<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, 2000.
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 26,444,019 common shares, par value $1.00, outstanding
at June 30, 2000.
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) 1999 2000
----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $132.5 $119.9
Marketable securities 196.5 159.7
Receivables - net 74.6 104.8
Inventories and supplies 54.3 59.7
Prepaid expenses and other assets 124.0 161.8
----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 581.9 605.9
----------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Flight equipment 1,386.6 1,493.1
Other property and equipment 337.2 371.9
Deposits for future flight equipment 217.7 241.2
----------------------------------------------------------------------------------------------
1,941.5 2,106.2
Less accumulated depreciation and amortization 486.7 517.1
----------------------------------------------------------------------------------------------
1,454.8 1,589.1
----------------------------------------------------------------------------------------------
Capital leases:
Flight and other equipment 44.4 44.4
Less accumulated amortization 31.8 32.8
----------------------------------------------------------------------------------------------
12.6 11.6
----------------------------------------------------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT - NET 1,467.4 1,600.7
----------------------------------------------------------------------------------------------
Intangible Assets - Subsidiaries 55.5 54.5
----------------------------------------------------------------------------------------------
Other Assets 75.3 36.6
----------------------------------------------------------------------------------------------
TOTAL ASSETS $2,180.1 $2,297.7
==============================================================================================
</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 Except Share Amounts) 1999 2000
----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $104.2 $115.0
Accrued aircraft rent 81.8 76.5
Accrued wages, vacation and payroll taxes 83.0 65.0
Other accrued liabilities 99.5 143.8
Air traffic liability 183.7 265.5
Current portion of long-term debt and
capital lease obligations 66.5 94.9
----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 618.7 760.7
----------------------------------------------------------------------------------------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 337.0 294.0
----------------------------------------------------------------------------------------------
OTHER LIABILITIES AND CREDITS
Deferred income taxes 144.0 105.9
Deferred income 37.4 121.4
Other liabilities 112.3 140.9
----------------------------------------------------------------------------------------------
293.7 368.2
----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value
Authorized: 100,000,000 shares
Issued: 1999 - 29,157,108 shares
2000 - 29,187,769 shares 29.2 29.2
Capital in excess of par value 480.0 480.8
Treasury stock, at cost: 1999 - 2,746,304 shares
2000 - 2,743,750 shares (62.7) (62.7)
Deferred compensation (0.6) -
Retained earnings 484.8 427.5
----------------------------------------------------------------------------------------------
930.7 874.8
----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,180.1 $2,297.7
==============================================================================================
</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) 1999 2000
----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
Passenger $483.6 $515.0
Freight and mail 23.4 23.2
Other - net 22.7 14.6
----------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 529.7 552.8
----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Wages and benefits 162.7 175.8
Contracted services 15.3 17.9
Aircraft fuel 59.7 83.1
Aircraft maintenance 32.7 45.4
Aircraft rent 50.4 46.7
Food and beverage service 12.8 13.2
Commissions 26.3 17.2
Other selling expenses 26.1 29.0
Depreciation and amortization 20.6 24.4
Loss (gain) on sale of assets 0.1 (0.4)
Landing fees and other rentals 22.1 23.9
Other 35.6 39.5
Special charge - Mileage Plan - 24.0
----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 464.4 539.7
----------------------------------------------------------------------------------------------------
OPERATING INCOME 65.3 13.1
----------------------------------------------------------------------------------------------------
NONOPERATING INCOME (EXPENSE)
Interest income 5.2 5.2
Interest expense (3.7) (7.9)
Interest capitalized 2.3 3.8
Other - net 1.0 0.6
----------------------------------------------------------------------------------------------------
4.8 1.7
----------------------------------------------------------------------------------------------------
Income before income tax 70.1 14.8
Income tax expense 28.0 6.0
----------------------------------------------------------------------------------------------------
NET INCOME $42.1 $8.8
====================================================================================================
BASIC EARNINGS PER SHARE $1.60 $0.33
====================================================================================================
DILUTED EARNINGS PER SHARE $1.59 $0.33
====================================================================================================
Shares used for computation:
Basic 26.374 26.442
Diluted 26.521 26.498
</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) 1999 2000
----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING REVENUES
Passenger $903.0 $970.1
Freight and mail 44.1 43.5
Other - net 43.8 28.9
----------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES 990.9 1,042.5
----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Wages and benefits 314.6 346.8
Contracted services 30.9 35.6
Aircraft fuel 102.6 173.2
Aircraft maintenance 68.1 85.6
Aircraft rent 101.7 93.1
Food and beverage service 25.2 26.1
Commissions 50.0 33.7
Other selling expenses 50.7 55.2
Depreciation and amortization 40.3 47.4
Loss (gain) on sale of assets 0.2 (0.5)
Landing fees and other rentals 44.3 46.3
Other 68.4 79.5
Special charge - Mileage Plan - 24.0
----------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 897.0 1,046.0
----------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 93.9 (3.5)
----------------------------------------------------------------------------------------------------
NONOPERATING INCOME (EXPENSE)
Interest income 9.9 10.4
Interest expense (7.5) (15.8)
Interest capitalized 4.5 7.2
Other - net 2.7 1.1
----------------------------------------------------------------------------------------------------
9.6 2.9
----------------------------------------------------------------------------------------------------
Income (loss) before income tax and accounting change 103.5 (0.6)
Income tax expense (credit) 41.2 (0.2)
----------------------------------------------------------------------------------------------------
Income (loss) before accounting change 62.3 (0.4)
Cumulative effect of accounting change,
net of income taxes of $35.6 million - (56.9)
----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $62.3 $(57.3)
====================================================================================================
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $2.36 $(0.02)
Cumulative effect of accounting change - (2.15)
----------------------------------------------------------------------------------------------------
Net Income (Loss) $2.36 $(2.17)
====================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $2.35 $(0.02)
Cumulative effect of accounting change - (2.15)
----------------------------------------------------------------------------------------------------
Net Income (Loss) $2.35 $(2.17)
====================================================================================================
Shares used for computation:
Basic 26.344 26.432
Diluted 26.482 26.432
</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, 1999 26.411 $29.2 $480.0 $(62.7) $(0.6) $484.8 $930.7
---------------------------------------------------------------------------------------------------------------------------------
Net loss for the six months
ended June 30, 2000 (57.3) (57.3)
Stock issued under stock plans 0.033 0.0 0.8 0.8
Employee Stock Ownership Plan
shares allocated 0.6 0.6
---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT JUNE 30, 2000 26.444 $29.2 $480.8 $(62.7) $(0.0) $427.5 $874.8
=================================================================================================================================
</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) 1999 2000
-----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $62.3 $(57.3)
Adjustments to reconcile net income (loss) to cash:
Cumulative effect of accounting change - 56.9
Special charge - Mileage Plan - 24.0
Depreciation and amortization 40.3 47.4
Amortization of airframe and engine overhauls 24.0 28.4
Loss (gain) on disposition of assets 0.2 (0.5)
Increase (decrease) in deferred income taxes 33.6 (38.1)
Increase in accounts receivable (29.1) (30.2)
Increase in other current assets (3.0) (4.9)
Increase in air traffic liability 75.6 81.8
Increase in other current liabilities 24.7 31.8
Other-net 4.1 13.1
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 232.7 152.4
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 0.2 37.7
Purchases of marketable securities (54.3) (81.3)
Sales and maturities of marketable securities 78.1 118.1
Flight equipment deposits returned 2.8 -
Additions to flight equipment deposits (67.1) (76.1)
Additions to property and equipment (149.0) (150.5)
Restricted deposits and other 0.9 0.9
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (188.4) (151.2)
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt and capital lease payments (11.4) (14.6)
Proceeds from issuance of common stock 5.5 0.8
-----------------------------------------------------------------------------------------------
Net cash used in financing activities (5.9) (13.8)
-----------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 38.4 (12.6)
Cash and cash equivalents at beginning of period 29.4 132.5
-----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $67.8 $119.9
-----------------------------------------------------------------------------------------------
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $3.3 $10.0
Income taxes 6.5 1.8
Noncash investing and financing activities None 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, 2000
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,
1999. 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. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At June 30, 2000, other current assets included $38.0 million of restricted
deposits that will be used to pay certain current liabilities. At December 31,
1999, these deposits were included with other assets. These deposits are
yen-denominated investments that are held to repay yen-denominated borrowings
that are due in the next 12 months.
NOTE 3. OTHER ACCRUED LIABILITIES
The current portion of the frequent flyer award liability, which was $40.0
million at December 31, 1999 and $57.8 million at June 30, 2000, is included
with other accrued liabilities.
NOTE 4. EARNINGS PER SHARE (SEE NOTE 9 TO CONSOLIDATED FINANCIAL
STATEMENTS AT DECEMBER 31, 1999)
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
1999 2000 1999 2000
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC
Income before accounting change $42.1 $8.8 $62.3 $(0.4)
Average shares outstanding 26.374 26.442 26.344 26.432
------------------------------------------------------------------------------------------------
EPS before accounting change $1.60 $0.33 $2.36 $(0.02)
================================================================================================
DILUTED
Income before accounting change $42.1 $8.8 $62.3 $(0.4)
Average shares outstanding 26.374 26.442 26.344 26.432
Assumed exercise of stock options .147 .056 .138 -
------------------------------------------------------------------------------------------------
Diluted EPS shares 26.521 26.498 26.482 26.432
------------------------------------------------------------------------------------------------
EPS before accounting change $1.59 $0.33 $2.35 $(0.02)
================================================================================================
</TABLE>
The exercise of stock options is excluded for the six months ended June 30,
2000 because their inclusion would be antidilutive. Had they been included,
diluted shares would have increased by 0.063 million shares.
8
<PAGE>
NOTE 5. OPERATING SEGMENT INFORMATION (SEE NOTE 11 TO CONSOLIDATED
FINANCIAL STATEMENTS AT DECEMBER 31, 1999)
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
1999 2000 1999 2000
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues:
Alaska $428.7 $444.2 $800.6 $835.7
Horizon 105.0 112.6 198.0 214.1
Elimination of
intercompany revenues (4.0) (4.0) (7.7) (7.3)
------------------------------------------------------------------------------------------------
Consolidated 529.7 552.8 990.9 1,042.5
================================================================================================
Income (loss) before income tax
and accounting change:
Alaska 60.4 9.9 91.2 (3.8)
Horizon 10.2 5.6 13.2 4.2
Air Group (0.5) (0.7) (0.9) (1.0)
------------------------------------------------------------------------------------------------
Consolidated 70.1 14.8 103.5 (0.6)
================================================================================================
Total assets at end of period:
Alaska 1,733.9 2,099.9 1,733.9 2,099.9
Horizon 219.2 248.8 219.2 248.8
Air Group 857.6 889.2 857.6 889.2
Elimination of
intercompany accounts (882.0) (940.2) (882.0) (940.2)
------------------------------------------------------------------------------------------------
Consolidated 1,928.7 2,297.7 1,928.7 2,297.7
================================================================================================
</TABLE>
NOTE 6. FREQUENT FLYER PROGRAM
(a) CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 gives specific guidance on the conditions that must be met
before revenue may be recognized, and in June 2000 Alaska changed its method
of accounting for the sale of miles in its Mileage Plan. Under the new method,
a majority of the sales proceeds is deferred, and recognized when the award
transportation is provided. The deferred proceeds are recognized as passenger
revenue for awards issued on Alaska and as other revenue-net for awards issued
on other airlines. In connection with the change, Alaska recognized a $56.9
million, net of income taxes of $35.6 million, cumulative effect charge
effective January 1, 2000. Accordingly, results for the first quarter 2000
have been restated.
(b) SPECIAL CHARGE - MILEAGE PLAN
In June 2000, Alaska recorded a $24.0 million special charge to recognize the
increased incremental cost of travel awards earned by flying on Alaska and
travel partners. The higher cost is due to an increase in the estimated costs
Alaska incurs to acquire awards on other airlines for its Mileage Plan
members, as well as lower assumed forfeiture of miles.
9
<PAGE>
(c) NON-CURRENT PORTION OF FREQUENT FLYER LIABILITY
At June 30, 2000, the non-current portion of the frequent flyer award
liability is recorded in deferred income ($77.0 million) and in other
liabilities ($37.0 million).
(d) RESTATED FIRST QUARTER 2000
The following table shows Alaska Air Group's previously reported results and
the restated results for the change in accounting principle for the sale of
miles.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1st Quarter 2000
Reported Restated
-------------------------------------------------------------------------------
(in millions, except per share)
<S> <C> <C>
Operating Revenues:
Passenger $450.6 $455.1
Freight and mail 20.3 20.3
Other-net 21.6 14.3
Total Revenues $492.5 $489.7
Loss before accounting change $(7.5) $(9.2)
Cumulative effect of accounting
change net of income tax - (56.9)
Net Loss $(7.5) $(66.1)
Basic and Diluted Loss per Share:
Loss before accounting change $(0.28) $(0.35)
Cumulative effect of accounting change - (2.15)
Net Loss $(0.28) $(2.50)
-------------------------------------------------------------------------------
</TABLE>
(e) PRO FORMA RESULTS FOR 1999
The following table shows Alaska Air Group's previously reported results and
what those results would have been on a pro forma basis if the new accounting
policy for the sale of miles had been in effect in 1999.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
---------------------- ---------------------
Reported Pro Forma Reported Pro Forma
-------------------------------------------------------------------------------
(in millions, except per share)
<S> <C> <C> <C> <C>
Operating Revenues:
Passenger $483.6 $488.7 $903.0 $912.8
Freight and mail 23.4 23.4 44.1 44.1
Other-net 22.7 14.5 43.8 28.8
Total Revenues $529.7 $526.6 $990.9 $985.7
Net Income $42.1 $40.3 $62.3 $59.3
Earnings per Share:
Basic $1.60 $1.53 $2.36 $2.25
Diluted 1.59 1.52 2.35 2.24
-------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
ALASKA AIRLINES FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
--------------------------------- ----------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1999 2000 Change 1999 2000 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $386.4 $410.0 6.1 $721.5 $770.1 6.7
Freight and mail 20.8 20.1 (3.4) 38.8 37.9 (2.3)
Other - net 21.5 14.1 (34.4) 40.3 27.7 (31.3)
---------------------- ---------------------
Total Operating Revenues 428.7 444.2 3.6 800.6 835.7 4.4
---------------------- ---------------------
Operating Expenses:
Wages and benefits 124.6 142.3 14.2 244.4 280.9 14.9
Employee profit sharing 5.6 0.0 NM 8.6 0.0 NM
Contracted services 13.1 14.9 13.7 26.6 30.1 13.2
Aircraft fuel 49.2 67.7 37.6 84.6 141.5 67.3
Aircraft maintenance 22.5 30.1 33.8 45.4 58.5 28.9
Aircraft rent 39.9 36.1 (9.5) 80.4 71.9 (10.6)
Food and beverage service 12.2 12.4 1.6 24.0 24.5 2.1
Commissions 24.5 16.7 (31.8) 46.6 32.3 (30.7)
Other selling expenses 20.6 23.4 13.6 40.0 43.8 9.5
Depreciation and amortization 16.4 19.4 18.3 32.3 38.0 17.6
Loss on sale of assets 0.1 0.4 NM 0.2 0.4 NM
Landing fees and other rentals 16.7 17.5 4.8 33.4 34.5 3.3
Other 27.5 31.1 13.1 52.2 62.1 19.0
Special charge - Mileage Plan 0.0 24.0 NM 0.0 24.0 NM
---------------------- ---------------------
Total Operating Expenses 372.9 436.0 16.9 718.7 842.5 17.2
---------------------- ---------------------
Operating Income (Loss) 55.8 8.2 (85.3) 81.9 (6.8) NM
---------------------- ---------------------
Interest income 5.6 6.3 10.8 12.4
Interest expense (3.6) (7.9) (7.5) (15.8)
Interest capitalized 1.8 3.0 3.6 5.6
Other - net 0.8 0.3 2.4 0.8
---------------------- ---------------------
4.6 1.7 9.3 3.0
---------------------- ---------------------
Income (Loss) Before Income Tax
and Accounting Change $60.4 $9.9 (83.6) $91.2 $(3.8) NM
---------------------- ---------------------
---------------------- ---------------------
OPERATING STATISTICS:
Revenue passengers (000) 3,439 3,432 (0.2) 6,511 6,600 1.4
RPMs (000,000) 2,976 3,047 2.4 5,678 5,861 3.2
ASMs (000,000) 4,266 4,210 (1.3) 8,384 8,441 0.7
Passenger load factor 69.8% 72.4% 2.6 pts 67.7% 69.4% 1.7 pts
Breakeven load factor 58.6% 66.9% 8.3 pts 59.2% 68.6% 9.4 pts
Yield per passenger mile 12.98 CENTS 13.45 CENTS 3.6 12.71 CENTS 13.14 CENTS 3.4
Operating revenue per ASM 10.05 CENTS 10.55 CENTS 5.0 9.55 CENTS 9.90 CENTS 3.7
Operating expenses per ASM 8.74 CENTS 10.36 CENTS 18.5 8.57 CENTS 9.98 CENTS 16.4
Fuel cost per gallon 65.5 CENTS 91.2 CENTS 39.3 57.1 CENTS 95.2 CENTS 66.7
Fuel gallons (000,000) 75.1 74.2 (1.2) 148.2 148.6 0.3
Average number of employees 9,244 9,439 2.1 9,065 9,359 3.2
Aircraft utilization
(block hours/day) 11.1 10.5 (5.4) 11.1 10.7 (3.6)
Operating fleet at period-end 86 91 5.8 86 91 5.8
</TABLE>
NM=Not Meaningful
11
<PAGE>
HORIZON AIR FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------------------- -----------------------------------
% %
FINANCIAL DATA (IN MILLIONS): 1999 2000 Change 1999 2000 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Passenger $100.4 $108.0 7.6 $187.7 $205.5 9.5
Freight and mail 2.7 3.1 14.8 5.3 5.6 5.7
Other - net 1.9 1.5 (21.1) 5.0 3.0 (40.0)
-------------------- ---------------------
Total Operating Revenues 105.0 112.6 7.2 198.0 214.1 8.1
-------------------- ---------------------
Operating Expenses:
Wages and benefits 30.7 32.9 7.2 59.3 65.3 10.1
Employee profit sharing 1.8 0.6 (66.7) 2.3 0.6 (73.9)
Contracted services 2.9 3.7 27.6 5.5 6.8 23.6
Aircraft fuel 10.5 15.4 46.7 18.0 31.7 76.1
Aircraft maintenance 10.2 15.3 50.0 22.7 27.1 19.4
Aircraft rent 10.5 10.7 1.9 21.3 21.3 0.0
Food and beverage service 0.6 0.8 33.3 1.2 1.6 33.3
Commissions 5.1 3.6 (29.4) 9.6 7.0 (27.1)
Other selling expenses 5.4 5.6 3.7 10.7 11.4 6.5
Depreciation and amortization 4.0 4.7 17.5 7.8 9.0 15.4
Loss (gain) on sale of assets 0.0 (0.8) NM 0.0 (0.9) NM
Landing fees and other rentals 5.4 6.2 14.8 10.9 11.9 9.2
Other 7.8 8.3 6.4 15.7 17.2 9.6
-------------------- ---------------------
Total Operating Expenses 94.9 107.0 12.8 185.0 210.0 13.5
-------------------- ---------------------
Operating Income 10.1 5.6 (44.6) 13.0 4.1 (68.5)
-------------------- ---------------------
Interest expense (0.4) (0.9) (0.9) (1.7)
Interest capitalized 0.5 0.9 1.0 1.7
Other - net (0.0) 0.0 0.1 0.1
-------------------- ---------------------
0.1 0.0 0.2 0.1
-------------------- ---------------------
Income Before Income Tax $10.2 $5.6 (45.1) $13.2 $4.2 (68.2)
==================== =====================
OPERATING STATISTICS:
Revenue passengers (000) 1,237 1,267 2.4 2,383 2,458 3.1
RPMs (000,000) 340 353 3.6 641 682 6.4
ASMs (000,000) 549 576 5.0 1,051 1,128 7.3
Passenger load factor 62.0% 61.2% (0.8)pts 61.0% 60.5% (0.5)pts
Breakeven load factor 55.2% 58.3% 3.1 pts 56.4% 59.4% 3.0 pts
Yield per passenger mile 29.48 cents 30.61 cents 3.8 29.28 cents 30.13 cents 2.9
Operating revenue per ASM 19.13 cents 19.53 cents 2.1 18.85 cents 18.98 cents 0.7
Operating expenses per ASM 17.30 cents 18.56 cents 7.3 17.62 cents 18.62 cents 5.7
Fuel cost per gallon 66.4 cents 93.7 cents 41.1 59.0 cents 97.6 cents 65.6
Fuel gallons (000,000) 15.8 16.5 4.4 30.5 32.5 6.6
Average number of employees 3,524 3,633 3.1 3,415 3,625 6.2
Aircraft utilization (block hours/day) 8.1 8.3 2.5 7.9 8.2 3.8
Operating fleet at period-end 61 62 1.6 61 62 1.6
NM = Not Meaningful
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING INFORMATION
This report may contain forward-looking statements that are based on the best
information currently available to management. These forward-looking
statements are intended to be subject to the safe harbor protection provided
by Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are indicated by phrases such
as "will", "should", "the Company believes", "we expect" or any other language
indicating a prediction of future events. There can be no assurance that
actual developments will be those anticipated by the Company. Actual results
could differ materially from those projected as a result of a number of
factors, some of which the Company cannot predict or control. For a discussion
of these factors, please see Item 1 of the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
RESULTS OF OPERATIONS
SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999
The consolidated net income for the second quarter of 2000 was $8.8 million,
or $0.33 per share (diluted), compared with $42.1 million, or $1.59 per share
(diluted), in 1999. Consolidated operating income for the second quarter of
2000 was $13.1 million compared to $65.3 million for 1999. The $52.2 million
reduction in operating income was largely due to a special charge related to
the Mileage Plan and higher fuel prices. Financial and statistical data for
Alaska and Horizon is shown on pages 11 and 12. A discussion of this data
follows.
ALASKA AIRLINES
REVENUES
Capacity decreased by 1.3% primarily due to higher than normal flight
cancellations that resulted from delays in getting aircraft back into service
from heavy maintenance checks. Many of the passengers from the canceled
flights traveled on other Alaska flights and traffic grew by 2.4%, resulting
in a 2.6 point increase in passenger load factor. Passenger yields were up
3.6% (2.3% excluding the impact of a new accounting method for the sale of
miles), primarily due to fuel-related fare increases. Yields were up in
substantially all major markets, with Canada showing the largest increase. The
higher traffic combined with the higher yield resulted in a 6.1% increase in
passenger revenue.
Freight and mail revenues decreased 3.4%, primarily due to lower freight
volumes that resulted in part from 3.0% fewer flights operated.
Other-net revenues decreased $7.4 million (34.4%), due to a change in
accounting for the sale of miles in Alaska's frequent flyer program. If the
new accounting method had been in effect in 1999, other-net revenues would
have increased $0.8 million (6.0%).
EXPENSES
Operating expenses grew by 16.9 % as a result of an 18.5% increase in cost per
ASM. The increase in cost per ASM was primarily due a special charge, higher
fuel prices and higher labor costs. Explanations of significant year-over-year
changes in the components of operating expenses are as follows:
13
<PAGE>
- Wages and benefits increased 14.2% due to a 2.1% increase in the
number of employees combined with an 11.8% increase in average wages
and benefits per employee. New labor contracts for mechanics, flight
attendants, passenger service and ramp service employees, combined
with longevity increases for pilots, and annual merit raises for
management employees all contributed to the higher average wage rates.
- Contracted services increased 14% due to higher security costs, higher
rates for ground handling services and new costs for processing
marketing information.
- Fuel expense increased 38%, primarily due to a 39% increase in the
price of fuel. The fuel consumption rate decreased 1% due to the use
of more fuel efficient B737-700 aircraft.
- Maintenance expense increased 34%, due to increased expenses for
engine overhauls, airframe checks and airframe component repairs.
- Aircraft rent expense decreased 10%, due to leasing four fewer MD-80
aircraft and two fewer B737-400 aircraft.
- Commission expense decreased 32% on a 6% increase in passenger
revenue. In 2000, 65.8% of ticket sales were made through travel
agents, versus 69.3% in 1999. In 2000, 10.1% of ticket sales were made
through Alaska's Internet web site versus 4.2% in 1999. In addition,
the commission rate paid to travel agents decreased from 8% to 5%.
- Other selling expense increased 14%, higher than the 6% increase in
passenger revenue, due to increased expenses for Mileage Plan awards.
- Depreciation increased 18%, primarily due to owning 10 more aircraft
in 2000.
- Other expense increased 13%, primarily due to higher expenditures for
passenger remuneration, operating supplies, legal fees, professional
services and recruiting.
- The $24.0 million special charge in 2000 recognizes the increased
incremental cost of travel awards earned by flying on Alaska and
travel partners. The higher cost is due to an increase in the
estimated costs Alaska incurs to acquire travel awards on other
airlines for its Mileage Plan members, as well as lower assumed
forfeiture of miles.
HORIZON AIR
REVENUES
Capacity grew by 5.0%, primarily due to added flights in the Canada and
California markets. Traffic grew by 3.6%, resulting in a 0.8 point decrease in
passenger load factor. Passenger yields were up 3.8%, largely due to "fuel
surcharge" fare increases. The higher traffic combined with the higher yield
resulted in a 7.6% increase in passenger revenue.
Other-net revenues decreased 21%, or $0.4 million, primarily due to recording
revenues related to aircraft manufacturer's support during the second quarter
of 1999.
EXPENSES
Operating expenses grew by 12.8% as a result of a 5.0% increase in capacity
and a 7.3% 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 7.2% due to a 3.1% increase in the number
of employees combined with a 4.0% increase in average wages and
benefits per employee. Employees were added to support 5.0% more block
hours of flying and to service the 2.4% increase in passengers
carried.
- Contracted services increased 28%, higher than the 5% increase in
capacity, due to increased expenses for ground handling, security and
information technology services.
- Fuel expense increased 47%, due to a 4% increase in fuel consumption
combined with a 41% increase in the price of fuel.
- Maintenance expense increased 50%, higher than the 5% increase in
block hours, due in part to increased expenses related to the earlier
than previously estimated timeframe for phasing out the Fokker F-28
jet aircraft.
- Commission expense decreased 29% on an 8% increase in passenger
revenue, because a smaller percentage of sales were made through
travel agents and commission rates dropped from 8% to 5%.
- Depreciation and amortization expense increased 18%, due in part to
added depreciation on Fokker F-28 jet aircraft spare parts.
CONSOLIDATED NONOPERATING INCOME (EXPENSE) Net nonoperating income decreased
$3.1 million, primarily due to higher interest expense resulting from new debt
incurred in late 1999.
SIX MONTHS 2000 COMPARED WITH SIX MONTHS 1999
In accordance with guidance provided in the SEC's Staff Accounting Bulletin
101, Alaska changed its method of accounting for the sale of miles in its
Mileage Plan. In connection with the change, Alaska recognized a $56.9
million, net of income taxes of $35.6 million, cumulative effect charge
effective January 1, 2000. The consolidated loss before accounting change for
the six months ended June 30, 2000 was $0.4 million, or $(0.02) per share
(diluted), compared with net income of $62.3 million, or $2.35 per share
(diluted) in 1999. The consolidated operating loss for the first six months of
2000 was $3.5 million compared with an operating income of $93.9 million for
1999. A discussion of operating results for the two airlines follows.
ALASKA AIRLINES Operating income decreased $88.7 million to a $6.8 million
operating loss in 2000, primarily due to higher fuel prices ($51.8 million)
and a special charge related to Mileage Plan estimates ($24.0 million).
Changes in operating revenues and operating expenses are generally due to the
same reasons stated above in the second quarter comparison.
15
<PAGE>
HORIZON AIR Operating income decreased to $4.1 million, resulting in a 1.9%
operating margin as compared to a 6.6% margin in 1999. Operating revenue per
ASM increased 0.7% to 18.98 cents, while operating expenses per ASM increased
5.7% to 18.62 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 income decreased
$6.7 million, primarily due to higher interest expense resulting from new debt
incurred in late 1999.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 June 30, 2000 Change
----------------------------------------------------------------------------------------------------------------------------------
(In millions, except debt-to-equity and per share amounts)
<S> <C> <C> <C>
Cash and marketable securities $329.0 $279.6 $(49.4)
Working capital (deficit) (36.8) (154.8) (118.0)
Long-term debt and
capital lease obligations 337.0 294.0 (43.0)
Shareholders' equity 930.7 874.8 (55.9)
Book value per common share $35.24 $33.08 $(2.16)
Debt-to-capital 27%:73% 25%:75% NA
Debt-to-capital assuming aircraft
operating leases are capitalized
at seven times annualized rent 64%:36% 65%:35% NA
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's cash and marketable securities portfolio decreased by $49
million during the first six months of 2000. Operating activities provided
$152 million of cash during this period. Another $38 million was provided by
insurance proceeds from an aircraft accident and other asset dispositions.
Cash was used for $227 million of capital expenditures, including the purchase
of four new Boeing 737 aircraft, flight equipment deposits and airframe and
engine overhauls, and for $15 million of debt repayment.
Shareholders' equity decreased $55.9 million due to the net loss of $57.3
million, which was partly offset by stock issued under stock plans and changes
in deferred compensation.
AIRCRAFT ACCIDENT On January 31, 2000, Alaska Airlines flight 261 from Puerto
Vallarta en route to San Francisco, went down in the water off the coast of
California near Point Mugu. The flight carried 83 passengers and five crew
members. There were no survivors. Consistent with industry standards, the
Company maintains insurance against aircraft accidents. The Company expects
substantially all accident response and civil litigation costs to be covered
by insurance. However, any aircraft accident, even if fully insured, could
cause a negative public perception of the Company with adverse financial
consequences. Principally as a result of added maintenance inspections Alaska
carried out after the accident, Alaska estimates that it canceled 6% of its
flights in February and 3% of its flights in March.
SAFETY ACTIVITIES In March 2000, to enhance existing lines of communication,
Alaska established a "safety hotline" for employees to contact the chairman's
office directly regarding any safety concern. In April 2000, an independent
team of outside safety experts began a full audit of the maintenance,
16
<PAGE>
flight operations, hazardous materials handling and security areas of Alaska.
The team presented its final report to Alaska in June 2000 and Alaska is
implementing those recommendations. Alaska has also hired a vice president of
safety, who reports directly to the chairman.
COMMITMENTS As of June 30, 2000, the Company had firm orders for 62 aircraft
requiring aggregate payments of approximately $1.4 billion, as set forth
below. In addition, Alaska has options to acquire 26 more B737s and Horizon
has options to acquire 15 Dash 8-400s and 25 CRJ 700s. Alaska and Horizon
expect to finance the new planes with either leases, long-term debt or
internally generated cash.
<TABLE>
<CAPTION>
DELIVERY PERIOD - FIRM ORDERS
------------------------------------------------------------------------------------------------------------------------------
AIRCRAFT 2000 2001 2002 2003 2004 2005 TOTAL
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing 737-700 3 3 -- -- -- -- 6
Boeing 737-900 -- 6 5 -- -- -- 11
de Havilland Dash 8-400 2 13 -- -- -- -- 15
------------------------------------------------------------------------------------------------------------------------------
Canadair RJ 700 1 13 -- 4 6 6 30
------------------------------------------------------------------------------------------------------------------------------
Total 6 35 5 4 6 6 62
==============================================================================================================================
Payments (Millions) $173 $681 $157 $102 $131 $110 $1,354
==============================================================================================================================
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1998, search warrants and a grand jury subpoena (for the U.S.
District Court for the Northern District of California) were served on Alaska,
initiating an investigation into the Company's Oakland maintenance base by the
U.S. Attorney for the Northern District of California. In addition, the
Federal Aviation Administration (FAA) issued a letter of investigation to
Alaska relating to maintenance performed on an MD-80 aircraft. In April 1999,
the FAA issued a notice of proposed civil penalty for $44,000. In July 1999,
Alaska responded informally to the notice, disputing that any violation
occurred, and to date the FAA has not taken any further action. The Company
understands that information developed by the National Transportation Safety
Board in connection with the crash of flight 261 on January 31, 2000 is being
shared with the U.S. Attorney and that the U.S. Attorney will use this
information, along with other records relating to the aircraft Alaska has
produced, to evaluate whether any crimes were committed in connection with
flight 261. To the Company's knowledge, no charges have been filed as a result
of the grand jury investigation.
Alaska is currently a defendant in several lawsuits relating to flight 261.
The Company is unable to predict the amount of claims that may ultimately be
made against it or how those claims might be resolved. Consistent with
industry standards, the Company maintains insurance against aircraft
accidents. In April 2000, the FAA began an audit of Alaska's maintenance and
flight operations departments to ensure adherence to mandated procedures.
During the audit, the FAA requested that Alaska take several actions, which
Alaska has done or is currently implementing. In June 2000, the FAA informed
Alaska that it was proposing to amend Alaska's operations specification to
suspend the Company's ability to perform heavy maintenance on its aircraft. In
June 2000, Alaska submitted an Airworthiness and Operations Action Plan
describing numerous steps Alaska would take to address the FAA's concerns. In
response to this plan the FAA withdrew its proposal to amend Alaska's
operations specification. The FAA also requested that the Company submit a
growth plan to demonstrate its ability to handle operationally its planned
fleet additions. In June 2000, Alaska submitted its growth plan to the FAA. In
July 2000, Alaska responded in writing to each of the FAA's
17
<PAGE>
findings from its April audit. The Company has not been informed what further
actions, if any, the FAA intends to take.
The Company cannot predict the outcome of any of the pending civil or
potential criminal proceedings described above. As a result, the Company can
give no assurance that these proceedings, if determined adversely to Alaska,
would not have a material adverse effect on the financial position or results
of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Air Group's annual meeting of stockholders was held on May 16, 2000.
(b) Not applicable.
(c) A stockholder proposal to reinstate simple majority voting was approved
with 12,694,475 votes for, 6,412,719 votes against, and 213,238 votes
abstaining.
<TABLE>
<CAPTION>
Four directors were elected with the following results:
Votes Against Broker
Director Votes For or Withheld Non-Votes
-------- --------- ----------- ---------
<S> <C> <C> <C>
M. J. Fate 23,839,462 443,897 0
J. F. Kelly 23,762,715 520,644 0
B. R. Kennedy 23,878,636 404,723 0
J. K. Thompson 23,868,704 414,655 0
</TABLE>
ITEM 5. OTHER INFORMATION
ALLIANCES WITH OTHER AIRLINES
During February, 2000, Canadian Airlines gave notice to Alaska that it is
canceling its marketing alliance with Alaska effective in August 2000 due to
it's merger with Air Canada.
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. Negotiations have
taken place since then and further negotiations are planned for the third
quarter of 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial data schedule.
(b) On June 5, 2000 a report on Form 8-K was filed discussing a Federal
Aviation Administration (FAA) audit of Alaska Airlines.
18
<PAGE>
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: August 9, 2000
/s/ John F. Kelly
---------------------------------------
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Bradley D. Tilden
---------------------------------------
Bradley D. Tilden
Vice President/Finance and Chief Financial Officer
19
