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, 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 26,402,917 common shares, par value $1.00,
outstanding at September 30, 1999.
<PAGE>
PART I. FINANCIAL STATEMENTS
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEET (unaudited)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
(In Millions) 1998 1999
<S> <C> <C>
Current Assets
Cash and cash equivalents $29.4 $76.8
Marketable securities 277.2 170.1
Receivables - net 70.6 90.5
Inventories and supplies 44.1 54.7
Prepaid expenses and other assets 107.5 103.3
Total Current Assets 528.8 495.4
Property and Equipment
Flight equipment 1,015.4 1,255.4
Other property and equipment 283.2 331.2
Deposits for future flight equipment 164.9 219.5
1,463.5 1,806.1
Less accumulated depreciation and amortization 417.0 468.5
1,046.5 1,337.6
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 29.6 31.2
14.8 13.2
Total Property and Equipment - Net 1,061.3 1,350.8
Intangible Assets - Subsidiaries 57.5 56.0
Other Assets 84.2 75.0
Total Assets $1,731.8 $1,977.2
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEET (unaudited)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, September 30,
(In Millions) 1998 1999
<S> <C> <C>
Current Liabilities
Accounts payable $84.3 $100.4
Accrued aircraft rent 75.5 72.1
Accrued wages, vacation and payroll taxes 79.4 84.6
Other accrued liabilities 80.9 102.3
Air traffic liability 178.6 214.1
Current portion of long-term debt and
capital lease obligations 27.2 27.1
Total Current Liabilities 525.9 600.6
Long-Term Debt and Capital Lease Obligations 171.5 153.9
Other Liabilities and Credits
Deferred income taxes 99.2 153.5
Deferred income 41.5 38.4
Other liabilities 104.2 117.5
244.9 309.4
Shareholders' Equity
Common stock, $1 par value
Authorized: 100,000,000 shares
Issued: 1998 - 28,974,107 shares
1999 - 29,149,275 shares 29.0 29.1
Capital in excess of par value 473.9 479.9
Treasury stock, at cost: 1998 - 2,750,102 shares
1999 - 2,746,358 shares (62.7) (62.7)
Deferred compensation (1.3) (0.8)
Retained earnings 350.6 467.8
789.5 913.3
Total Liabilities and Shareholders' Equity $1,731.8 $1,977.2
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME (unaudited)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
Three Months Ended September 30
(In Millions except Per share Amounts) 1998 1999
<S> <C> <C>
Operating Revenues
Passenger $495.6 $545.2
Freight and mail 25.5 24.8
Other - net 18.3 19.1
Total Operating Revenues 539.4 589.1
Operating Expenses
Wages and benefits 161.0 172.5
Contracted services 14.0 16.6
Aircraft fuel 52.5 72.2
Aircraft maintenance 29.8 37.8
Aircraft rent 52.4 51.0
Food and beverage service 14.2 13.7
Commissions 27.2 29.3
Other selling expenses 25.7 27.5
Depreciation and amortization 19.0 21.3
Loss (gain) on sale of assets 0.3 0.7
Landing fees and other rentals 20.4 23.8
Other 33.4 36.4
Total Operating Expenses 449.9 502.8
Operating Income 89.5 86.3
Nonoperating Income (Expense)
Interest income 6.3 5.1
Interest expense (4.3) (3.6)
Interest capitalized 1.4 2.8
Other - net (15.5) 0.6
(12.1) 4.9
Income before income tax 77.4 91.2
Income tax expense 32.0 36.3
Net Income $45.4 $54.9
Basic Earnings Per Share $1.73 $2.08
Diluted Earnings Per Share $1.72 $2.07
Shares used for computation:
Basic 26.209 26.391
Diluted 26.423 26.527
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF INCOME (unaudited)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
Nine Months Ended September 30
(In Millions Except Per Share Amounts) 1998 1999
<S> <C> <C>
Operating Revenues
Passenger $1,313.5 $1,448.2
Freight and mail 72.0 68.9
Other - net 55.2 62.9
Total Operating Revenues 1,440.7 1,580.0
Operating Expenses
Wages and benefits 447.2 487.1
Contracted services 41.9 47.5
Aircraft fuel 145.5 174.8
Aircraft maintenance 92.4 105.9
Aircraft rent 147.9 152.7
Food and beverage service 38.3 38.9
Commissions 74.5 79.3
Other selling expenses 70.4 78.2
Depreciation and amortization 55.1 61.6
Loss on sale of assets 0.5 0.9
Landing fees and other rentals 56.7 68.1
Other 95.7 104.8
Total Operating Expenses 1,266.1 1,399.8
Operating Income 174.6 180.2
Nonoperating Income (Expense)
Interest income 15.5 14.9
Interest expense (17.2) (11.1)
Interest capitalized 4.8 7.3
Other - net (14.3) 3.4
(11.2) 14.5
Income before income tax 163.4 194.7
Income tax expense 66.0 77.5
Net Income $97.4 $117.2
Basic Earnings Per Share $4.34 $4.45
Diluted Earnings Per Share $3.79 $4.43
Shares used for computation:
Basic 22.436 26.359
Diluted 26.400 26.484
</TABLE>
See accompanying notes to consolidated financial statements.
<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 nine months
ended September 30, 1999 117.2 117.2
Stock issued under stock plans 0.179 0.1 6.0 6.1
Employee Stock Ownership Plan
shares allocated 0.5 0.5
Balances at September 30, 1999 26.403 $29.1 $479.9 $(62.7) $(0.8) $467.8 $913.3
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Alaska Air Group, Inc.
<TABLE>
<CAPTION>
Nine Months Ended September 30 (In Millions) 1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $97.4 $117.2
Adjustments to reconcile net income to cash:
Depreciation and amortization 55.1 61.6
Amortization of airframe and engine overhauls 30.0 37.8
Loss on sale of assets 0.5 0.9
Increase in deferred income taxes 35.1 54.3
Increase in accounts receivable (18.1) (19.9)
Decrease (increase) in other current assets 2.3 (6.4)
Increase in air traffic liability 27.4 35.5
Increase in other current liabilities 74.7 39.3
Other-net (1.5) 3.6
Net cash provided by operating activities 302.9 323.9
Cash flows from investing activities:
Proceeds from sale of assets 0.6 2.1
Purchases of marketable securities (158.9) (98.7)
Sales and maturities of marketable securities 54.1 205.9
Flight equipment deposits returned 22.3 8.3
Additions to flight equipment deposits (117.4) (127.5)
Additions to property and equipment (327.7) (289.2)
Restricted deposits and other (1.4) 4.4
Net cash used in investing activities (528.4) (294.7)
Cash flows from financing activities:
Proceeds from sale and leaseback transactions 344.5 29.7
Long-term debt and capital lease payments (35.4) (17.6)
Proceeds from issuance of common stock 6.2 6.1
Net cash provided by financing activities 315.3 18.2
Net increase in cash and cash equivalents 89.8 47.4
Cash and cash equivalents at beginning of period 102.6 29.4
Cash and cash equivalents at end of period $192.4 $76.8
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $14.3 $4.6
Income taxes 28.1 22.0
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY
DURING THE NINE MONTHS ENDED SEPTEMBER 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 Sep. 30 Nine Months Ended Sep. 30
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Basic
Net income $45.4 $54.9 $97.4 $117.2
Avg. shares outstanding 26.209 26.391 22.436 26.359
Basic earnings per share $1.73 $2.08 $4.34 $4.45
Diluted
Net income $45.4 $54.9 $97.4 $117.2
After-tax interest on:
6-1/2% debentures -- -- 2.2 --
6-7/8% debentures -- -- 0.4 --
Diluted EPS income $45.4 $54.9 $100.0 $117.2
Avg. shares outstanding 26.209 26.391 22.436 26.359
Assumed conversion of:
6-1/2% debentures -- -- 3.399 --
6-7/8% debentures -- -- .342 --
Assumed exercise of
stock options .214 .136 .223 .125
Diluted EPS shares 26.423 26.527 26.400 26.484
Diluted earnings per share $1.72 $2.07 $3.79 $4.43
</TABLE>
<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 Sep. 30 Nine Months Ended Sep. 30
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Operating revenues:
Alaska $446.5 $476.1 $1,193.6 $1,276.6
Horizon 97.7 117.1 258.7 315.1
Elimination of
intercompany revenues (4.8) (4.1) (11.6) (11.7)
Consolidated 539.4 589.1 1,440.7 1,580.0
Pretax income (loss):
Alaska 66.9 80.3 151.7 171.5
Horizon 10.4 10.8 16.5 24.0
Parent company 0.1 0.1 (4.8) (0.8)
Consolidated 77.4 91.2 97.4 194.7
Total assets at end of period:
Alaska 1,596.2 1,769.8 1,596.2 1,769.8
Horizon 178.5 214.1 178.5 214.1
Parent company 763.1 913.5 763.1 913.5
Elimination of
intercompany accounts (771.9) (920.2) (771.9) (920.2)
Consolidated 1,765.9 1,977.2 1,765.9 1,977.2
</TABLE>
<PAGE>
Alaska Airlines Financial and Statistical Data
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
Financial Data (in millions): 1998 1999 % Change 1998 1999 % Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $406.2 $435.6 7.2 $1,076.9 $1,157.1 7.4
Freight and mail 22.7 21.9 (3.5) 63.9 60.6 (5.2)
Other - net 17.6 18.6 5.7 52.8 58.9 11.6
Total Operating Revenues 446.5 476.1 6.6 1,193.6 1,276.6 7.0
Operating Expenses:
Wages and benefits 123.3 130.0 5.4 351.1 374.4 6.6
Employee profit sharing 8.0 7.5 (6.3) 16.0 16.1 0.6
Contracted services 12.1 14.1 16.5 36.9 40.7 10.3
Aircraft fuel 44.4 59.5 34.0 123.2 144.2 17.0
Aircraft maintenance 19.6 23.7 20.9 60.3 69.1 14.6
Aircraft rent 42.1 40.1 (4.8) 117.7 120.5 2.4
Food and beverage service 13.5 13.1 (3.0) 36.6 37.0 1.1
Commissions 26.5 26.7 0.8 71.9 73.2 1.8
Other selling expenses 20.4 21.7 6.4 56.3 61.7 9.6
Depreciation and amortization 15.6 16.9 8.3 46.0 49.3 7.2
Loss on sale of assets 0.1 0.2 NM 0.3 0.4 NM
Landing fees and other rentals 15.9 18.3 15.1 44.6 51.7 15.9
Other 25.7 28.6 11.3 73.3 80.8 10.2
Total Operating Expenses 367.2 400.4 9.0 1,034.2 1,119.1 8.2
Operating Income 79.3 75.7 (4.5) 159.4 157.5 (1.2)
Interest income 6.5 5.5 16.4 16.3
Interest expense (4.3) (3.6) (13.5) (11.1)
Interest capitalized 1.0 2.2 3.6 5.8
Other - net (15.6) 0.5 (14.2) 3.0
(12.4) 4.6 (7.7) 14.0
Income Before Income Tax $66.9 $80.3 20.0 $151.7 $171.5 13.1
Operating Statistics:
Revenue passengers (000) 3,661 3,813 4.2 9,845 10,324 4.9
RPMs (000,000) 3,200 3,265 2.0 8,535 8,943 4.8
ASMs (000,000) 4,639 4,641 0.0 12,603 13,025 3.3
Passenger load factor 69.0% 70.3% 1.3 pts 67.7% 68.7% 1.0 pts
Breakeven load factor 57.3% 56.7% (0.6)pts 58.0% 58.2% 0.2 pts
Yield per passenger mile 12.69c 13.34c 5.1 12.62c 12.94c 2.5
Operating revenue per ASM 9.62c 10.26c 6.6 9.47c 9.80c 3.5
Operating expenses per ASM 7.92c 8.63c 9.0 8.21c 8.59c 4.7
Fuel cost per gallon 54.2c 72.8c 34.3 55.2c 62.7c 13.4
Fuel gallons (000,000) 81.9 81.8 (0.1) 223.1 230.1 3.1
Average number of employees 9,015 9,419 4.5 8,669 9,183 5.9
Aircraft utilization (block hours) 11.8 11.7 (0.8) 11.6 11.3 (2.6)
Operating fleet at period-end 85 88 3.5 85 88 3.5
</TABLE>
NM = Not Meaningful
c = cents
<PAGE>
Horizon Air Financial and Statistical Data
<TABLE>
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
% %
Financial Data (in millions): 1998 1999 Change 1998 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $93.5 $112.6 20.4 $246.8 $300.4 21.7
Freight and mail 2.8 2.9 3.6 8.1 8.2 1.2
Other - net 1.4 1.6 14.3 3.8 6.5 71.1
Total Operating Revenues 97.7 117.1 19.9 258.7 315.1 21.8
Operating Expenses:
Wages and benefits 27.6 32.4 17.4 77.0 91.7 19.1
Employee profit sharing 2.1 2.5 19.0 3.1 4.9 58.1
Contracted services 2.5 3.2 28.0 6.5 8.7 33.8
Aircraft fuel 8.1 12.7 56.8 22.3 30.7 37.7
Aircraft maintenance 10.2 14.1 38.2 32.1 36.8 14.6
Aircraft rent 10.1 10.9 7.9 30.3 32.3 6.6
Food and beverage service 0.6 0.7 16.7 1.7 1.9 11.8
Commissions 4.8 5.7 18.8 12.9 15.4 19.4
Other selling expenses 5.3 5.7 7.5 14.2 16.5 16.2
Depreciation and amortization 3.4 4.3 26.5 8.9 12.2 37.1
Loss on sale of assets 0.2 0.4 NM 0.1 0.5 NM
Landing fees and other rentals 4.7 5.9 25.5 12.4 16.7 34.7
Other 7.9 8.0 1.3 21.1 23.3 10.4
Total Operating Expenses 87.5 106.5 21.7 242.6 291.6 20.2
Operating Income 10.2 10.6 3.9 16.1 23.5 46.0
Interest expense (0.2) (0.4) (1.0) (1.3)
Interest capitalized 0.4 0.6 1.2 1.6
Other - net 0.0 0.0 0.2 0.2
0.2 0.2 0.4 0.5
Income Before Income Tax $10.4 $10.8 3.8 $16.5 $24.0 45.5
Operating Statistics:
Revenue passengers (000) 1,221 1,358 11.2 3,203 3,741 16.8
RPMs (000,000) 329 388 18.0 832 1,029 23.7
ASMs (000,000) 496 583 17.6 1,329 1,633 22.9
Passenger load factor 66.3% 66.6% 0.3 pts 62.6% 63.0% 0.4 pts
Breakeven load factor 58.1% 59.4% 1.3 pts 58.0% 57.5% (0.5)pts
Yield per passenger mile 28.41c 29.01c 2.1 29.66c 29.18c (1.6)
Operating revenue per ASM 19.68c 20.09c 2.1 19.47c 19.29c (0.9)
Operating expenses per ASM 17.62c 18.27c 3.7 18.26c 17.85c (2.2)
Fuel cost per gallon 56.8c 75.2c 32.4 58.4c 64.7c 10.8
Fuel gallons (000,000) 14.3 16.8 17.5 38.1 47.4 24.4
Average number of employees 3,132 3,737 19.3 2,940 3,522 19.8
Aircraft utilization (block hours) 8.3 8.3 0.0 7.9 8.1 2.5
Operating fleet at period-end 58 62 6.9 58 62 6.9
</TABLE>
NM = Not Meaningful
c = cents
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Third Quarter 1999 Compared with Third Quarter 1998
The consolidated net income for the third quarter of 1999 was $54.9
million, or $2.07 per share (diluted), compared with a net income of $45.4
million, or $1.72 per share, in 1998. The 1998 third quarter included an
after-tax charge of $10.1 million ($0.38 per diluted share) for a
litigation settlement. Consolidated operating income for the third quarter
of 1999 was $86.3 million compared to $89.5 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 remained constant as additional flights in the Arizona and Nevada
markets were offset by no service to Russia in 1999 and some reductions in
flights in the Alaska markets. Traffic grew by 2.0%, resulting in a 1.3
point increase in passenger load factor. The Canada and Nevada markets
experienced the largest increases in load factor. Passenger yields were up
5.1%, with virtually 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 6.6% increase in
revenue per available seat mile (ASM). Consequently, passenger revenues
increased 7.2%.
Freight and mail revenues decreased 3.5%, due to lower average freight and
mail rates. Other-net revenues increased 5.7%, due to increased revenue
from travel partners in Alaska's frequent flyer program.
Expenses
Operating expenses grew by 9.0 % as a result of a 9.0% 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
5.9%. Explanations of significant year-over-year changes in the components
of operating expenses are as follows:
Wages and benefits increased 5.4% due to a 4.5% increase in the
number of employees. Employees were added in all areas to service
the 4.2% increase in passengers carried.
Contracted services increased 16% due to greater use of temporary
employees (particularly in computer systems development), higher
facility repair costs incurred, higher rates for ground handling
services and increased navigation fees in Canada and Mexico.
Fuel expense increased 34%, due to a 34% increase in the price of
fuel.
Maintenance expense increased 21%, exceeding the 2% increase in
block hours, due to increased airframe and engine overhaul expense.
Commission expense increased 1% on a 7% increase in passenger
revenue. As a percentage of passenger revenue, commission expense
decreased 5%, from 5.9% to 5.6%. In 1999, 67% of ticket sales were
made through travel agents, versus 70% in 1998.
Other selling expenses increased 6%, in line with the 7% increase in
passenger revenues.
Depreciation increased 7%, primarily due to owning six more aircraft
in 1999.
Landing fees and other rentals increased 15%, higher than the 1%
increase in landings, due to rate increases at Seattle, Portland and
several other airports.
Other expense increased 11%, primarily due to higher expenditures
for employee uniforms, recruiting, computer software, operating
supplies, utilities and building repairs.
Horizon Air
Revenues
Capacity grew by 17.6%, primarily due to added flights in the Canada,
Montana and California markets. Traffic grew by 18.0%, resulting in a 0.3
point increase in passenger load factor. Passenger yields were up 2.1%,
with virtually all major markets showing an increase over last year. The
higher yield combined with an essentially constant load factor resulted in
a 2.1% increase in revenue per available seat mile (ASM). Consequently,
passenger revenues increased 20.4%.
Expenses
Operating expenses grew by 21.7% as a result of an 17.6% increase in
capacity and a 3.7% increase in cost per ASM. Explanations of significant
year-over-year changes in the components of operating expenses are as
follows:
Wages and benefits increased 17.4% due to a 19.3% increase in the
number of employees. Employees were added in all areas to service
the 11% increase in passengers carried.
Contracted services increased 28%, higher than the 18% increase in
capacity, due to increased navigation fees in Canada, higher ground
handling and security charges and greater use of computer and other
consultants.
Fuel expense increased 57%, due to an 18% increase in fuel
consumption combined with a 32% increase in the price of fuel.
Maintenance expense increased 38%, greater than the 14% increase in
block hours flown, primarily due to higher engine repair costs.
Commission expense increased 19% in line with the 20% increase in
passenger revenue.
Depreciation and amortization expense increased 27%, primarily due
to purchase of F-28s in late 1998 and added depreciation on aircraft
spare parts and station equipment.
Landing fees and other rentals increased 26%, higher than the 18%
increase in capacity, primarily due to rent on the new Portland
operations center and rate increases at Seattle and Portland
airports.
Consolidated Nonoperating Income (Expense) The 1998 third quarter included
a $16.5 million pretax charge for a litigation settlement. Excluding this
charge, net nonoperating items were essentially the same in both periods.
Nine Months 1999 Compared with Nine Months 1998
The consolidated net income for the nine months ended September 30, 1999
was $117.2 million, or $4.43 per share (diluted), compared with net income
of $97.4 million, or $3.79 per share in 1998. The 1998 results included an
after-tax charge of $10.1 million ($0.38 per diluted share) for a
litigation settlement. Consolidated operating income for the first nine
months of 1999 was $180.2 million compared to $174.6 million for 1998. A
discussion of operating results for the two airlines follows.
Alaska Airlines Operating income decreased 1.2% to $157.5 million,
resulting in a 12.3% operating margin as compared to a 13.4% margin in
1998. Operating revenue per ASM increased 3.5% to 9.80 cents while
operating expenses per ASM increased 4.7% to 8.59 cents. The increase in
revenue per ASM was due to a 2.5% increase in system passenger yield
combined with a 1.0 point increase in load factor.
Unit costs increased 4.7% due to higher fuel prices, increased maintenance
costs, lower aircraft utilization and higher wages and benefits.
Horizon Air Operating income increased 46.0% to $23.5 million, resulting
in a 7.5% operating margin as compared to a 6.2% margin in 1998. Operating
revenue per ASM decreased 0.9% to 19.29 cents, while operating expenses per
ASM decreased 2.2% to 17.85 cents. The decrease in revenue per ASM was due
to a 1.6% decrease in system passenger yield combined with a 0.4 point
increase in load factor. The impact of higher fuel prices was more than
offset by lower unit costs for aircraft rent, maintenance and wages,
resulting in a 2.2% decrease in overall unit costs.
Consolidated Nonoperating Income (Expense) Net nonoperating items improved
$25.7 million over 1998 due to a $16.5 million litigation settlement charge
during 1998 and lower interest expense in 1999.
<PAGE>
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
Dec. 31, 1998 Sep. 30, 1999 Change
(In millions, except debt-to-equity and per share amounts)
<S> <C> <C> <C>
Cash and marketable securities $306.6 $246.9 $(59.7)
Working capital (deficit) 2.9 (105.2) (108.1)
Long-term debt and
capital lease obligations 171.5 153.9 (17.6)
Shareholders' equity 789.5 913.3 123.8
Book value per common share $ 30.11 $ 34.59 $ 4.48
Debt-to-equity 18%:82% 14%:86% NA
Debt-to-equity assuming aircraft
operating leases are capitalized
at seven times annualized rent 67%:33% 63%:37% NA
</TABLE>
The Company's cash and marketable securities portfolio decreased by $60
million during the first nine months of 1999. Operating activities
provided $324 million of cash during this period. Additional cash was
provided by the sale and leaseback of three Dash 8-200 aircraft ($30
million), flight equipment deposits returned ($8 million) and the exercise
of stock options ($6 million). Cash was used for $417 million of capital
expenditures, including the purchase of five new Boeing 737 aircraft, two
formerly leased Boeing 737s, three new Dash 8-200 aircraft, flight
equipment deposits and airframe and engine overhauls, and for $18 million
of debt repayment.
Shareholders' equity increased $124 million due to net income of $117
million and issuance of $6 million of common stock under stock plans.
Commitments At September 30, 1999, the Company had firm orders for 65
aircraft requiring aggregate payments of approximately $1.4 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 4 7 4 -- -- 15
Boeing 737-900 -- -- 5 5 -- 10
de Havilland
Dash 8-400 -- 5 10 -- -- 15
Canadair RJ 700 -- -- -- 4 21 25
Total 4 12 19 9 21 65
Payments (Millions) $85 $321 $363 $203 $439 $1,411
</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 September 30, 1999 the Company has
completed every phase, through implementation, of 98% 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 any remaining systems is scheduled to take place during
the fourth quarter of 1999. The Company 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. 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, facilities equipment, finance,
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 financial stability, (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 has completed steps (a) to (c) and
expects to complete its contingency planning during the fourth quarter 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.
PART II. OTHER INFORMATION
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 and which are new in 1999.
<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 New 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.
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.
In October 1999, a new four-year contract covering approximately 2,000
flight attendants was ratified. The contract calls for increases in wage
rates, improvements in benefits, work rule changes and scheduling
flexibility provisions. The contract is amendable in October, 2003.
In October 1999, a new three-year contract covering approximately 3,300
clerical, office and passenger service employees was ratified. The
contract calls for increases in wage rates and improvements in benefits,
including a matching component to the 401(k) plan. The contract is
amendable October 29, 2002.
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.
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.
Negotiations have taken place since then and further negotiations are
planned for the fourth quarter of 1999.
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 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: November 2, 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR
GROUP INC THIRD QUARTER 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 76800
<SECURITIES> 170100
<RECEIVABLES> 90500
<ALLOWANCES> 0
<INVENTORY> 54700
<CURRENT-ASSETS> 495400
<PP&E> 1850500
<DEPRECIATION> 499700
<TOTAL-ASSETS> 1977200
<CURRENT-LIABILITIES> 600600
<BONDS> 153900
0
0
<COMMON> 29100
<OTHER-SE> 884200
<TOTAL-LIABILITY-AND-EQUITY> 1977200
<SALES> 1580000
<TOTAL-REVENUES> 1580000
<CGS> 1399800
<TOTAL-COSTS> 1399800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11100
<INCOME-PRETAX> 194700
<INCOME-TAX> 77500
<INCOME-CONTINUING> 117200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117200
<EPS-BASIC> 4.45
<EPS-DILUTED> 4.43
</TABLE>
