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 June 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 26,206,545 common shares, par value $1.00,
outstanding at June 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 June 30, 1998 and December 31, 1997; (ii) consolidated statements of
income for the quarters and six months ended June 30, 1998 and 1997; (iii)
consolidated statement of shareholders' equity for the six months ended
June 30, 1998; and, (iv) consolidated statements of cash flows for the six
months ended June 30, 1998 and 1997. Also attached are the accompanying
notes to the Company's consolidated financial statements that have changed
significantly during the six months ended June 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
Second Quarter 1998 Compared with Second Quarter 1997
The consolidated net income for the second quarter of 1998 was $38.9
million, or $1.51 per share (diluted), compared with net income of $20.8
million, or $1.01 per share in 1997. Consolidated operating income for the
second quarter of 1998 was $62.6 million compared to $40.9 million for
1997. Lower fuel prices, adjusted for profit sharing, accounted for $11.8
million of the $21.7 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 37.1% to $57.7 million,
resulting in a 14.3% operating margin as compared to a 11.5% margin in
1997. Operating revenue per available seat mile (ASM) increased 1.2% to
9.67 cents while operating expenses per ASM decreased 2.0% to 8.29 cents.
The increase in revenue per ASM was due to a 0.5 point improvement in
system passenger load factor combined with a 0.9% increase in system
passenger yield. The higher load factor and higher yield reflect a more
stabilized competitive environment in 1998.
Freight and mail revenues increased 4.1% due to higher freight volumes.
Other-net revenues increased 6.6% 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 second 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 2.79 2.81 .02 1
Employee profit sharing .08 .14 .06 NM
Contracted services .26 .31 .05 19
Aircraft fuel 1.23 .96 (.27) (22)
Aircraft maintenance .42 .54 .12 29
Aircraft rent .94 .92 (.02) (2)
Food and beverage service .30 .29 (.01) (3)
Commissions .66 .57 (.09) (14)
Other selling expenses .41 .45 .04 10
Depreciation and amortization .36 .37 .01 3
Landing fees and other rentals .35 .37 .02 6
Other .66 .56 (.10) (15)
Alaska Airlines Total 8.46 8.29 (.17) (2)
NM = Not Meaningful
</TABLE>
Alaska's lower unit costs were primarily due to lower fuel prices, offset
by higher maintenance and profit sharing costs. Significant unit cost
changes are discussed below.
Contracted services per ASM increased 19%, primarily due to greater use of
temporary employees (particularly in computer systems development), higher
shipping charges incurred and increased navigation fees in Canada and
Mexico.
Fuel expense per ASM decreased 22%, due to a 22% decrease in the price of
fuel.
Maintenance expense per ASM increased 29%, primarily due to a B737-400
auxiliary power unit retrofit program, increased engine repairs, higher
cost of airframe materials and a greater number of annual aircraft
inspections (C checks) performed.
Commission expense per ASM decreased 14%, 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 14%, from 7.7% to 6.6%.
Other selling expenses per ASM increased 10%, primarily due to the timing
of recording advertising expenses. On a year-to-date basis, other selling
expenses per ASM is up 5%.
Other expense per ASM decreased 15%, primarily due to a $2.7 million
recovery of California property taxes that resulted from settlement of
industry litigation.
Horizon Air Operating income improved to $5.4 million, resulting in a 6.3%
operating margin as compared to a negative 1.1% margin in 1997. Operating
revenue per ASM decreased 5.3% to 19.60 cents, while operating expenses per
ASM decreased 12.3% to 18.36 cents.
The decrease in revenue per ASM was due to a 6.9% decrease in yield per
revenue passenger mile (RPM), offset by a 1.1 point increase in passenger
load factor. The decrease in yield per RPM is partly due to 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 second 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 6.70 5.74 (.96) (14)
Employee profit sharing -- .23 .23 NM
Contracted services .39 .52 .13 33
Aircraft fuel 2.18 1.63 (.55) (25)
Aircraft maintenance 3.10 2.59 (.51) (17)
Aircraft rent 2.48 2.31 (.17) (7)
Food and beverage service .12 .13 .01 8
Commissions 1.26 .98 (.28) (22)
Other selling expenses 1.19 1.04 (.15) (13)
Depreciation and amortization .78 .65 (.13) (17)
Landing fees and other rentals .93 .91 (.02) (2)
Other 1.79 1.63 (.16) (9)
Horizon Air Total 20.92 18.36 (2.56) (12)
</TABLE>
Horizon's unit costs decreased 12%, primarily due to 23% lower fuel prices,
lower travel agency commission rates and more efficient operations that
have resulted from a simplified fleet.
Consolidated Nonoperating Income (Expense) A $3.1 million increase in
interest income earned on higher cash balances combined with less interest
expense incurred due to conversion of the 6-7/8% convertible bonds in
February 1998, resulted in a $5.8 million improvement in net nonoperating
items.
Six Months 1998 Compared with Six Months 1997
The consolidated net income for the six months ended June 30, 1998 was
$52.0 million, or $2.07 per share (diluted), compared with net income of
$15.1 million, or $0.84 per share in 1997. Consolidated operating income
for the first six months of 1998 was $85.1 million compared to $35.5
million for 1997. Lower fuel prices, adjusted for profit sharing,
accounted for $30.3 million of the $49.6 million improvement in operating
income. A discussion of operating results for the two airlines follows.
Alaska Airlines Operating income increased 97.5% to $80.2 million,
resulting in a 10.7% operating margin as compared to a 6.0% margin in 1997.
Operating revenue per ASM increased 2.6% to 9.38 cents while operating
expenses per ASM decreased 2.6% to 8.38 cents. The increase in revenue per
ASM was due to a 3.4% increase in system passenger yield while the system
passenger load factor remained constant at 67.0%.
Unit costs decreased 2.6% due to lower fuel prices, partially offset by
higher maintenance and profit sharing costs.
Horizon Air Operating income improved to $5.8 million, resulting in a 3.6%
operating margin as compared to a negative 3.2% margin in 1997. Operating
revenue per ASM decreased 6.3% to 19.34 cents, while operating expenses per
ASM decreased 12.5% to 18.64 cents. The changes in unit revenue and unit
expense are due to the same reasons stated above in the second quarter
comparison.
Consolidated Nonoperating Income (Expense) Net nonoperating items improved
$10.0 million over 1997 for the same reasons as noted above in the second
quarter comparison.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
Dec. 31, 1997 June 30, 1998 Change
(In millions, except debt-to-equity and per share amounts)
<S> <C> <C> <C>
Cash and marketable securities $212.7 $350.1 $137.4
Working capital (deficit) (48.7) 25.2 73.9
Long-term debt
and capital lease obligations 401.4 183.3 (218.1)
Shareholders' equity 475.3 716.1 240.8
Book value per common share $26.00 $27.32 $1.32
Debt-to-equity 46%:54% 20%:80% NA
</TABLE>
The Company's cash and marketable securities portfolio increased by $137
million during the first six months of 1998. Operating activities provided
$191 million of cash during this period. Additional cash was provided by
the sale and leaseback of seven B737-400 aircraft and four Dash 8-200
aircraft ($262 million) and the return of $14 million of equipment
deposits. Cash was used for $305 million of capital expenditures,
including the purchase of eight new B737-400 aircraft, four new Dash 8-200
aircraft, flight equipment deposits and airframe and engine overhauls and
the repayment of debt ($29 million).
Shareholders' equity increased $241 million due to the conversion of $186
million of convertible bonds into common stock, net income of $52 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 June 30, 1998, the Company had firm orders for
40 aircraft with a total cost of approximately $906 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 1 3 -- -- -- -- 4
Boeing B737-700 -- 5 3 -- -- -- 8
Boeing B737-900 -- -- -- 5 5 -- 10
de Havilland Dash 8-200 7 1 3 -- -- 7 18
Total 8 9 6 5 5 7 40
Cost (Millions) $102 $261 $123 $175 $175 $70 $906
</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 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. To the extent possible, the Company is developing and
executing 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. A formal settlement agreement will
be executed if the agreement is approved by the bankruptcy court. If
approved, the $16.5 million settlement is expected to result in an after-
tax charge of $10.1 million ($0.38 per diluted share) in the third quarter
of 1998.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Air Group's annual meeting of stockholders was held on May 19, 1998.
(b)Not applicable.
(c) Three directors were elected with the following results:
<TABLE>
<CAPTION>
Votes Against Broker
Director Votes For or Withheld Non-Votes
<S> <C> <C> <C>
R.F. Cosgrave 18,983,316 37,987 0
R.M. Langland 18,975,073 46,230 0
J.V. Rindlaub 18,977,686 43,617 0
</TABLE>
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. In July 1998, the Company and the IAM requested
mediation to help negotiate a new contract.
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 second 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: July 29, 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, June 30,
(In Millions) 1997 1998
<S> <C> <C>
Current Assets
Cash and cash equivalents $102.6 $152.7
Marketable securities 110.1 197.4
Receivables - net 72.6 94.2
Inventories and supplies 47.2 44.0
Prepaid expenses and other assets 92.1 95.3
Total Current Assets 424.6 583.6
Property and Equipment
Flight equipment 950.1 993.3
Other property and equipment 258.5 269.4
Deposits for future flight equipment 108.9 83.0
1,317.5 1,345.7
Less accumulated depreciation and amortization 373.8 402.5
943.7 943.2
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 27.5 28.6
16.9 15.8
Total Property and Equipment - Net 960.6 959.0
Intangible Assets - Subsidiaries 59.6 58.5
Other Assets 88.3 85.8
Total Assets $1,533.1 $1,686.9
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
(In Millions) 1997 1998
<S> <C> <C>
Current Liabilities
Accounts payable $73.9 $82.3
Accrued aircraft rent 60.7 65.2
Accrued wages, vacation and payroll taxes 70.1 64.4
Other accrued liabilities 73.5 84.7
Air traffic liability 166.4 230.3
Current portion of long-term debt and
capital lease obligations 28.7 31.5
Total Current Liabilities 473.3 558.4
Long-Term Debt and Capital Lease Obligations 401.4 183.3
Other Liabilities and Credits
Deferred income taxes 72.3 96.3
Deferred income 19.5 36.1
Other liabilities 91.3 96.7
183.1 229.1
Shareholders' Equity
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1997 - 21,030,762 shares
1998 - 28,956,725 shares 21.0 29.0
Capital in excess of par value 292.5 473.3
Treasury stock, at cost: 1997 - 2,748,030 shares
1998 - 2,750,180 shares (62.6) (62.7)
Deferred compensation (1.8) (1.7)
Retained earnings 226.2 278.2
475.3 716.1
Total Liabilities and Shareholders' Equity $1,533.1 $1,686.9
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
<CAPTION>
Three Months Ended June 30
(In Millions except Per share Amounts) 1997 1998
<S> <C> <C>
Operating Revenues
Passenger $391.7 $439.6
Freight and mail 24.7 25.5
Other - net 18.6 19.8
Total Operating Revenues 435.0 484.9
Operating Expenses
Wages and benefits 132.9 149.3
Contracted services 11.3 14.3
Aircraft fuel 54.8 46.9
Aircraft maintenance 26.8 33.7
Aircraft rent 44.7 48.5
Food and beverage service 12.0 12.8
Commissions 27.1 24.7
Other selling expenses 19.8 23.2
Depreciation and amortization 16.7 18.2
Loss on sale of assets 0.1 0.2
Landing fees and other rentals 16.8 19.4
Other 31.1 31.1
Total Operating Expenses 394.1 422.3
Operating Income 40.9 62.6
Non-operating Income (Expense)
Interest income 2.2 5.3
Interest expense (8.6) (6.1)
Interest capitalized 1.3 1.9
Other - net 0.7 0.3
(4.4) 1.4
Income before income tax 36.5 64.0
Income tax expense 15.7 25.1
Net Income $20.8 $38.9
Basic Earnings Per Share $1.43 $1.77
Diluted Earnings Per Share $1.01 $1.51
Shares used for computation:
Basic 14.576 21.933
Diluted 22.471 26.454
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
<CAPTION>
Six Months Ended June 30
(In Millions Except Per Share Amounts) 1997 1998
Operating Revenues
<S> <C> <C>
Passenger $734.6 $817.9
Freight and mail 44.8 46.5
Other - net 36.0 36.9
Total Operating Revenues 815.4 901.3
Operating Expenses
Wages and benefits 255.3 286.2
Contracted services 22.8 27.9
Aircraft fuel 117.5 93.0
Aircraft maintenance 52.0 62.5
Aircraft rent 89.6 95.5
Food and beverage service 23.0 24.2
Commissions 51.9 47.3
Other selling expenses 40.2 44.7
Depreciation and amortization 33.4 36.1
Loss (gain) on sale of assets (0.5) 0.2
Landing fees and other rentals 32.7 36.3
Other 62.0 62.3
Total Operating Expenses 779.9 816.2
Operating Income 35.5 85.1
Nonoperating Income (Expense)
Interest income 4.1 9.2
Interest expense (17.0) (12.9)
Interest capitalized 2.3 3.5
Other - net 1.5 1.1
(9.1) 0.9
Income before income tax 26.4 86.0
Income tax expense 11.3 34.0
Net Income $15.1 $52.0
Basic Earnings Per Share $1.04 $2.53
Diluted Earnings Per Share $0.84 $2.07
Shares used for computation:
Basic 14.533 20.518
Diluted 22.400 26.403
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 six months
ended June 30, 1998 52.0 52.0
Stock issued under stock plans 0.179 0.3 5.8 6.1
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 0.1 0.1
Balances at June 30, 1998 26.207 $29.0 $473.3 $(62.7) $(1.7) $278.2 $716.1
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
<CAPTION>
Six Months Ended June 30 (In Millions) 1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $15.1 $52.0
Adjustments to reconcile net income to cash:
Depreciation and amortization 33.4 36.1
Amortization of airframe and engine overhauls 17.2 19.1
Loss (gain) on disposition of assets (0.5) 0.2
Increase in deferred income taxes 11.0 24.0
Increase in accounts receivable (23.9) (21.6)
Decrease in other current assets 10.1 -
Increase in air traffic liability 55.7 63.9
Increase (decrease) in other current liabilities (1.2) 18.4
Other-net (4.6) (1.6)
Net cash provided by operating activities 112.3 190.5
Cash flows from investing activities:
Proceeds from disposition of assets 0.2 0.4
Purchases of marketable securities (22.8) (123.1)
Sales and maturities of marketable securities 28.9 35.8
Restricted deposits (1.1) (1.1)
Flight equipment deposits returned 3.3 14.1
Additions to flight equipment deposits (23.8) (67.9)
Additions to property and equipment (165.1) (237.0)
Net cash used in investing activities (180.4) (378.8)
Cash flows from financing activities:
Proceeds from short-term borrowings 56.4 -
Repayment of short-term borrowings (75.0) -
Proceeds from sale and leaseback transactions 99.1 261.6
Proceeds from issuance of long-term debt 28.0 -
Long-term debt and capital lease payments (9.5) (29.3)
Proceeds from issuance of common stock 2.0 6.1
Net cash provided by financing activities 101.0 238.4
Net increase in cash and cash equivalents 32.9 50.1
Cash and cash equivalents at beginning of period 49.4 102.6
Cash and cash equivalents at end of period $82.3 $152.7
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) $14.8 $11.0
Income taxes (refunds) (4.5) 7.2
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 SIX MONTHS ENDED JUNE 30, 1998
Alaska Air Group, Inc.
Note 1. Commitments (See Note 5 to Consolidated Financial Statements at
December 31, 1997)
During the first six months of 1998, Alaska's lease commitments
increased approximately $324 million due to the sale and leaseback of
seven B737-400 aircraft under 18-year operating leases. During the first
six months of 1998, Horizon's lease commitments increased approximately
$54 million due to the sale and leaseback of four 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 June 30 Six Months Ended June 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income $20.8 $38.9 $15.1 $52.0
Avg. shares outstanding 14.576 21.933 14.533 20.518
Basic earnings per share $1.43 $1.77 $1.04 $2.53
Net income $20.8 $38.9 $15.1 $52.0
After-tax interest on:
6-1/2% debentures 1.3 0.9 2.6 2.2
6-7/8% debentures 0.6 -- 1.2 0.4
Diluted EPS income $22.7 $39.8 $18.9 $54.6
Avg. shares outstanding 14.576 21.933 14.533 20.518
Assumed conversion of:
6-1/2% debentures 6.151 4.263 6.151 5.127
6-7/8% debentures 1.608 -- 1.608 .515
Assumed exercise of
stock options .136 .258 .116 .243
Diluted EPS shares 22.471 26.454 22.408 26.403
Diluted earnings per share $1.01 $1.51 $0.84 $2.07
</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) for the three months ended March
31 was as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Operating revenues:
Alaska $366.0 $403.0 $677.6 $747.2
Horizon 71.4 86.1 142.4 161.2
Elimination of
intercompany revenues (2.4) (4.2) (4.6) (7.1)
Consolidated 435.0 484.9 815.4 901.3
Pretax income (loss):
Alaska 39.9 60.7 36.1 84.8
Horizon (0.7) 5.6 (4.5) 6.1
Air Group (2.7) (2.3) (5.2) (4.9)
Consolidated 36.5 64.0 26.4 86.0
Total assets at end of period:
Alaska 1,326.5 1,531.2 1,326.5 1,531.2
Horizon 165.8 163.6 165.8 163.6
Air Group 537.0 715.9 537.0 715.9
Elimination of
intercompany accounts (629.0) (723.8) (629.0) (723.8)
Consolidated 1,400.3 1,686.9 1,400.3 1,686.9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Alaska Airlines Financial and Statistical Data
Quarter Ended June 30 Six Months Ended June 30
Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $326.0 $360.9 10.7 $603.5 $670.7 11.1
Freight and mail 21.9 22.8 4.1 39.3 41.2 4.8
Other - net 18.1 19.3 6.6 34.8 35.3 1.4
Total Operating Revenues 366.0 403.0 10.1 677.6 747.2 10.3
Operating Expenses:
Wages and benefits 106.7 117.1 9.7 205.9 227.8 10.6
Employee profit sharing 3.0 6.0 100.0 3.0 8.0 166.7
Contracted services 9.9 12.8 29.3 19.9 24.7 24.1
Aircraft fuel 47.3 39.8 (15.9) 101.0 78.9 (21.9)
Aircraft maintenance 16.2 22.4 38.3 31.0 40.7 31.3
Aircraft rent 36.2 38.3 5.8 72.6 75.5 4.0
Food and beverage service 11.6 12.2 5.2 22.1 23.1 4.5
Commissions 25.1 23.8 (5.2) 47.7 45.4 (4.8)
Other selling expenses 15.7 18.7 19.1 31.8 35.9 12.9
Depreciation and amortization 13.9 15.3 10.1 27.7 30.4 9.7
Loss on sale of assets 0.1 0.2 NM 0.1 0.2 NM
Landing fees and other rentals 13.6 15.4 13.2 26.3 28.7 9.1
Other 24.6 23.3 (5.3) 47.9 47.7 (0.4)
Total Operating Expenses 323.9 345.3 6.6 637.0 667.0 4.7
Operating Income 42.1 57.7 37.1 40.6 80.2 97.5
Interest income 2.7 5.6 5.1 9.9
Interest expense (6.5) (4.5) (12.7) (9.2)
Interest capitalized 0.8 1.5 1.5 2.6
Other - net 0.8 0.4 1.6 1.3
(2.2) 3.0 (4.5) 4.6
Income Before Income Tax $39.9 $60.7 $36.1 $84.8
Operating Statistics:
Revenue passengers (000) 3,114 3,321 6.6 5,884 6,183 5.1
RPMs (000,000) 2,621 2,876 9.7 4,963 5,335 7.5
ASMs (000,000) 3,829 4,166 8.8 7,410 7,964 7.5
Passenger load factor 68.5% 69.0% 0.5 pts 67.0% 67.0% 0.0 pts
Breakeven load factor 59.4% 57.0% (2.4)pts 63.0% 58.4% (4.6)pts
Yield per passenger mile 12.44c 12.55c 0.9 12.16c 12.57c 3.4
Operating revenue per ASM 9.56c 9.67c 1.2 9.14c 9.38c 2.6
Operating expenses per ASM 8.46c 8.29c (2.0) 8.60c 8.38c (2.6)
Fuel cost per gallon 69.5c 54.3c (21.9) 76.2c 55.9c (26.7)
Fuel gallons (000,000) 68.0 73.3 7.8 132.6 141.2 6.5
Average number of employees 8,265 8,639 4.5 8,093 8,496 5.0
Aircraft utilization (block hours) 11.5 11.5 0.0 11.3 11.4 0.9
Operating fleet at period-end 76 84 10.5 76 84 10.5
NM = Not Meaningful
c = cents
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Horizon Air Financial and Statistical Data
Quarter Ended June 30 Six Months Ended June 30
Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $68.0 $82.0 20.6 $135.8 $153.4 13.0
Freight and mail 2.8 2.7 (3.6) 5.4 5.3 (1.9)
Other - net 0.6 1.4 133.3 1.2 2.5 108.3
Total Operating Revenues 71.4 86.1 20.6 142.4 161.2 13.2
Operating Expenses:
Wages and benefits 23.1 25.2 9.1 46.4 49.3 6.3
Employee profit sharing 0.0 1.0 NM 0.0 1.1 NM
Contracted services 1.5 2.3 53.3 2.9 4.0 37.9
Aircraft fuel 7.5 7.1 (5.3) 16.5 14.1 (14.5)
Aircraft maintenance 10.7 11.4 6.5 21.0 21.9 4.3
Aircraft rent 8.5 10.1 18.8 17.1 20.0 17.0
Food and beverage service 0.4 0.5 25.0 0.9 1.0 11.1
Commissions 4.3 4.3 0.0 8.8 8.1 (8.0)
Other selling expenses 4.1 4.5 9.8 8.4 8.8 4.8
Depreciation and amortization 2.7 2.9 7.4 5.6 5.6 0.0
Loss (gain) on sale of assets 0.0 0.0 0.0 (0.6) 0.0 NM
Landing fees and other rentals 3.2 3.9 21.9 6.4 7.5 17.2
Other 6.2 7.5 21.0 13.5 14.0 3.7
Total Operating Expenses 72.2 80.7 11.8 146.9 155.4 5.8
Operating Income (Loss) (0.8) 5.4 NM (4.5) 5.8 NM
Interest income 0.0 0.0 0.1 0.0
Interest expense (0.5) (0.3) (1.1) (0.8)
Interest capitalized 0.5 0.4 0.8 0.8
Other - net 0.1 0.1 0.2 0.3
0.1 0.2 0.0 0.3
Income (Loss) Before Income Tax $(0.7) $5.6 $(4.5) $6.1
Operating Statistics:
Revenue passengers (000) 881 1,058 20.1 1,737 1,982 14.1
RPMs (000,000) 209 270 29.5 412 503 22.0
ASMs (000,000) 345 439 27.2 690 833 20.8
Passenger load factor 60.5% 61.6% 1.1 pts 59.8% 60.4% 0.6 pts
Breakeven load factor 61.2% 57.1% (4.1)pts 62.3% 57.8% (4.5)pts
Yield per passenger mile 32.57c 30.33c (6.9) 32.93c 30.48c (7.4)
Operating revenue per ASM 20.69c 19.60c (5.3) 20.64c 19.34c (6.3)
Operating expenses per ASM 20.92c 18.36c (12.3) 21.29c 18.64c (12.5)
Fuel cost per gallon 74.7c 57.2c (23.4) 81.3c 59.4c (27.0)
Fuel gallons (000,000) 10.1 12.5 23.8 20.3 23.8 17.2
Average number of employees 2,704 2,906 7.5 2,758 2,844 3.1
Aircraft utilization (block hours) 6.9 7.9 14.5 7.0 7.6 8.6
Operating fleet at period-end 59 54 (8.5) 59 54 (8.5)
NM = Not Meaningful
c = cents
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR
GROUP INC. SECOND QUARTER 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 152700
<SECURITIES> 197400
<RECEIVABLES> 94200
<ALLOWANCES> 0
<INVENTORY> 44000
<CURRENT-ASSETS> 583600
<PP&E> 1390100
<DEPRECIATION> 431100
<TOTAL-ASSETS> 1686900
<CURRENT-LIABILITIES> 558400
<BONDS> 183300
0
0
<COMMON> 29000
<OTHER-SE> 687100
<TOTAL-LIABILITY-AND-EQUITY> 1686900
<SALES> 901300
<TOTAL-REVENUES> 901300
<CGS> 816200
<TOTAL-COSTS> 816200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12900
<INCOME-PRETAX> 86000
<INCOME-TAX> 34000
<INCOME-CONTINUING> 52000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52000
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 2.07
</TABLE>
