<PAGE>
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, 1999.
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 26,378,292 common shares, par value $1.00, outstanding
at June 30, 1999.
1
<PAGE>
PART I. FINANCIAL STATEMENTS
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEET (UNAUDITED)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
ASSETS
- ------------------------------------------------------------------------- -----------------
December 31, JUNE 30,
(In Millions) 1998 1999
- ------------------------------------------------------------------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $29.4 $67.8
Marketable securities 277.2 253.5
Receivables - net 70.6 99.8
Inventories and supplies 44.1 50.1
Prepaid expenses and other assets 107.5 104.4
- ------------------------------------------------------------------------- -----------------
TOTAL CURRENT ASSETS 528.8 575.6
- ------------------------------------------------------------------------- -----------------
PROPERTY AND EQUIPMENT
Flight equipment 1,015.4 1,153.5
Other property and equipment 283.2 311.1
Deposits for future flight equipment 164.9 190.1
- ------------------------------------------------------------------------- -----------------
1,463.5 1,654.7
Less accumulated depreciation and amortization 417.0 450.0
- ------------------------------------------------------------------------- -----------------
1,046.5 1,204.7
- ------------------------------------------------------------------------- -----------------
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 29.6 30.7
- ------------------------------------------------------------------------- -----------------
14.8 13.7
- ------------------------------------------------------------------------- -----------------
TOTAL PROPERTY AND EQUIPMENT - NET 1,061.3 1,218.4
- ------------------------------------------------------------------------- -----------------
Intangible Assets - Subsidiaries 57.5 56.5
- ------------------------------------------------------------------------- -----------------
Other Assets 84.2 78.2
- ------------------------------------------------------------------------- -----------------
TOTAL ASSETS $1,731.8 $1,928.7
========================================================================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEET (UNAUDITED)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------- -----------------
December 31, JUNE 30,
(In Millions) 1998 1999
- ------------------------------------------------------------------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $84.3 $96.0
Accrued aircraft rent 75.5 75.4
Accrued wages, vacation and payroll taxes 79.4 71.7
Other accrued liabilities 80.9 101.6
Air traffic liability 178.6 254.2
Current portion of long-term debt and
capital lease obligations 27.2 27.0
- ------------------------------------------------------------------------- -----------------
TOTAL CURRENT LIABILITIES 525.9 625.9
- ------------------------------------------------------------------------- -----------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 171.5 160.3
- ------------------------------------------------------------------------- -----------------
OTHER LIABILITIES AND CREDITS
Deferred income taxes 99.2 132.9
Deferred income 41.5 39.4
Other liabilities 104.2 112.6
- ------------------------------------------------------------------------- -----------------
244.9 284.9
- ------------------------------------------------------------------------- -----------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value
Authorized: 100,000,000 shares
Issued: 1998 - 28,974,107 shares
1999 - 29,125,050 shares 29.0 29.1
Capital in excess of par value 473.9 479.2
Treasury stock, at cost: 1998 - 2,750,102 shares
1999 - 2,746,758 shares (62.7) (62.7)
Deferred compensation (1.3) (0.9)
Retained earnings 350.6 412.9
- ------------------------------------------------------------------------- -----------------
789.5 857.6
- ------------------------------------------------------------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,731.8 $1,928.7
========================================================================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- --------------
Three Months Ended June 30
(In Millions except Per share Amounts) 1998 1999
- ---------------------------------------------------------------------- --------------
<S> <C> <C>
OPERATING REVENUES
Passenger $439.6 $483.6
Freight and mail 25.5 23.4
Other - net 19.8 22.7
- ---------------------------------------------------------------------- --------------
TOTAL OPERATING REVENUES 484.9 529.7
- ---------------------------------------------------------------------- --------------
OPERATING EXPENSES
Wages and benefits 149.3 162.7
Contracted services 14.3 15.3
Aircraft fuel 46.9 59.7
Aircraft maintenance 33.7 32.7
Aircraft rent 48.5 50.4
Food and beverage service 12.8 12.8
Commissions 24.7 26.3
Other selling expenses 23.2 26.1
Depreciation and amortization 18.2 20.6
Loss (gain) on sale of assets 0.2 0.1
Landing fees and other rentals 19.4 22.1
Other 31.1 35.6
- ---------------------------------------------------------------------- --------------
TOTAL OPERATING EXPENSES 422.3 464.4
- ---------------------------------------------------------------------- --------------
OPERATING INCOME 62.6 65.3
- ---------------------------------------------------------------------- --------------
NONOPERATING INCOME (EXPENSE)
Interest income 5.3 5.2
Interest expense (6.1) (3.7)
Interest capitalized 1.9 2.3
Other - net 0.3 1.0
- ---------------------------------------------------------------------- --------------
1.4 4.8
- ---------------------------------------------------------------------- --------------
Income before income tax 64.0 70.1
Income tax expense 25.1 28.0
- ---------------------------------------------------------------------- --------------
NET INCOME $38.9 $42.1
====================================================================== ==============
BASIC EARNINGS PER SHARE $1.77 $1.60
====================================================================== ==============
DILUTED EARNINGS PER SHARE $1.51 $1.59
====================================================================== ==============
Shares used for computation:
Basic 21.933 26.374
Diluted 26.454 26.521
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------- --------------
Six Months Ended June 30
(In Millions Except Per Share Amounts) 1998 1999
- ---------------------------------------------------------------------- --------------
<S> <C> <C>
OPERATING REVENUES
Passenger $817.9 $903.0
Freight and mail 46.5 44.1
Other - net 36.9 43.8
- ---------------------------------------------------------------------- --------------
TOTAL OPERATING REVENUES 901.3 990.9
- ---------------------------------------------------------------------- --------------
OPERATING EXPENSES
Wages and benefits 286.2 314.6
Contracted services 27.9 30.9
Aircraft fuel 93.0 102.6
Aircraft maintenance 62.5 68.1
Aircraft rent 95.5 101.7
Food and beverage service 24.2 25.2
Commissions 47.3 50.0
Other selling expenses 44.7 50.7
Depreciation and amortization 36.1 40.3
Loss on sale of assets 0.2 0.2
Landing fees and other rentals 36.3 44.3
Other 62.3 68.4
- ---------------------------------------------------------------------- --------------
TOTAL OPERATING EXPENSES 816.2 897.0
- ---------------------------------------------------------------------- --------------
OPERATING INCOME 85.1 93.9
- ---------------------------------------------------------------------- --------------
NONOPERATING INCOME (EXPENSE)
Interest income 9.2 9.9
Interest expense (12.9) (7.5)
Interest capitalized 3.5 4.5
Other - net 1.1 2.7
- ---------------------------------------------------------------------- --------------
0.9 9.6
- ---------------------------------------------------------------------- --------------
Income before income tax 86.0 103.5
Income tax expense 34.0 41.2
- ---------------------------------------------------------------------- --------------
NET INCOME $52.0 $62.3
====================================================================== ==============
BASIC EARNINGS PER SHARE $2.53 $2.36
====================================================================== ==============
DILUTED EARNINGS PER SHARE $2.07 $2.35
====================================================================== ==============
Shares used for computation:
Basic 20.518 26.344
Diluted 26.403 26.482
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
Alaska Air Group, Inc.
<TABLE>
<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, 1998 26.224 $29.0 $473.9 $(62.7) $(1.3) $350.6 $789.5
- ----------------------------------------------------------------------------------------------------------------------------------
Net income for the six months
ended June 30, 1999 62.3 62.3
Stock issued under stock plans 0.154 0.1 5.3 5.4
Employee Stock Ownership Plan
shares allocated 0.4 0.4
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 1999 26.378 $29.1 $479.2 $(62.7) $(0.9) $412.9 $857.6
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------- -----------------
Six Months Ended June 30 (In Millions) 1998 1999
- --------------------------------------------------------------------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $52.0 $62.3
Adjustments to reconcile net income to cash:
Depreciation and amortization 36.1 40.3
Amortization of airframe and engine overhauls 19.1 24.0
Loss on disposition of assets 0.2 0.2
Increase in deferred income taxes 24.0 33.6
Increase in accounts receivable (21.6) (29.1)
Increase in other current assets - (3.0)
Increase in air traffic liability 63.9 75.6
Increase in other current liabilities 18.4 24.7
Other-net (1.6) 4.1
- --------------------------------------------------------------------------------- -----------------
Net cash provided by operating activities 190.5 232.7
- --------------------------------------------------------------------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 0.4 0.2
Purchases of marketable securities (123.1) (54.3)
Sales and maturities of marketable securities 35.8 78.1
Restricted deposits (1.1) 0.9
Flight equipment deposits returned 14.1 2.8
Additions to flight equipment deposits (67.9) (67.1)
Additions to property and equipment (237.0) (149.0)
- --------------------------------------------------------------------------------- -----------------
Net cash used in investing activities (378.8) (188.4)
- --------------------------------------------------------------------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback transactions 261.6 -
Long-term debt and capital lease payments (29.3) (11.4)
Proceeds from issuance of common stock 6.1 5.5
- --------------------------------------------------------------------------------- -----------------
Net cash provided by (used in) financing activities 238.4 (5.9)
- --------------------------------------------------------------------------------- -----------------
Net increase in cash and cash equivalents 50.1 38.4
Cash and cash equivalents at beginning of period 102.6 29.4
- --------------------------------------------------------------------------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $152.7 $67.8
================================================================================= =================
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $11.0 $3.3
Income taxes 7.2 6.5
Noncash investing and financing activities:
1998 - $186.0 million of convertible debentures were converted into 7.7
million shares of common stock.
1999 - None
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY
DURING THE SIX MONTHS ENDED JUNE 30, 1999
Alaska Air Group, Inc.
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Alaska Air Group, Inc.
(the Company or Air Group) include the accounts of its principal
subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc.
(Horizon). These statements 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, 1998. They 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.
NOTE 2. EARNINGS PER SHARE (SEE NOTE 9 TO CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 1998)
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,
1998 1999 1998 1999
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC
Net income $38.9 $42.1 $52.0 $62.3
Avg. shares outstanding 21.933 26.374 20.518 26.344
- ---------------------------------------------------------------------------------------------
Basic earnings per share $1.77 $1.60 $2.53 $2.36
=============================================================================================
DILUTED
Net income $38.9 $42.1 $52.0 $62.3
After-tax interest on:
6-1/2% debentures 0.9 -- 2.2 --
6-7/8% debentures -- -- 0.4 --
- ---------------------------------------------------------------------------------------------
Diluted EPS income $39.8 $42.1 $54.6 $62.3
- ---------------------------------------------------------------------------------------------
Avg. shares outstanding 21.933 26.374 20.518 26.344
Assumed conversion of:
6-1/2% debentures 4.263 -- 5.127 --
6-7/8% debentures -- -- .515 --
Assumed exercise of
stock options .258 .147 .243 .138
- ---------------------------------------------------------------------------------------------
Diluted EPS shares 26.454 26.521 26.403 26.482
- ---------------------------------------------------------------------------------------------
Diluted earnings per share $1.51 $1.59 $2.07 $2.35
=============================================================================================
</TABLE>
8
<PAGE>
NOTE 3. OPERATING SEGMENT INFORMATION (SEE NOTE 11 TO CONSOLIDATED FINANCIAL
STATEMENTS AT DECEMBER 31, 1998)
Operating segment information for Alaska Airlines, Inc. (Alaska) and Horizon
Air Industries, Inc.
(Horizon) was as follows in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
1998 1999 1998 1999
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Alaska $ 403.0 $ 428.7 $ 747.2 $ 800.6
Horizon 86.1 105.0 161.2 198.0
Elimination of
intercompany accounts (4.2) (4.0) (7.1) (7.7)
- --------------------------------------------------------------------------------------
Consolidated 484.9 529.7 901.3 9990.9
======================================================================================
Pretax income (loss):
Alaska 60.7 60.4 84.8 91.2
Horizon 5.6 10.2 6.1 13.2
Parent company (2.3) (0.5) (4.9) (0.9)
- --------------------------------------------------------------------------------------
Consolidated 64.0 70.1 86.0 103.5
======================================================================================
Pretax income (loss):
Alaska 1,531.2 1,733.9 1,531.2 1,733.9
Horizon 163.6 219.2 163.6 219.2
Parent company 715.9 857.6 715.9 857.6
Elimination of
intercompany accounts (723.8) (882.0) (723.8) (882.0)
- --------------------------------------------------------------------------------------
Consolidated 1,686.9 1,928.7 1,686.9 1,928.7
======================================================================================
</TABLE>
9
<PAGE>
ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
------------------------------------- -----------------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1998 1999 Change 1998 1999 Change
----- ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $360.9 $386.4 7.1 $670.7 $721.5 7.6
Freight and mail 22.8 20.8 (8.8) 41.2 38.8 (5.8)
Other - net 19.3 21.5 11.4 35.3 40.3 14.2
------------------------ ----------------------------
Total Operating Revenues 403.0 428.7 6.4 747.2 800.6 7.1
------------------------ ----------------------------
Operating Expenses:
Wages and benefits 117.1 124.6 6.4 227.8 244.4 7.3
Employee profit sharing 6.0 5.6 (6.7) 8.0 8.6 7.5
Contracted services 12.8 13.1 2.3 24.7 26.6 7.7
Aircraft fuel 39.8 49.2 23.6 78.9 84.6 7.2
Aircraft maintenance 22.4 22.5 0.4 40.7 45.4 11.5
Aircraft rent 38.3 39.9 4.2 75.5 80.4 6.5
Food and beverage service 12.2 12.2 0.0 23.1 24.0 3.9
Commissions 23.8 24.5 2.9 45.4 46.6 2.6
Other selling expenses 18.7 20.6 10.2 35.9 40.0 11.4
Depreciation and amortization 15.3 16.4 7.2 30.4 32.3 6.3
Loss on sale of assets 0.2 0.1 NM 0.2 0.2 0.0
Landing fees and other rentals 15.4 16.7 8.4 28.7 33.4 16.4
Other 23.3 27.5 18.0 47.7 52.2 9.4
------------------------ ----------------------------
Total Operating Expenses 345.3 372.9 8.0 667.0 718.7 7.8
------------------------ ----------------------------
Operating Income 57.7 55.8 (3.3) 80.2 81.9 2.1
------------------------ ----------------------------
Interest income 5.6 5.6 9.9 10.8
Interest expense (4.5) (3.6) (9.2) (7.5)
Interest capitalized 1.5 1.8 2.6 3.6
Other - net 0.4 0.8 1.3 2.4
------------------------ ----------------------------
3.0 4.6 4.6 9.3
------------------------ ----------------------------
Income Before Income Tax $60.7 $60.4 (0.5) $84.8 $91.2 7.5
======================== ============================
OPERATING STATISTICS:
Revenue passengers (000) 3,321 3,439 3.6 6,183 6,511 5.3
RPMs (000,000) 2,876 2,976 3.5 5,335 5,678 6.4
ASMs (000,000) 4,166 4,266 2.4 7,964 8,384 5.3
Passenger load factor 69.0% 69.8% 0.8 pts 67.0% 67.7% 0.7 pts
Breakeven load factor 57.0% 58.6% 1.6 pts 58.4% 59.2% 0.8 pts
Yield per passenger mile 12.55c 12.98C 3.5 12.57c 12.71C 1.1
Operating revenue per ASM 9.67c 10.05C 3.9 9.38c 9.55C 1.8
Operating expenses per ASM 8.29c 8.74C 5.4 8.38c 8.57C 2.4
Fuel cost per gallon 54.3c 65.5C 20.6 55.9c 57.1C 2.2
Fuel gallons (000,000) 73.3 75.1 2.5 141.2 148.2 5.0
Average number of employees 8,639 9,244 7.0 8,496 9,065 6.7
Aircraft utilization (block hours) 11.5 11.1 (3.5) 11.4 11.1 (2.6)
Operating fleet at period-end 84 86 2.4 84 86 2.4
</TABLE>
NM = Not Meaningful
10
<PAGE>
HORIZON AIR FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
------------------------------------ -----------------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1998 1999 Change 1998 1999 Change
----- ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $82.0 $100.4 22.4 $153.4 $187.7 22.4
Freight and mail 2.7 2.7 0.0 5.3 5.3 0.0
Other - net 1.4 1.9 35.7 2.5 5.0 100.0
------------------------ ----------------------------
Total Operating Revenues 86.1 105.0 22.0 161.2 198.0 22.8
------------------------ ----------------------------
Operating Expenses:
Wages and benefits 25.2 30.7 21.8 49.3 59.3 20.3
Employee profit sharing 1.0 1.8 80.0 1.1 2.3 109.1
Contracted services 2.3 2.9 26.1 4.0 5.5 37.5
Aircraft fuel 7.1 10.5 47.9 14.1 18.0 27.7
Aircraft maintenance 11.4 10.2 (10.5) 21.9 22.7 3.7
Aircraft rent 10.1 10.5 4.0 20.0 21.3 6.5
Food and beverage service 0.5 0.6 20.0 1.0 1.2 20.0
Commissions 4.3 5.1 18.6 8.1 9.6 18.5
Other selling expenses 4.5 5.4 20.0 8.8 10.7 21.6
Depreciation and amortization 2.9 4.0 37.9 5.6 7.8 39.3
Landing fees and other rentals 3.9 5.4 38.5 7.5 10.9 45.3
Other 7.5 7.8 4.0 14.0 15.7 12.1
------------------------ ----------------------------
Total Operating Expenses 80.7 94.9 17.6 155.4 185.0 19.0
------------------------ ----------------------------
Operating Income 5.4 10.1 87.0 5.8 13.0 124.1
------------------------ ----------------------------
Interest expense (0.3) (0.4) (0.8) (0.9)
Interest capitalized 0.4 0.5 0.8 1.0
Other - net 0.1 (0.0) 0.3 0.1
------------------------ ----------------------------
0.2 0.1 0.3 0.2
------------------------ ----------------------------
Income Before Income Tax $5.6 $10.2 82.1 $6.1 $13.2 116.4
======================== ============================
OPERATING STATISTICS:
Revenue passengers (000) 1,058 1,237 17.0 1,982 2,383 20.2
RPMs (000,000) 270 340 25.9 503 641 27.4
ASMs (000,000) 439 549 25.1 833 1,051 26.1
Passenger load factor 61.6% 62.0% 0.4 pts 60.4% 61.0% 0.6 pts
Breakeven load factor 57.1% 55.2% (1.9)pts 57.8% 56.4% (1.4)pts
Yield per passenger mile 30.33c 29.48C (2.8) 30.48c 29.28C (3.9)
Operating revenue per ASM 19.60c 19.13C (2.4) 19.34c 18.85C (2.5)
Operating expenses per ASM 18.36c 17.30C (5.8) 18.64c 17.62C (5.5)
Fuel cost per gallon 57.2c 66.4C 16.1 59.4c 59.0C (0.8)
Fuel gallons (000,000) 12.5 15.8 26.4 23.8 30.5 28.2
Average number of employees 2,906 3,524 21.3 2,844 3,415 20.1
Aircraft utilization (block hours) 7.9 8.1 2.5 7.6 7.9 3.9
Operating fleet at period-end 54 61 13.0 54 61 13.0
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED WITH SECOND QUARTER 1998
The consolidated net income for the second quarter of 1999 was $42.1 million, or
$1.59 per share (diluted), compared with a net income of $38.9 million, or $1.51
per share, in 1998. Consolidated operating income for the second quarter of 1999
was $65.3 million compared to $62.6 million for 1998. Financial and statistical
data for Alaska and Horizon is shown on pages 10 and 11. A discussion of this
data follows.
ALASKA AIRLINES
REVENUES
Capacity grew by 2.4%, primarily due to above average growth in the Southern
California, Arizona, Nevada and Canada markets. Traffic grew by 3.5%, resulting
in almost a one point increase in passenger load factor. The Mexico, Canada and
Northern Alaska markets experienced above average increases in load factor,
while the Seattle-Anchorage and Southeast Alaska markets experienced decreases.
Passenger yields were up 3.5%, with all markets showing an increase over last
year. New marketing alliances with other airlines, improved yield management
techniques and small fare increases have helped improve yields. The higher load
factor combined with the higher yield resulted in a 3.9% increase in revenue per
available seat mile (ASM). Consequently, passenger revenues increased 7.1%.
Freight and mail revenues decreased 8.8%, due to lower freight and mail volumes.
Flight cancellations and a poor fish run in Alaska contributed to the lower
freight volumes. Other-net revenues increased 11.4%, primarily due to increased
revenue from travel partners in Alaska's frequent flyer program.
EXPENSES
Operating expenses grew by 8.0 % as a result of a 2.4% increase in capacity and
a 5.4% increase in cost per ASM. The increase in cost per ASM was partly due to
higher fuel prices in 1999. Without the higher fuel prices, cost per ASM would
have increased 3.3%. Explanations of significant year-over-year changes in the
components of operating expenses are as follows:
- - Wages and benefits increased 6.4% due to a 7.0% increase in the
number of employees. Employees were added in all areas to service the
2.4% capacity (ASM) increase and the 3.6% increase in passengers
carried.
- - Fuel expense increased 24%, due to a 3% increase in fuel usage and a
21% increase in the price of fuel.
- - Maintenance expense increased less than 1%, in spite of a 2% increase
in block hours, primarily due to the timing of engine overhauls and
other repairs.
- - Commission expense increased 3% on a 7% increase in passenger
revenue. As a percentage of passenger revenue, commission expense
decreased 4%, from 6.6% to 6.3%. In 1999, 70% of ticket sales were
made through travel agents, versus 72% in 1998.
12
<PAGE>
- - Other selling expenses increased 10%, higher than the 7% increase in
passenger revenues, primarily due to increased credit card sales and
related commission rates.
- - Depreciation increased 7%, primarily due to owning four more aircraft
in 1999.
- - Landing fees and other rentals increased 8%, higher than the 2%
increase in capacity, due to rate increases at Seattle and several
other airports.
- - Other expense increased 18%, primarily due to recording a $2.7
million property tax credit in 1998. Absent this tax credit, the
increase would have been 6%.
HORIZON AIR
REVENUES
Capacity grew by 25.1%, primarily due to above average growth in the Canada,
Montana and Portland-Spokane markets. Traffic grew by 25.9%, resulting in a 0.4
point increase in passenger load factor. Longer average passenger trips
contributed to a 2.8% decrease in yield. The lower yield combined with the
higher load factor resulted in a 2.4% decrease in revenue per ASM. Consequently,
passenger revenues increased 22.4%, somewhat less than the 25.1% increase in
capacity.
Other-net revenues increased 36%, or $0.5 million, primarily due to recording
revenues related to aircraft manufacturer's support.
EXPENSES
Operating expenses grew by 17.6% as a result of an 25.1% increase in capacity
and a 5.8% decrease in cost per ASM. Explanations of significant year-over-year
changes in the components of operating expenses are as follows:
- - Wages and benefits increased 21.8% due to a 21.3% increase in the
number of employees. Employees were added in all areas to service the
17% increase in passengers carried.
- - Contracted services increased 26%, in line with the 25% increase in
capacity.
- - Fuel expense increased 48%, due to a 26% increase in fuel consumption
combined with a 16% increase in the price of fuel.
- - Maintenance expense decreased 11%, in spite of a 16% increase in
block hours flown, primarily due to unusually high engine repairs
last year.
- - Commission expense increased 19% on a 22% increase in passenger
revenue. As a percentage of passenger revenue, commission expense
decreased 2%, from 5.2% to 5.1%.
- - Other selling expenses increased 20%, in line with the 22% increase
in passenger revenues.
- - Depreciation and amortization expense increased 38%, primarily due to
purchase of F-28s in late 1998 and added depreciation on aircraft
spare parts and station equipment.
13
<PAGE>
- - Landing fees and other rentals increased 39%, higher than the 25%
increase in capacity, primarily due to rent on the new Portland
operations center and rate increases at Seattle and Portland
airports.
- - Other expense increased 4%, less than the 25% increase in capacity,
due to lower rates for insurance and communications.
CONSOLIDATED NONOPERATING INCOME (EXPENSE) Net nonoperating items improved $3.4
million over 1998, primarily due to lower interest expense (due to conversion of
convertible bonds in 1998 and other debt repayments).
SIX MONTHS 1999 COMPARED WITH SIX MONTHS 1998
The consolidated net income for the six months ended June 30, 1999 was $62.3
million, or $2.35 per share (diluted), compared with net income of $52.0
million, or $2.07 per share in 1998. Consolidated operating income for the first
six months of 1999 was $93.9 million compared to $85.1 million for 1998. A
discussion of operating results for the two airlines follows.
ALASKA AIRLINES Operating income increased 2.1% to $81.9 million, resulting in a
10.2% operating margin as compared to a 10.7% margin in 1998. Operating revenue
per ASM increased 1.8% to 9.55 cents while operating expenses per ASM increased
2.4% to 8.57 cents. The increase in revenue per ASM was due to a 1.1% increase
in system passenger yield combined with a 0.7 point increase in load factor.
Unit costs increased 2.4% due to higher fuel prices, lower aircraft utilization
and higher wages and benefits.
HORIZON AIR Operating income improved to $13.0 million, resulting in a 6.6%
operating margin as compared to a 3.6% margin in 1998. Operating revenue per ASM
decreased 2.5% to 18.85 cents, while operating expenses per ASM decreased 5.5%
to 17.62 cents. The changes in unit revenue and unit expense are generally due
to the same reasons stated above in the second quarter comparison.
CONSOLIDATED NONOPERATING INCOME (EXPENSE) Net nonoperating items improved $8.7
million over 1998 for the same reasons as noted above in the second quarter
comparison.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 JUNE 30, 1999 Change
- --------------------------------------------------------------------------------------------------------------------------------
(In millions, except debt-to-equity and per share amounts)
<S> <C> <C>
Cash and marketable securities $ 306.6 $ 321.3 $ 14.7
Working capital (deficit) 2.9 (50.3) (53.2)
Long-term debt and
capital lease obligations 171.5 160.3 (11.2)
Shareholders' equity 789.5 857.6 68.1
Book value per common share $ 30.11 $ 32.51 $ 2.40
Debt-to-equity 18%:82% 16%:84% NA
Debt-to-equity assuming aircraft
operating leases are capitalized
at seven times annualized rent 67%:33% 65%:35% NA
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's cash and marketable securities portfolio increased by $15 million
during the first six months of 1999. Operating activities provided $233 million
of cash during this period. Additional cash was provided by the exercise of
stock options ($6 million). Cash was used for $216 million of capital
expenditures, including the purchase of three new B737-400 aircraft, flight
equipment deposits and airframe and engine overhauls, and for $11 million of
debt repayment.
Shareholders' equity increased $68 million due to net income of $62 million
and issuance of $6 million of common stock under stock plans.
COMMITMENTS At June 30, 1999, the Company had firm orders for 65 aircraft
requiring aggregate payments of approximately $1.5 billion, as set forth below.
<TABLE>
<CAPTION>
DELIVERY PERIOD - FIRM ORDERS
- -----------------------------------------------------------------------------------------------
AIRCRAFT 1999 2000 2001 2002 2003-05 TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Boeing 737-700 6 7 -- -- -- 13
Boeing 737-900 -- -- 5 5 -- 10
de Havilland Dash 8-200 2 -- -- -- -- 2
de Havilland Dash 8-400 -- 5 10 -- -- 15
Canadair RJ 700 -- -- -- 4 21 25
- -----------------------------------------------------------------------------------------------
Total 8 12 15 9 21 65
===============================================================================================
Payments (Millions) $217 $286 $314 $216 $439 $1,472
===============================================================================================
</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's Y2K project comprises five phases for each
affected system: inventory, assessment, remediation, testing and
implementation. Inventory and assessment phases were completed for all
systems by first quarter 1999. As of June 30, 1999 the Company has completed
every phase, through implementation, of 94% of its mission-critical systems,
which is consistent with the industry as a whole as reported by the Air
Transport Association (ATA). Remediation, testing and implementation of all
remaining systems is scheduled to take place during the third and early
fourth quarters of 1999. The Company believes that, with modifications to its
15
<PAGE>
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. The Company does not track certain costs attributable to year
2000, such as salaries of information technology staff not dedicated entirely
to the project. 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 has received favorable Y2K readiness responses from all
of its mission-critical and 95% of its other high-priority vendors and
suppliers, and continues to follow up to ensure readiness predictions are
being met. 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 ATA and the International Air Transport Association (IATA)
to monitor the progress of FAA and airports in making their systems year 2000
compliant. In addition, the Company is independently working with certain
rural Alaska airports. 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 is building its year 2000
contingency planning on these existing plans. The Company is also developing
and executing additional contingency plans designed to allow continued
operation in the event of failure of key internal and third party systems or
products. This planning involves (a) making a list of critical operations
processes, (b) assessing the effect of their failure on safety, operations
and revenue, (c) quantifying the risk of failure of each, and (d) based on
the foregoing, developing a discrete contingency plan for each potential
failure. Where applicable, the Company will communicate its plans to airports
to maximize coordination with their own contingency planning. The Company
expects to complete its contingency planning during the third and fourth
quarters of 1999. The foregoing Year 2000 Computer Issue comments include
forward-looking statements regarding the performance of the Company. Actual
results may differ materially from these projections. Factors that could
cause results to differ include the availability of adequate resources to
complete the Company's year 2000 plan, the ability to identify and remediate
noncompliant systems, and the success of third parties in remediating their
year 2000 issues.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Air Group's annual meeting of stockholders was held on May 18, 1999.
(b) Not applicable.
(c) The 1999 Long-Term Incentive Equity Plan was approved with 22,251,139
votes for, 2,105,280 votes against, and 105,982 votes abstaining. The
authorization to increase common stock from 50 million to 100 million shares
was approved with 21,532,326 votes for, 2,849,242 votes against, and 80,833
votes abstaining. Three directors were elected with the following results:
<TABLE>
<CAPTION>
Votes Against Broker
Director Votes For or Withheld Non-Votes
-------- --------- ----------- ---------
<S> <C> <C> <C>
B. I. Mallott 23,857,965 604,436 0
P. Q. Stonesifer 23,850,245 612,156 0
R. A. Wien 23,858,022 604,379 0
</TABLE>
ITEM 5. OTHER INFORMATION
ALLIANCES WITH OTHER AIRLINES
Alaska and Horizon have announced a number of new marketing alliances with
other airlines that allow reciprocal frequent flyer mileage accrual and
redemption privileges and codesharing on certain flights. The purpose of the
alliances is to enhance Alaska's and Horizon's revenues by (a) providing our
customers more value by offering them more travel destinations and better
mileage accrual/redemption opportunities, and (b) gaining access to more
connecting traffic from other airlines. The following table shows which of
these relationships were existing as of December 31, 1998 (Existing), which
are new (New) and which are planned later in 1999 (Planned).
<TABLE>
<CAPTION>
CODESHARING-- CODESHARING--
FREQUENT ALASKA FLIGHT # OTHER AIRLINE FLIGHT #
FLYER ON FLIGHTS OPERATED ON FLIGHTS OPERATED
AGREEMENT BY OTHER AIRLINES BY ALASKA/HORIZON
--------- ----------------- -----------------
<S> <C> <C> <C>
MAJOR U.S. OR
INTERNATIONAL AIRLINES
- ----------------------
American Airlines New Planned None
British Airways Existing None None
Canadian Airlines New New New
Continental Airlines New New New
KLM Existing None Existing
Northwest Airlines Existing Existing Existing
Qantas Existing None New
TWA Existing None None
COMMUTER AIRLINES
- -----------------
American Eagle Existing* Existing None
Era Aviation Existing* Existing None
Harbor Airlines Existing* Existing None
Trans States Airlines Existing* Existing None
PenAir Existing* Existing None
Reeve Aleutian Airways Existing* Existing None
</TABLE>
* This airline does not have its own frequent flyer program. However, Alaska's
Mileage Plan members can accrue and redeem miles on this airline's route
system.
17
<PAGE>
EMPLOYEES
In June 1999, a new 42-month contract covering approximately 1,100 aircraft
maintenance technicians, technician helpers, janitors and fleet service
employees was ratified. The contract establishes enhanced rates of pay,
retirement, health and 401(k) benefits. It also provides for a union shop
and, in the event the parties cannot reach agreement on a new contract,
requires binding arbitration of certain issues including rates of pay. The
contract is amendable December 25, 2002.
Alaska and the Association of Flight Attendants are continuing negotiation of
a new labor contract covering approximately 1,900 flight attendants. Alaska
and the International Association of Machinists (IAM) are continuing
negotiation of a new contract (covering approximately 1,000 rampservice and
stock clerk employees) with the assistance of a federal mediator. Alaska and
the IAM are also continuing negotiation, with the assistance of a federal
mediator, of a new contract covering approximately 3,300 clerical, office and
passenger service employees.
During the first quarter of 1999, a federal mediator was assigned to assist
Horizon and the International Brotherhood of Teamsters in the negotiation of
an initial labor contract covering approximately 600 pilots. One week of
negotiations occurred in June 1999 and further negotiations are planned for
August 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial data schedule.
(b) The following report on Form 8-K was filed during the second quarter of
1999: (1) Agreement to acquire 15 de Havilland Dash 8 Q400 aircraft filed
on June 16, 1999
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 28, 1999
/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)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR
GROUP, INC. SECOND QUARTER 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 67,800
<SECURITIES> 253,500
<RECEIVABLES> 99,800
<ALLOWANCES> 0
<INVENTORY> 50,100
<CURRENT-ASSETS> 575,600
<PP&E> 1,699,100
<DEPRECIATION> 480,700
<TOTAL-ASSETS> 1,928,700
<CURRENT-LIABILITIES> 625,900
<BONDS> 160,300
0
0
<COMMON> 29,100
<OTHER-SE> 828,500
<TOTAL-LIABILITY-AND-EQUITY> 1,928,700
<SALES> 990,900
<TOTAL-REVENUES> 990,900
<CGS> 897,000
<TOTAL-COSTS> 897,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,500
<INCOME-PRETAX> 103,500
<INCOME-TAX> 41,200
<INCOME-CONTINUING> 62,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,300
<EPS-BASIC> 02.36
<EPS-DILUTED> 02.35
</TABLE>
