UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7040
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes. No.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The registrant has 26,212,548 common shares, par value $1.00,
outstanding at September 30, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Air Group, Inc. (the Company or Air
Group) unaudited financial statements: (i) consolidated balance sheets as
of September 30, 1998 and December 31, 1997; (ii) consolidated statements
of income for the quarters and nine months ended September 30, 1998 and
1997; (iii) consolidated statement of shareholders' equity for the nine
months ended September 30, 1998; and, (iv) consolidated statements of cash
flows for the nine months ended September 30, 1998 and 1997. Also attached
are the accompanying notes to the Company's consolidated financial
statements that have changed significantly during the nine months ended
September 30, 1998. These statements, which should be read in conjunction
with the financial statements in the Company's annual report on Form 10-K
for the year ended December 31, 1997, include all adjustments that are, in
the opinion of management, necessary for a fair presentation of the results
for the interim periods. The adjustments made were of a normal recurring
nature.
Air Group is a holding company incorporated in Delaware in 1985. Its
principal subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Third Quarter 1998 Compared with Third Quarter 1997
The consolidated net income for the third quarter of 1998 was $45.4
million, or $1.72 per share (diluted), compared with net income of $42.2
million, or $1.96 per share in 1997. The 1998 third quarter includes an
after-tax charge of $10.1 million ($0.38 per diluted share) for settlement
of the MarkAir litigation. Consolidated operating income for the third
quarter of 1998 was $89.5 million compared to $76.3 million for 1997.
Lower fuel prices accounted for $11.2 million of the $13.2 million
improvement in operating income. Airline financial and statistical data is
shown following the Air Group financial statements. A discussion of this
data follows.
Alaska Airlines Operating income increased 14.4% to $79.3 million,
resulting in a 17.8% operating margin as compared to a 16.5% margin in
1997. Operating revenue per available seat mile (ASM) decreased 4.3% to
9.62 cents while operating expenses per ASM decreased 5.8% to 7.92 cents.
The decrease in revenue per ASM was due to a 1.2 point decrease in system
passenger load factor combined with a 2.2% decrease in system passenger
yield. The lower load factors and yields are largely due to an 11.0%
increase in capacity in 1998. Approximately half of the yield decline is
due to the Canadian market, which is still in the development stage.
Freight and mail revenues decreased 0.9% due to lower freight volumes,
resulting from increased competition in the Seattle-Anchorage market.
Other-net revenues increased 4.1% due to increased revenue from travel
partners in Alaska's frequent flyer program.
The table below shows the major operating expense elements on a cost per
ASM basis for Alaska for the third quarters of 1997 and 1998.
<TABLE>
<CAPTION>
Alaska Airlines Operating Expenses Per ASM (In Cents)
1997 1998 Change % Change
<S> <C> <C> <C> <C>
Wages and benefits 2.67 2.66 (.01) --
Employee profit sharing .16 .17 .01 6
Contracted services .26 .26 -- --
Aircraft fuel 1.18 .96 (.22) (19)
Aircraft maintenance .43 .42 (.01) (2)
Aircraft rent .90 .91 .01 1
Food and beverage service .31 .29 (.02) (7)
Commissions .72 .57 (.15) (21)
Other selling expenses .49 .44 (.05) (10)
Depreciation and amortization .35 .34 (.01) (3)
Gain on sale of assets (.01) -- .01 NM
Landing fees and other rentals .34 .34 -- --
Other .60 .56 (.04) (7)
Alaska Airlines Total 8.40 7.92 (.48) (6)
NM = Not Meaningful
</TABLE>
Alaska's lower unit costs were primarily due to lower fuel prices and lower
travel agent commission rates. Significant unit cost changes are discussed
below.
Fuel expense per ASM decreased 19%, due to a 19% decrease in the price of
fuel.
Commission expense per ASM decreased 21%, because the commission rate paid
to travel agents decreased from 10% to 8% for sales made October 1, 1997
and thereafter. As a percentage of passenger revenue, commissions expense
decreased 18%, from 7.9% to 6.5%.
Horizon Air Operating income increased 45.7% to $10.4 million. Horizon's
operating margin was 10.4% as compared to 8.2% in 1997. Operating revenue
per ASM decreased 11.8% to 19.68 cents while operating expenses per ASM
decreased 13.9% to 17.62 cents.
The decrease in revenue per ASM was due to a 13.8 % decrease in yield per
revenue passenger mile (RPM), partly offset by a 1.6 point increase in
passenger load factor. The decrease in yield per RPM is partly due to an
increase in Horizon's average trip length, as it is providing more longer-
haul nonstop service to existing city pairs with F-28 jets.
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon for the third quarters of 1997 and 1998.
<TABLE>
<CAPTION>
Horizon Air Operating Expenses Per ASM (In Cents)
1997 1998 Change % Change
<S> <C> <C> <C> <C>
Wages and benefits 6.33 5.57 (.76) (12)
Employee profit sharing .16 .42 .26 163
Contracted services .44 .50 .06 14
Aircraft fuel 2.08 1.64 (.44) (21)
Aircraft maintenance 3.23 2.06 (1.17) (36)
Aircraft rent 2.35 2.07 (.28) (12)
Food and beverage service .12 .14 .02 17
Commissions 1.29 .97 (.32) (25)
Other selling expenses 1.18 1.07 (.11) (9)
Depreciation and amortization .75 .67 (.08) (11)
Loss on sale of assets .02 .03 .01 NM
Landing fees and other rentals .93 .98 .05 5
Other 1.59 1.50 (.09) (16)
Horizon Air Total 20.47 17.62 (2.85) (14)
</TABLE>
Horizon's unit costs decreased 14%, primarily due to 21% lower fuel prices,
lower travel agency commission rates and more efficient operations that
have resulted from a simplified fleet.
Consolidated Nonoperating Income (Expense) Nonoperating expense was
significantly affected by the $16.5 million charge for settling the MarkAir
litigation (see Legal Proceedings). This charge was partly offset by $4.3
million less interest expense incurred (due to conversion of convertible
bonds in 1998) and by a $3.3 million increase in interest income earned on
higher cash balances, resulting in an $8.3 million increase in net
nonoperating expense.
Nine Months 1998 Compared with Nine Months 1997
The consolidated net income for the nine months ended September 30, 1998
was $97.4 million, or $3.79 per share (diluted), compared with net income
of $57.3 million, or $2.80 per share in 1997. Consolidated operating
income for the first nine months of 1998 was $174.6 million compared to
$111.8 million for 1997. Lower fuel prices, adjusted for profit sharing,
accounted for $41.8 million of the $62.8 million improvement in operating
income. A discussion of operating results for the two airlines follows.
Alaska Airlines Operating income increased 45.0% to $159.4 million,
resulting in a 13.4% operating margin as compared to a 10.0% margin in
1997. Operating revenue per ASM remained even at 9.47 cents while
operating expenses per ASM decreased 3.7% to 8.21 cents. A 1.3% increase
in system passenger yield was offset by a 0.4 point decrease in the system
passenger load factor.
Unit costs decreased 3.7% due to lower fuel prices and commission rates,
partly offset by higher maintenance and profit sharing costs.
Horizon Air Operating income increased 519% to $16.1 million, resulting in
a 6.2% operating margin as compared to a 1.1% margin in 1997. Operating
revenue per ASM decreased 8.3% to 19.47 cents, while operating expenses per
ASM decreased 13.1% to 18.26 cents. The changes in unit revenue and unit
expense are due to the same reasons stated above in the third quarter
comparison.
Consolidated Nonoperating Income (Expense) Net nonoperating items improved
$1.7 million over 1997 due to lower interest expense and higher interest
income, which were partly offset by a $16.5 million charge for a legal
settlement.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
Dec. 31, 1997 Sep. 30, 1998 Change
(In millions, except debt-to-equity and per share amounts)
<S> <C> <C> <C>
Cash and marketable securities $212.7 $407.3 $194.6
Working capital (deficit) (48.7) 60.7 109.4
Long-term debt and
capital lease obligations 401.4 181.1 (220.3)
Shareholders' equity 475.3 761.8 286.5
Book value per common share $26.00 $29.06 $3.06
Debt-to-equity 46%:54% 19%:81% NA
</TABLE>
The Company's cash and marketable securities portfolio increased by $195
million during the first nine months of 1998. Operating activities
provided $303 million of cash during this period. Additional cash was
provided by the sale and leaseback of nine B737-400 aircraft and seven Dash
8-200 aircraft ($345 million) and the return of $22 million of equipment
deposits. Cash was used for $445 million of capital expenditures,
including the purchase of nine new B737-400 aircraft, eight new Dash 8-200
aircraft, flight equipment deposits and airframe and engine overhauls and
the repayment of debt ($35 million).
Shareholders' equity increased $287 million due to the conversion of $186
million of convertible bonds into common stock, net income of $97 million
and issuance of $6 million of common stock under stock plans.
Commitments During May 1998, Alaska ordered one Boeing 737-400 and two
Boeing 737-700 aircraft to be delivered in 1999, and three more B737-700s
to be delivered in 2000. At September 30, 1998, the Company had firm
orders for 37 aircraft with a total cost of approximately $896 million as
set forth below.
<TABLE>
<CAPTION>
Delivery Period - Firm Orders
Aircraft 1998 1999 2000 2001 2002 2003-05 Total
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing B737-400 -- 3 -- -- -- -- 3
Boeing B737-700 -- 5 5 -- -- -- 10
Boeing B737-900 -- -- -- 5 5 -- 10
de Havilland Dash 8-200 3 1 3 -- -- 7 14
Total 3 9 8 5 5 7 37
Cost (Millions) $3 $261 $185 $175 $175 $70 $896
</TABLE>
Year 2000 Computer Issue The Company uses a significant number of computer
software programs and embedded operating systems that were not originally
designed to process dates beyond 1999. The Company has implemented a
project to ensure that the Company's systems will function properly in the
year 2000 and thereafter. The Company anticipates completing this project
for substantially all key systems in early 1999 and believes that, with
modifications to its existing software and systems and/or conversions to
new software, the year 2000 issue will not pose significant operational
problems. Most of the Company's information technology projects in the
last several years have made the affected systems Year 2000 compliant. The
direct costs of projects solely intended to correct year 2000 problems are
currently estimated at less than $2 million. Additional systems currently
under review may require further resources. The Company does not expect
any cost increases to have a material effect on its results of operations.
The Company is also in contact with its significant suppliers and vendors
with which its systems interface and exchange data or upon which its
business depends. These efforts are designed to minimize the extent to
which its business will be vulnerable to their failure to remediate their
own year 2000 issues. The Company's business is also dependent upon
certain governmental organizations or entities such as the Federal Aviation
Administration (FAA) that provide essential aviation industry
infrastructure. The Company is working with the Airline Transport
Association to monitor the FAA's progress in making its systems year 2000
compliant. There can be no assurance that such third parties on which the
Company's business relies will successfully remediate their systems on a
timely basis. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of its
systems or those operated by other parties to operate properly beyond 1999.
Areas that could be adversely affected include flight operations,
maintenance, planning, reservations, sales, accounting and the frequent
flyer program. The Company already has in place certain disaster
contingency plans anticipating the potential loss of essential services
such as electricity and financial accounting systems. The Company will
leverage its Year 2000 contingency planning off these existing plans. In
addition, the Company is developing and executing additional contingency
plans designed to allow continued operation in the event of failure of
third party systems or products.
New Accounting Standards During June 1998, the Financial Accounting
Standards Board issued FAS 133, Accounting for Derivative Instruments and
Hedging Activities The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Due to the Company's
minimal use of derivatives, the new standard is expected to have no
material impact on its financial position or results of operations. FAS
133 will be effective for the Company's fiscal year beginning January 1,
2000.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In July 1998, the Company announced that it had reached an agreement in
principle with the trustee for creditors of the defunct MarkAir, Inc.
regarding a breach of contract lawsuit. Subsequently, a formal settlement
agreement was approved by the bankruptcy court. The $16.5 million
settlement resulted in an after-tax charge of $10.1 million ($0.38 per
diluted share) in the third quarter of 1998.
ITEM 5. Other Information
During the first quarter of 1998, Alaska's mechanics, inspectors, cleaners,
janitors and fleet service employees voted to be represented by the
Aircraft Mechanics Fraternal Association (AMFA) rather than the
International Association of Machinists (IAM). The negotiation of an
initial contract began in July 1998. The IAM will continue to represent
Alaska's stock clerks and ramp service employees, whose contract became
amendable August 31, 1997. Alaska and the IAM are continuing negotiations
of a new contract with the assistance of a federal mediator.
During the second quarter of 1998, Horizon and the Transport Workers Union
of America signed a new three-year contract covering approximately 400
mechanics and related classifications. Horizon and the International
Brotherhood of Teamsters are continuing negotiations of an initial contract
covering approximately 500 pilots.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial data schedule.
(b) No reports on Form 8-K were filed during the third quarter of 1998.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALASKA AIR GROUP, INC.
Registrant
Date: October 28, 1998
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Finance
(Principal Financial Officer)
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
<CAPTION>
ASSETS
December 31, September 30,
(In Millions) 1997 1998
<S> <C> <C>
Current Assets
Cash and cash equivalents $102.6 $192.4
Marketable securities 110.1 214.9
Receivables - net 72.6 90.7
Inventories and supplies 47.2 48.2
Prepaid expenses and other assets 92.1 88.8
Total Current Assets 424.6 635.0
Property and Equipment
Flight equipment 950.1 995.0
Other property and equipment 258.5 284.0
Deposits for future flight equipment 108.9 111.0
1,317.5 1,390.0
Less accumulated depreciation and amortization 373.8 416.5
943.7 973.5
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 27.5 29.1
16.9 15.3
Total Property and Equipment - Net 960.6 988.8
Intangible Assets - Subsidiaries 59.6 58.0
Other Assets 88.3 84.1
Total Assets $1,533.1 $1,765.9
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, September 30,
(In Millions) 1997 1998
<S> <C> <C>
Current Liabilities
Accounts payable $73.9 $83.7
Accrued aircraft rent 60.7 64.9
Accrued wages, vacation and payroll taxes 70.1 77.7
Other accrued liabilities 73.5 126.6
Air traffic liability 166.4 193.8
Current portion of long-term debt and
capital lease obligations 28.7 27.6
Total Current Liabilities 473.3 574.3
Long-Term Debt and Capital Lease Obligations 401.4 181.1
Other Liabilities and Credits
Deferred income taxes 72.3 107.4
Deferred income 19.5 40.8
Other liabilities 91.3 100.5
183.1 248.7
Shareholders' Equity
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1997 - 21,030,762 shares
1998 - 28,962,650 shares 21.0 29.0
Capital in excess of par value 292.5 473.4
Treasury stock, at cost: 1997 - 2,748,030 shares
1998 - 2,750,102 shares (62.6) (62.7)
Deferred compensation (1.8) (1.5)
Retained earnings 226.2 323.6
475.3 761.8
Total Liabilities and Shareholders' Equity $1,533.1 $1,765.9
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
<CAPTION>
Three Months Ended September 30
(In Millions except Per share Amounts) 1997 1998
<S> <C> <C>
Operating Revenues
Passenger $457.2 $495.6
Freight and mail 26.0 25.5
Other - net 18.0 18.3
Total Operating Revenues 501.2 539.4
Operating Expenses
Wages and benefits 143.1 161.0
Contracted services 12.7 14.0
Aircraft fuel 57.3 52.5
Aircraft maintenance 30.1 29.8
Aircraft rent 46.6 52.4
Food and beverage service 13.2 14.2
Commissions 30.7 27.2
Other selling expenses 24.8 25.7
Depreciation and amortization 17.3 19.0
Loss (gain) on sale of assets (0.4) 0.3
Landing fees and other rentals 17.6 20.4
Other 31.9 33.4
Total Operating Expenses 424.9 449.9
Operating Income 76.3 89.5
Nonoperating Income (Expense)
Interest income 3.0 6.3
Interest expense (8.6) (4.3)
Interest capitalized 1.3 1.4
Other - net 0.5 (15.5)
(3.8) (12.1)
Income before income tax 72.5 77.4
Income tax expense 30.3 32.0
Net Income $42.2 $45.4
Basic Earnings Per Share $2.88 $1.73
Diluted Earnings Per Share $1.96 $1.72
Shares used for computation:
Basic 14.671 26.209
Diluted 22.558 26.423
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
<CAPTION>
Nine Months Ended September 30
(In Millions Except Per Share Amounts) 1997 1998
<S> <C> <C>
Operating Revenues
Passenger $1,191.9 $1,313.5
Freight and mail 70.7 72.0
Other - net 54.0 55.2
Total Operating Revenues 1,316.6 1,440.7
Operating Expenses
Wages and benefits 398.5 447.2
Contracted services 35.5 41.9
Aircraft fuel 174.8 145.5
Aircraft maintenance 82.1 92.4
Aircraft rent 136.2 147.9
Food and beverage service 36.2 38.3
Commissions 82.6 74.5
Other selling expenses 65.1 70.4
Depreciation and amortization 50.7 55.1
Loss (gain) on sale of assets (0.9) 0.5
Landing fees and other rentals 50.3 56.7
Other 93.7 95.7
Total Operating Expenses 1,204.8 1,266.1
Operating Income 111.8 174.6
Nonoperating Income (Expense)
Interest income 7.0 15.5
Interest expense (25.6) (17.2)
Interest capitalized 3.6 4.8
Other - net 2.1 (14.3)
(12.9) (11.2)
Income before income tax 98.9 163.4
Income tax expense 41.6 66.0
Net Income $57.3 $97.4
Basic Earnings Per Share $3.93 $4.34
Diluted Earnings Per Share $2.80 $3.79
Shares used for computation:
Basic 14.580 22.436
Diluted 22.462 26.400
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
<CAPTION>
Common Capital in Treasury Deferred
Shares Common Excess of Stock Compen- Retained
(In Millions) Outstanding Stock Par Value at Cost sation Earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 18.283 $21.0 $292.5 $(62.6) $(1.8) $226.2 $475.3
Net income for the nine months
ended September 30, 1998 97.4 97.4
Stock issued under stock plans 0.185 0.3 5.9 6.2
Stock issued for convertible
subordinated debentures 7.747 7.7 175.0 182.7
Treasury stock purchase (0.002) (0.1) (0.1)
Employee Stock Ownership Plan
shares allocated 0.3 0.3
Balances at September 30, 1998 26.213 $29.0 $473.4 $(62.7) $(1.5) $323.6 $761.8
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
<CAPTION>
Nine Months Ended September 30 (In Millions) 1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $57.3 $97.4
Adjustments to reconcile net income to cash:
Depreciation and amortization 50.7 55.1
Amortization of airframe and engine overhauls 26.3 30.0
Loss (gain) on sale of assets (0.9) 0.5
Increase in deferred income taxes 34.6 35.1
Increase in accounts receivable (18.4) (18.1)
Decrease in other current assets 20.0 2.3
Increase in air traffic liability 21.0 27.4
Increase in other current liabilities 43.4 74.7
Other-net (6.8) (1.5)
Net cash provided by operating activities 227.2 302.9
Cash flows from investing activities:
Proceeds from sale of assets 2.5 0.6
Purchases of marketable securities (236.2) (158.9)
Sales and maturities of marketable securities 195.2 54.1
Flight equipment deposits returned 7.9 22.3
Additions to flight equipment deposits (47.0) (117.4)
Additions to property and equipment (269.8) (327.7)
Restricted deposits and other (0.7) (1.4)
Net cash used in investing activities (348.1) (528.4)
Cash flows from financing activities:
Proceeds from short-term borrowings 56.4 -
Repayment of short-term borrowings (103.4) -
Proceeds from sale and leaseback transactions 199.4 344.5
Proceeds from issuance of long-term debt 28.0 -
Long-term debt and capital lease payments (15.8) (35.4)
Proceeds from issuance of common stock 5.6 6.2
Net cash provided by financing activities 170.2 315.3
Net increase in cash and cash equivalents 49.3 89.8
Cash and cash equivalents at beginning of period 49.4 102.6
Cash and cash equivalents at end of period $98.7 $192.4
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $19.7 $14.3
Income taxes 1.5 28.1
Noncash investing and financing activities:
1997 - None
1998 - $186.0 million of convertible debentures were converted into 7.7 million
shares of common stock.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Alaska Air Group, Inc.
Note 1. Commitments (See Note 5 to Consolidated Financial Statements at
December 31, 1997)
During the first nine months of 1998, Alaska's lease commitments
increased approximately $414 million due to the sale and leaseback of
nine B737-400 aircraft under 18-year operating leases. During the first
nine months of 1998, Horizon's lease commitments increased approximately
$95 million due to the sale and leaseback of seven Dash 8-200 aircraft
under 15-year operating leases.
Note 2. Earnings per Share (See Note 9 to Consolidated Financial
Statements at December 31, 1997)
Earnings per share (EPS) calculations were as follows (in millions
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Sep. 30 Nine Months Ended Sep. 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income $42.2 $45.4 $57.3 $97.4
Avg. shares outstanding 14.671 26.209 14.580 22.436
Basic earnings per share $2.88 $1.73 $3.93 $4.34
Net income $42.2 $45.4 $57.3 $97.4
After-tax interest on:
6-1/2% debentures 1.3 -- 4.0 2.2
6-7/8% debentures 0.6 -- 1.7 0.4
Diluted EPS income $44.1 $45.4 $63.0 $100.0
Avg. shares outstanding 14.671 26.209 14.580 22.436
Assumed conversion of:
6-1/2% debentures 6.151 -- 6.151 3.399
6-7/8% debentures 1.608 -- 1.608 .342
Assumed exercise of
stock options .128 .214 .123 .223
Diluted EPS shares 22.558 26.423 22.462 26.400
Diluted earnings per share $1.96 $1.72 $2.80 $3.79
</TABLE>
Convertible debentures and stock options only enter the diluted EPS
calculation when their individual effect is dilutive.
<PAGE>
Note 3. Operating Segment Information (See Note 11 to Consolidated
Financial Statements at December 31, 1997)
Operating segment information for Alaska Airlines, Inc. (Alaska) and
Horizon Air Industries, Inc. (Horizon) was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Sep. 30 Nine Months Ended Sep. 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Operating revenues:
Alaska $420.3 $446.5 $1,097.9 $1,193.6
Horizon 84.9 97.7 227.3 258.7
Elimination of
intercompany revenues (4.0) (4.8) (8.6) (11.6)
Consolidated 501.2 539.4 1,316.6 1,440.7
Pretax income (loss):
Alaska 67.6 66.9 103.7 151.7
Horizon 7.2 10.4 2.7 16.5
Air Group (2.3) 0.1 (7.5) (4.8)
Consolidated 72.5 77.4 98.9 97.4
Total assets at end of period:
Alaska 1,366.6 1,596.2 1,366.6 1,596.2
Horizon 156.0 178.5 156.0 178.5
Air Group 596.0 763.1 596.0 763.1
Elimination of
intercompany accounts (667.9) (771.9) (667.9) (771.9)
Consolidated 1,450.7 1,765.9 1,450.7 1,765.9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alaska Airlines Financial and Statistical Data
Quarter Ended September 30 Nine Months Ended September 30
Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $380.5 $406.2 6.8 $984.0 $1,076.9 9.4
Freight and mail 22.9 22.7 (0.9) 62.3 63.9 2.6
Other - net 16.9 17.6 4.1 51.6 52.8 2.3
Total Operating Revenues 420.3 446.5 6.2 1,097.9 1,193.6 8.7
Operating Expenses:
Wages and benefits 111.8 123.3 10.3 317.7 351.1 10.5
Employee profit sharing 6.7 8.0 19.4 9.7 16.0 64.9
Contracted services 11.0 12.1 10.0 30.9 36.9 19.4
Aircraft fuel 49.4 44.4 (10.1) 150.4 123.2 (18.1)
Aircraft maintenance 17.8 19.6 10.1 48.8 60.3 23.6
Aircraft rent 37.7 42.1 11.7 110.2 117.7 6.8
Food and beverage service 12.7 13.5 6.3 34.9 36.6 4.9
Commissions 30.1 26.5 (12.0) 77.9 71.9 (7.7)
Other selling expenses 20.3 20.4 0.5 52.2 56.3 7.9
Depreciation and amortization 14.4 15.6 8.3 42.1 46.0 9.3
Loss (gain) on sale of assets (0.4) 0.1 NM (0.3) 0.3 NM
Landing fees and other rentals 14.1 15.9 12.8 40.4 44.6 10.4
Other 25.4 25.7 1.2 73.1 73.3 0.3
Total Operating Expenses 351.0 367.2 4.6 988.0 1,034.2 4.7
Operating Income 69.3 79.3 14.4 109.9 159.4 45.0
Interest income 3.3 6.5 8.4 16.4
Interest expense (6.4) (4.3) (19.1) (13.5)
Interest capitalized 0.8 1.0 2.4 3.6
Other - net 0.6 (15.6) 2.1 (14.2)
(1.7) (12.4) (6.2) (7.7)
Income Before Income Tax $67.6 $66.9 $103.7 $151.7
Operating Statistics:
Revenue passengers (000) 3,441 3,661 6.4 9,325 9,845 5.6
RPMs (000,000) 2,933 3,200 9.1 7,896 8,535 8.1
ASMs (000,000) 4,179 4,639 11.0 11,589 12,603 8.8
Passenger load factor 70.2% 69.0% (1.2)pts 68.1% 67.7% (0.4)pts
Breakeven load factor 56.6% 57.3% 0.7 pts 60.5% 58.0% (2.5)pts
Yield per passenger mile 12.97c 12.69c (2.2) 12.46c 12.62c 1.3
Operating revenue per ASM 10.06c 9.62c (4.3) 9.47c 9.47c (0.0)
Operating expenses per ASM 8.40c 7.92c (5.8) 8.53c 8.21c (3.7)
Fuel cost per gallon 66.9c 54.2c (19.0) 72.8c 55.2c (24.2)
Fuel gallons (000,000) 73.9 81.9 10.8 206.4 223.1 8.1
Average number of employees 8,534 9,015 5.6 8,240 8,669 5.2
Aircraft utilization (block hours) 11.9 11.8 (0.8) 11.5 11.6 0.9
Operating fleet at period-end 78 85 9.0 78 85 9.0
NM = Not Meaningful
c = cents
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Horizon Air Financial and Statistical Data
Quarter Ended September 30 Nine Months Ended September 30
Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $81.0 $93.5 15.4 $216.8 $246.8 13.8
Freight and mail 3.0 2.8 (6.7) 8.5 8.1 (4.7)
Other - net 0.9 1.4 55.6 2.0 3.8 90.0
Total Operating Revenues 84.9 97.7 15.1 227.3 258.7 13.8
Operating Expenses:
Wages and benefits 24.1 27.6 14.5 70.5 77.0 9.2
Employee profit sharing 0.6 2.1 250.0 0.6 3.1 416.7
Contracted services 1.7 2.5 47.1 4.6 6.5 41.3
Aircraft fuel 7.9 8.1 2.5 24.4 22.3 (8.6)
Aircraft maintenance 12.3 10.2 (17.1) 33.3 32.1 (3.6)
Aircraft rent 8.9 10.1 13.5 26.0 30.3 16.5
Food and beverage service 0.5 0.6 20.0 1.4 1.7 21.4
Commissions 4.9 4.8 (2.0) 13.7 12.9 (5.8)
Other selling expenses 4.5 5.3 17.8 12.9 14.2 10.1
Depreciation and amortization 2.9 3.4 17.2 8.5 8.9 4.7
Loss (gain) on sale of assets 0.1 0.2 NM (0.6) 0.1 NM
Landing fees and other rentals 3.5 4.7 34.3 10.0 12.4 24.0
Other 6.0 7.9 31.7 19.4 21.1 8.8
Total Operating Expenses 77.9 87.5 12.3 224.7 242.6 8.0
Operating Income 7.0 10.2 45.7 2.6 16.1 519.2
Interest income 0.1 0.0 0.1 0.0
Interest expense (0.4) (0.2) (1.5) (1.0)
Interest capitalized 0.4 0.4 1.2 1.2
Other - net 0.1 0.0 0.3 0.2
0.2 0.2 0.1 0.4
Income Before Income Tax $7.2 $10.4 $2.7 $16.5
Operating Statistics:
Revenue passengers (000) 1,010 1,221 20.9 2,747 3,203 16.6
RPMs (000,000) 246 329 33.8 658 832 26.4
ASMs (000,000) 380 496 30.4 1,070 1,329 24.2
Passenger load factor 64.7% 66.3% 1.6 pts 61.5% 62.6% 1.1 pts
Breakeven load factor 58.3% 58.1% (0.2)pts 60.9% 58.0% (2.9)pts
Yield per passenger mile 32.96c 28.41c (13.8) 32.94c 29.66c (9.9)
Operating revenue per ASM 22.32c 19.68c (11.8) 21.24c 19.47c (8.3)
Operating expenses per ASM 20.47c 17.62c (13.9) 21.00c 18.26c (13.1)
Fuel cost per gallon 71.8c 56.8c (20.9) 78.0c 58.4c (25.1)
Fuel gallons (000,000) 11.0 14.3 30.0 31.3 38.1 21.7
Average number of employees 2,735 3,132 14.5 2,750 2,940 6.9
Aircraft utilization (block hours) 7.5 8.3 10.7 7.1 7.9 11.3
Operating fleet at period-end 57 58 1.8 57 58 1.8
NM = Not Meaningful
c = cents
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR
GROUP INC THIRD QUARTER 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 192400
<SECURITIES> 214900
<RECEIVABLES> 90700
<ALLOWANCES> 0
<INVENTORY> 48200
<CURRENT-ASSETS> 635000
<PP&E> 1434400
<DEPRECIATION> 445600
<TOTAL-ASSETS> 1765900
<CURRENT-LIABILITIES> 574300
<BONDS> 181100
0
0
<COMMON> 29000
<OTHER-SE> 732800
<TOTAL-LIABILITY-AND-EQUITY> 1765900
<SALES> 1440700
<TOTAL-REVENUES> 1440700
<CGS> 1266100
<TOTAL-COSTS> 1266100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17200
<INCOME-PRETAX> 163400
<INCOME-TAX> 66000
<INCOME-CONTINUING> 97400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97400
<EPS-PRIMARY> 4.34
<EPS-DILUTED> 3.79
</TABLE>
