
1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, 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 24, 1997
<TABLE>
VALUATION AND QUALIFYING ACCOUNTS
Alaska Air Group, Inc. Schedule II
<CAPTION>
Additions
Beginning Charged (A) Ending
(In Millions) Balance to Expense Deductions Balance
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2.6 $0.9 $(1.2) $2.3
Obsolescence allowance for
flight equipment spare parts $8.3 $4.5 $(0.7) $12.1
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $30.7 $9.1 $(14.2) $25.6
Year Ended December 31, 1995
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $2.3 $0.6 $(1.3) $1.6
Obsolescence allowance for
flight equipment spare parts $12.1 $2.7 $(1.3) $13.5
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $25.6 $7.5 $(0.6) $32.5
Year Ended December 31, 1996
(a) Reserve deducted from asset
to which it applies:
Allowance for doubtful accounts $1.6 $0.7 $(1.0) $1.3
Obsolescence allowance for
flight equipment spare parts $13.5 $3.5 $(0.9) $16.1
(b) Reserve recorded as other
long-term liabilities:
Leased aircraft return provision $32.5 $9.4 $(3.3) $38.6
(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) Articles of Incorporation of Alaska Air Group, Inc. as amended
through May 21, 1996.
3.(ii) Bylaws of Alaska Air Group, Inc., as amended through Feb. 8, 1996
(Exhibit 3.(ii) to 1995 10-K).
4.1 Amended and Restated Rights Agreement dated 8/7/96 between Alaska
Air Group, Inc. and The First National Bank of Boston, as Rights
Agent (Exhibit 2.1 to Form 8A-A filed 8/8/96).
10.1 Lease Agreement dated Feb. 1, 1979 between Alaska Airlines, Inc.
and the Alaska Industrial Development Authority (AIDA) (Exhibit 10-
15 to Registration Statement No. 2-70742).
10.2 Lease Agreement dated April 1, 1978 between Alaska Airlines, Inc.
and the AIDA (Exhibit 10-16 to Registration Statement No. 2-70742).
10.3 Management Incentive Plan (1992 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 (Exhibit 10-38 to 1984 10-K).
10.5 Alaska Air Group, Inc. 1984 Stock Option Plan, as amended through
May 7, 1992 (Registration Statement No. 33-22358).
10.6 Officers Supplementary Retirement Plan (1996 Proxy Statement).
10.7 Severance agreement between Alaska Air Group, Inc. and Raymond J.
Vecci (1995 Proxy Statement).
10.8 Alaska Air Group, Inc. 1988 Stock Option Plan, as amended through
May 19, 1992 (Registration Statement No. 33-52242).
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 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).
#10.12 Purchase Agreement dated May 15, 1991, between Horizon Air
Industries, Inc. (HAII) and Dornier Luftfahrt GmbH (DLG) for the
purchase of up to 60 Dornier 328 aircraft (Exhibit 10-19 to May 30,
1991 8-K).
#10.13 Amendment dated as of June 25, 1993 to the Purchase Agreement dated
as of May 15, 1991, between HAII and DLG for the purchase of up to
60 Dornier 328 aircraft (Exhibit 10-19a to Second Quarter 1993 10-
Q).
#10.14 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).
#10.15 Agreement dated August 28, 1996 between Horizon Air Industries,
Inc. and Bombardier for the purchase of 25 de Havilland Dash 8-200
aircraft (Exhibit 10.2 to Third Quarter 1996 10-Q).
10.16 Supplemental retirement plan arrangement between Horizon Air
Industries, Inc. and George D. Bagley (1996 Proxy Statement).
10.17 Alaska Air Group, Inc. 1996 Long-Term Incentive Equity Plan
(Registration Statement 333-09547).
*11 Computation of Earnings Per Common Share
*12 Calculation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant (Exhibit 22-01 to 1987 10-K)
*23 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
* Filed herewith.
# Confidential treatment was granted as to a portion of this document.
EXHIBIT 3.(i)
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION OF
ALASKA AIR GROUP, INC.
ALASKA AIR GROUP, INC., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
That at a meeting of the Board of Directors of Alaska Air Group, Inc.,
a resolution was duly adopted setting forth a proposed amendment to the
Restated Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that Section 4.1 of Article IV of the Company's
Articles of Incorporation be, and hereby is, amended to read as
follows, effective upon approval by the stockholders of the
corporation and upon filing and recording pursuant to the laws of
the state of Delaware:
"The total number of shares of all classes of stock
which this corporation shall have authority to issue is
55,000,000 shares, of which 5,000,000 shares shall be
preferred stock having a par value of $1 per share and
50,000,000 shares shall be common stock having a par
value of $1 per share."
That thereafter, pursuant to resolution of its Board of Directors, the
annual meeting of the stockholders of said corporation was duly called and
held on May 21, 1996, upon notice in accordance with Section 222 of the
General Corporation Law of the State of Delaware at which meeting the
necessary number of shares as required by statute were voted in favor of
the amendment.
That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporate Law of the State of Delaware.
IN WITNESS WHEREOF, said Alaska Air Group, Inc. has caused this
certificate to be signed by Steven G. Hamilton, its Vice President/Legal
and General Counsel, this 30th day of December, 1996.
Alaska Air Group, Inc.
BY __________/S/_______________
Steven G. Hamilton
Vice President/Legal & General Counsel
<TABLE>
Alaska Air Group, Inc. EXHIBIT 11
Computation of Earnings Per Common Share
(In thousands, except per share)
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
PRIMARY -
Net income $38,063 $17,255 $22,531
Average number of shares outstanding 14,241 13,471 13,367
Assumed exercise of stock options reduced
by the number of shares purchased with
the proceeds from exercise of such options 97 14 11
Average shares as adjusted 14,338 13,485 13,378
Primary earnings per common share $2.65 $1.28 $1.68
FULLY DILUTED -
Net income $38,063 $17,255 $22,531
After tax interest on convertible debt 8,081 8,952 9,252
Income applicable to common shares $46,144 $26,207 $31,783
Average number of shares outstanding 14,241 13,471 13,367
Assumed exercise of stock options 97 14 11
Assumed conversion of 6.5% debentures 6,151 3,151 0
Assumed conversion of 7.75% debentures 361 468 512
Assumed conversion of 6.875% debentures 1,608 1,608 1,678
Assumed conversion of 7.25% notes 0 2,053 4,030
Average shares as adjusted 22,458 20,765 19,598
Fully diluted earnings per common share $2.05 $1.26 $1.62
</TABLE>
* Anti-dilutive
<TABLE> EXHIBIT 12
Alaska Air Group, Inc.
Calculation of Ratio of Earnings to Fixed Charges
(In thousands, except ratios)
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Earnings:
Income (loss) before income tax
expense and accounting change $64,349 $33,983 $40,961 ($45,812) ($125,706)
Less: Capitalized interest (1,031) (208) (353) (446) (6,102)
Add:
Interest on indebtedness 38,394 51,479 46,960 37,624 43,223
Amortization of debt expense 1,224 1,100 1,368 690 643
Portion of rent under long-term
operating leases representative
of an interest factor 71,562 67,295 65,618 60,136 49,889
Earnings Available for Fixed Charges $174,498 $153,649 $154,554 $52,192 ($38,053)
Fixed Charges:
Interest 38,394 51,479 46,960 37,624 43,223
Amortization of debt expense 1,224 1,100 1,368 690 643
Portion of rent under long-term
operating leases representative
of an interest factor 71,562 67,295 65,618 60,136 49,889
Total Fixed Charges $111,180 $119,874 $113,946 $98,450 $93,755
Ratio of Earnings to Fixed Charges 1.57 1.28 1.36 0.53 (0.41)
Coverage deficiency - - - $46,258 $131,808
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated January 24, 1997 included in this Form
10-K, into the Company's previously filed Registration Statements, File
Numbers 33-22358, 33-52242, 33-33087 and 333-09547.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Seattle, Washington
February 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR
GROUP INC 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 49400
<SECURITIES> 52400
<RECEIVABLES> 71000
<ALLOWANCES> 1300
<INVENTORY> 47800
<CURRENT-ASSETS> 300200
<PP&E> 1215200
<DEPRECIATION> 351800
<TOTAL-ASSETS> 1311400
<CURRENT-LIABILITIES> 485800
<BONDS> 404100
0
0
<COMMON> 17200
<OTHER-SE> 255300
<TOTAL-LIABILITY-AND-EQUITY> 1311400
<SALES> 1592200
<TOTAL-REVENUES> 1592200
<CGS> 1503200
<TOTAL-COSTS> 1503200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38400
<INCOME-PRETAX> 64300
<INCOME-TAX> 26300
<INCOME-CONTINUING> 38000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38000
<EPS-PRIMARY> 2.65
<EPS-DILUTED> 2.05
</TABLE>
