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Alaska Air Group Reports Record Adjusted Third Quarter Results

October 20, 2011

SEATTLE, Oct. 20, 2011 /PRNewswire/ —

Third quarter highlights with comparison to third quarter 2010:

  • Record third quarter net income, excluding special items, of $131.1 million, or $3.58 per diluted share, compared to net income of $118.1 million, or $3.21 per diluted share. This quarter’s results compare to a First Call mean estimate of $3.33 per share.
  • Net income under Generally Accepted Accounting Principles (GAAP) of $77.5 million, or $2.12 per diluted share, compared to net income of $122.4 million, or $3.32 per diluted share.
  • Revenues improved by 12 percent with record load factors and higher yields in each month of the quarter, more than offsetting the 41 percent increase in economic fuel costs.
  • Non-fuel unit costs declined by 2.6 percent.
  • Improved employee productivity by 3.8 percent compared to the third quarter of 2010.
  • Held $1.3 billion in unrestricted cash and marketable securities as of September 30, 2011.
  • Adjusted debt-to-total capitalization ratio of 61 percent, lowest level on record.
  • Twelve-month return on invested capital of 12 percent.
  • Alaska Airlines held the No. 1 spot in U.S. Department of Transportation on-time performance among the 10 largest U.S. airlines for the twelve months ending in August 2011.
  • Reached tentative five-year agreement with the Aircraft Mechanics Fraternal Association (“AMFA”) representing the Alaska Airlines aircraft technicians.
  • Won Seattle Business Magazine’s 2011 Green Award in the Large Services company category.

Alaska Air Group, Inc. (NYSE: ALK) today reported third quarter 2011 net income of $77.5 million, or $2.12 per diluted share, compared to net income of $122.4 million, or $3.32 per diluted share. Excluding mark-to-market fuel hedge losses of $84.3 million ($52.4 million after tax, or $1.43 per diluted share) and fleet transition charges of $2.0 million ($1.2 million after tax or $0.03 per diluted share), the company reported record third quarter 2011 net income of $131.1 million, or $3.58 per diluted share, compared to net income of $118.1 million, or $3.21 per diluted share, excluding special items.

“We are pleased to report our highest adjusted quarterly profit ever. The outstanding financial performance was driven by a record quarterly load factor of 86.5%, higher yields and record on-time performance of over 91%,” said Bill Ayer, chairman and chief executive officer. “These results reflect the hard work and changes we’ve made as a company over the past several years. As we grow stronger – both financially and operationally – we become better prepared to face challenges that come our way. I am grateful to the 12,000 Air Group employees who helped achieve this quarter’s results.”

The following table reconciles the company’s adjusted net income and earnings per diluted share (EPS) during the third quarters of 2011 and 2010 to amounts as reported in accordance with GAAP (in millions except per-share amounts):


                                         Three Months Ended September 30,
                                         --------------------------------
                                                     2011                                2010
                                                     ----                                ----
                                                Diluted                              Diluted
                                Dollars                       EPS             Dollars         EPS
                                -------        --------            -------          --------
    Net income and diluted EPS,
     excluding the items noted
     below:                      $131.1         $3.58              $118.1            $3.21
    Fleet transition costs, net
     of tax                        (1.2)        (0.03)               (6.1)           (0.17)
    Adjustments to reflect the
     timing of gain or loss
     recognition resulting from
     mark-to-market fuel-
     hedge accounting, net of
     tax                          (52.4)    (1.43)         10.4          0.28
                                  -----         -----                ----             ----
    Reported GAAP amounts         $77.5         $2.12              $122.4            $3.32
                                  =====         =====              ======            =====

Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on page 4 of this release.

A conference call regarding the third quarter results will be simulcast via the Internet at 8:30 a.m. Pacific time on October 20, 2011. It can be accessed through the company’s Web site at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call at alaskaair.com/investors.

References in this news release to “Air Group,” “company,” “we,” “us” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the company’s Annual Report on Form 10-K for the year ended December 31, 2010. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines and Horizon Air, subsidiaries of Alaska Air Group (NYSE: ALK), together serve more than 90 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” in the J.D. Power and Associates 2008, 2009, 2010 and 2011 North America Airline Satisfaction Studies(SM). For reservations, visit alaskaair.com. For more news and information, visit the Alaska Airlines/Horizon Air Newsroom at alaskaair.com/newsroom.

Glossary of Terms

ASM – available seat miles, or “capacity” – represents total seats available across the fleet multiplied by the number of miles flown

RPM – revenue passenger miles, or “traffic” – the number of those available seats that were filled with paying passengers; one passenger traveling one mile is one RPM

RASM – total operating revenue divided by ASMs; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; commonly called “unit revenue” and represents the average total revenue for flying one seat one mile

PRASM – passenger revenue per ASM; commonly called “passenger unit revenue”

Yield – passenger revenue per RPM; this represents the average revenue for flying one passenger one mile

CASM – total operating costs per ASM; this represents all operating expenses including fuel and special items; commonly called “unit cost”

CASMex – operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Economic fuel – best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Mainline – represents flying on Alaska jets and all associated revenues and costs

Regional - represents operations whereby Horizon, SkyWest, and another small carrier in the state of Alaska fly certain routes for Alaska using Horizon’s or the other carrier’s fleets

Diluted Earnings per Share - represents earnings per share using fully diluted shares outstanding

Diluted Shares – represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Productivity – represents the number of revenue passengers per full-time equivalent employee


    CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
    Alaska Air Group, Inc.

                                                Three Months Ended            Nine Months Ended September
                                                  September 30,                                    30,
                                               -------------------                    ----------------------------
    (in millions,
     except per
     share
     amounts)                              2011             2010    Change          2011               2010        Change
                                           ----             ----    ------          ----               ----        ------
    Operating Revenues:
    Passenger
    Mainline                          $887.4           $779.2        13.9%   $2,409.7           $2,068.5            16.5%
    Regional                           213.4            198.1         7.7%      584.2              547.0             6.8%
                                       -----            -----                   -----              -----
    Total
     passenger
     revenue                         1,100.8            977.3        12.6%    2,993.9            2,615.5            14.5%
    Freight and
     mail                               29.9             29.4         1.7%       83.9               80.5             4.2%
    Other - net                         67.4             61.3        10.0%      195.7              177.8            10.1%
    Total
     Operating
     Revenues                        1,198.1          1,068.0        12.2%    3,273.5            2,873.8            13.9%
                                     -------          -------                 -------            -------

    Operating Expenses:
    Wages and
     benefits                          245.1            240.2         2.0%      737.2              719.1             2.5%
    Variable
     incentive pay                      19.1             23.0      (17.0)%       53.4               62.5          (14.6)%
    Aircraft fuel,
     including
     hedging gains
     and losses                        420.1            220.9        90.2%    1,012.1              683.2            48.1%
    Aircraft
     maintenance                        49.9             55.3       (9.8)%      152.3              166.1           (8.3)%
    Aircraft rent                       28.8             33.9      (15.0)%       88.3              106.3          (16.9)%
    Landing fees
     and other
     rentals                            62.0             59.8         3.7%      179.8              173.6             3.6%
    Contracted
     services                           46.1             40.7        13.3%      136.2              121.4            12.2%
    Selling
     expenses                           47.4             44.3         7.0%      133.0              116.1            14.6%
    Depreciation
     and
     amortization                       62.2             57.8         7.6%      184.2              172.0             7.1%
    Food and
     beverage
     service                            17.6             15.6        12.8%       49.8               42.2            18.0%
    Other                               54.6             49.8         9.6%      173.5              145.8            19.0%
    Fleet
     transition
     costs                               2.0              9.8             NM    38.9               13.2                 NM
                                         ---              ---                   ----               ----
    Total
     Operating
     Expenses                        1,054.9            851.1        23.9%    2,938.7            2,521.5            16.5%
    Operating
     Income                            143.2            216.9      (34.0)%      334.8              352.3           (5.0)%
                                       -----            -----                   -----              -----

    Nonoperating Income
     (Expense):
    Interest
     income                              4.5              7.6      (40.8)%       18.4               22.7          (18.9)%
    Interest
     expense                           (25.7)           (29.5)     (12.9)%      (69.1)             (81.4)         (15.1)%
    Interest
     capitalized                         2.1              1.4             NM     5.5                4.7            17.0%
    Other - net                          1.2              1.8             NM     3.4                4.1          (17.1)%
                                       (17.9)           (18.7)      (4.3)%      (41.8)             (49.9)         (16.)2%
    Income Before
     Income Tax                        125.3            198.2      (36.8)%      293.0              302.4           (3.1)%
    Income tax
     expense                            47.8             75.8      (36.9)%      112.5              116.1           (3.1)%
    Net Income                         $77.5           $122.4      (36.7)%     $180.5             $186.3           (3.1)%
                                       -----           ------                  ------             ------

    Basic Earnings
     Per Share:                        $2.15            $3.41                      $5.02              $5.21
    Diluted
     Earnings Per
     Share:                            $2.12            $3.32                      $4.91              $5.08
    Shares Used for
     Computation:
    Basic                             35.977           35.898                 35.984             35.755
    Diluted                           36.619           36.830                 36.725             36.706

    NM - Not Meaningful


    CONDENSED CONSOLIDATED BALANCE SHEETS
     (unaudited)
    Alaska Air Group, Inc.

                                          September 30,    December 31,
    (in millions)                               2011           2010
                                          -------------- -------------

    Cash and marketable securities            $1,265.8       $1,208.2
                                              ========       ========

    Total current assets                       1,726.3        1,662.0
    Property and equipment-net                 3,350.1        3,148.4
    Other assets                                 183.8          206.2
                                                 -----          -----
    Total assets                              $5,260.2       $5,016.6
                                              ========       ========

    Current liabilities                       $1,518.3       $1,424.7
    Long-term debt                             1,178.8        1,313.0
    Other liabilities and credits              1,298.8        1,173.5
    Shareholders' equity                       1,264.3        1,105.4
                                               -------
    Total liabilities and shareholders'
     equity                                   $5,260.2       $5,016.6
                                              ========       ========

    Debt to Capitalization, adjusted for
     operating leases                           61%:39%     67%:33%
                                                =======      =======

    Number of common shares outstanding         35.645         35.924
                                                ======         ======


    OPERATING STATISTICS SUMMARY (unaudited)
    Alaska Air Group,
     Inc.
                                             Three Months Ended                       Nine Months Ended September
                                                September 30,                                            30,
                                            -------------------                             ----------------------------
    Mainline
     Operating
     Statistics:                       2011            2010        Change                    2011             2010       Change
                                       ----            ----        ------                    ----             ----       ------
    Revenue
     passengers
     (000)                         4,839           4,562             6.1%                13,479          12,373             8.9%
    RPMs
     (000,000)
     "traffic"                     6,035           5,580             8.2%                17,011          15,124            12.5%
    ASMs
     (000,000)
     "capacity"                    6,936           6,544             6.0%                19,991          18,197             9.9%
    Passenger
     load
     factor                         87.0%           85.3%            1.7       pts         85.1%           83.1%            2.0      pts
    Yield per
     passenger
     mile (in
     cents)                        14.70           13.96             5.3%                 14.17           13.68             3.6%
    Passenger
     revenue
     per ASM
     (PRASM)
     (in cents)                    12.79       11.91         7.4%       12.05      11.37         6.0%
    Operating
     revenue
     per ASM
     (RASM) (in
     cents)                        14.15       13.25         6.8%       13.40      12.73         5.3%
    Cost per
     ASM
     excluding
     fuel(f)
     (in cents)                     7.27        7.52       (3.3)%        7.50       7.88       (4.8)%
    Economic
     fuel cost
     per
     gallon(b)                     $3.23           $2.37            36.3%                 $3.13           $2.30            36.1%
    Fuel
     gallons
     (000,000)                      90.6            85.5             6.0%                 260.8           237.4             9.9%
    Average
     number of
     full-time
     equivalent
     employees                     8,960       8,737         2.6%       8,914      8,631         3.3%
    Aircraft
     utilization
     (blk hrs/
     day)                           10.7            10.4             2.9%                  10.5             9.9             6.1%
    Average
     aircraft
     stage
     length
     (miles)                       1,105       1,089         1.5%       1,109      1,078         2.9%
    Mainline
     operating
     fleet at
     period-
     end                             117         115           2    a/c       117         115           2   a/c

    Regional Operating
     Statistics:(c)
    RPMs
     (000,000)
     "traffic"                       668             679           (1.6)%                 1,838           1,889           (2.7)%
    ASMs
     (000,000)
     "capacity"                      812             850           (4.5)%                 2,338           2,512           (6.9)%
    Passenger
     load
     factor                         82.3%           79.9%            2.4       pts         78.6%           75.2%            3.4      pts
    PRASM (in
     cents)                        26.28           23.31            12.7%                 24.99           21.78            14.7%

    Consolidated
     Operating
     Statistics:(d)
    Revenue
     passengers
     (000)                         6,709           6,389             5.0%                18,707          17,489             7.0%
    RPMs
     (000,000)
     "traffic"                     6,703           6,259             7.1%                18,849          17,013            10.8%
    ASMs
     (000,000)
     "capacity"                    7,748           7,394             4.8%                22,329          20,709             7.8%
    Passenger
     load
     factor                         86.5%           84.6%            1.9       pts         84.4%           82.2%            2.2      pts
    PRASM (in
     cents)                        14.21           13.22             7.5%                 13.41           12.63             6.2%
    RASM (in
     cents)                        15.46           14.44             7.1%                 14.66           13.88             5.6%
    CASM
     excluding
     fuel and
     fleet
     transition
     costs(a)(f)
     (in cents)                     8.17        8.39       (2.6)%        8.45       8.81       (4.1)%
    Economic
     fuel cost
     per
     gallon(b)                     $3.24           $2.37            36.7%                 $3.13           $2.31            35.5%
    Fuel
     gallons
     (000,000)                     103.8           100.3             3.5%                 299.8           281.1             6.7%
    Average
     number of
     full-time
     equivalent
     employees                    11,859      11,722         1.2%      11,850     11,712         1.2%

    Horizon Air
     Operating
     Statistics:(e)
    ASMs
     (000,000)
     "capacity"                      664             835          (20.5)%                 2,097           2,461          (14.8)%
    CASM
     excluding
     fuel(f)
     (in cents)                    12.48           14.67                  NM  (a)        12.25           15.05                 NM (a)
    (a)    See page 9 for a reconciliation of this non-GAAP measure.
    (b)    See page 10 for a reconciliation of economic fuel cost.
    (c)    Data presented includes information related to flights
     operated by Horizon Air and third-party carriers.
    (d)    Except for revenue passengers and full-time equivalent
     employees, data includes information related to third-party
     regional capacity purchase flying arrangements.
    (e)    Data presented separately for information purposes and is
     included in Regional Operating Statistics.
    (f)    See Note A on page 11 for a discussion of why these measures
     may be important to investors.


    ALASKA AIRLINES NON-GAAP FINANCIAL DATA (unaudited)

                                               Three Months Ended                  Nine Months Ended September
                                                 September 30,                                     30,
                                              -------------------                     ----------------------------
    (in millions)                                2011                  2010                2011                  2010
                                                 ----                  ----                ----                  ----
    Operating Revenues:
    Passenger
    Mainline                                $887.4                $779.2            $2,409.7              $2,068.5
    Regional                                 213.4                  88.9               584.2                 247.6
                                             -----                  ----               -----                 -----
    Total passenger
     revenue                               1,100.8                 868.1             2,993.9               2,316.1
    Other revenue                             95.3                  88.0               273.3                 250.1

    Total Operating
     Revenues                              1,196.1                 956.1             3,267.2               2,566.2
                                           -------                 -----             -------               -------

    Operating Expenses:
    Mainline
     operating
     expenses,
     excluding fuel                          504.1                 491.8             1,500.2               1,433.5
    Mainline
     economic
     fuel(a)                                 292.4                 202.1               816.0                 547.4
    Regional
     expense -paid
     to Horizon Air
     under CPA                                91.2                  69.0               279.3                 202.8
    Other regional
     operating
     expense,
     excluding fuel                           45.3                   5.7               128.7                  18.7
    Regional
     economic
     fuel(a)                                  43.4                    -               122.9                    -
                                              ----                  ---               -----                  ---
    Total Adjusted
     Operating
     Expenses(b)                             976.4                 768.6             2,847.1               2,202.4
                                             219.7                 187.5               420.1                 363.8
                                             -----                 -----               -----                 -----
    Nonoperating
     Expense                                 (13.8)                (14.5)              (29.4)                (36.2)
    Adjusted Income
     before Income
     Tax(b)                                 $205.9                $173.0              $390.7                $327.6
                                            ======                ======              ======                ======

    HORIZON AIR NON-GAAP FINANCIAL DATA (unaudited)

                                             Three Months Ended             Nine Months Ended September
                                               September 30,                                  30,
                                            -------------------                  ----------------------------
    (in millions)                                2011                  2010                2011                  2010
                                                 ----                  ----                ----                  ----
    Operating Revenues:
    Passenger
    Brand revenue                   $            -                $109.2      $            -                $299.4
    Revenue from
     CPA with
     Alaska
     Airlines                                 91.2                  69.0               279.3                 202.8
                                              ----                  ----               -----                 -----
    Total passenger
     revenue                                  91.2                 178.2               279.3                 502.2
    Other revenue                              2.0                   2.7                 6.3                   8.2
    Total Operating
     Revenues                                 93.2                 180.9               285.6                 510.4
                                              ----                 -----               -----                 -----

    Operating Expenses:
    Landing fees,
     rents &
     selling
     expenses(c)                                -                  32.2                  -                  93.2
    All other non-
     fuel operating
     expenses                                 82.9                  90.3               256.9                 277.3
                                              ----                  ----               -----                 -----
    Non-fuel
     operating
     expenses                                 82.9                 122.5               256.9                 370.5
    Economic fuel
     costs(a)                                   -                  35.5                  -                 102.4
                                              ---                  ----                ---                 -----
    Total Adjusted
     Operating
     Expenses(b)                              82.9                 158.0               256.9                 472.9
                                              10.3                  22.9                28.7                  37.5
    Nonoperating
     expense                                  (3.9)                 (4.1)              (12.1)                (13.5)
    Adjusted Income
     Before Income
     Tax(b)                                   $6.4                 $18.8               $16.6                 $24.0
                                              ====                 =====               =====                 =====
    (a)    See page 10 for a reconciliation of economic fuel cost.
    (b)    See Note A on page 11 for a discussion about why this measure
     may be important to investors.  "Adjusted" refers to these measures
     excluding certain items.  See page 9 and 10 for reconciliation
     between adjusted amounts and the most directly comparable GAAP
     amount.
    (c)    See Note B on page 11 for a discussion regarding Horizon Air's
     CPA agreement with Alaska Airlines.


    ALASKA AIR GROUP CONSOLIDATED FINANCIAL AND STATISTICAL DATA
     (unaudited)

    Reconciliation of operating revenues:
                                               Three Months Ended                    Nine Months Ended September
                                                 September 30,                                      30,
                                              -------------------                      ----------------------------
                                                2011                 2010                 2011                 2010
                                                ----                 ----                 ----                 ----
    Alaska Airlines
     operating
     revenues                            $1,196.1               $956.1             $3,267.2             $2,566.2
    Horizon Air
     operating
     revenues                                93.2                180.9                285.6                510.4
    Elimination of
     intercompany
     revenue                                (91.2)               (69.0)              (279.3)              (202.8)
                                            -----                -----               ------               ------
    Consolidated
     operating
     revenues                            $1,198.1             $1,068.0             $3,273.5             $2,873.8
                                         ========             ========             ========             ========

    Reconciliation of operating expenses:
                                            Three Months Ended             Nine Months Ended September
                                              September 30,                                  30,
                                           -------------------                  ----------------------------
                                                2011                 2010                 2011                 2010
                                                ----                 ----                 ----                 ----
    Alaska Airlines
     adjusted
     operating
     expenses                              $976.4               $768.6             $2,847.1             $2,202.4
    Horizon Air
     adjusted
     operating
     expenses                                82.9                158.0                256.9                472.9
    Parent company
     expenses                                 0.5                  0.4                  1.9                  2.4
    Intercompany
     eliminations                           (91.2)               (69.0)              (279.3)              (202.8)
                                            -----                -----               ------               ------
    Adjusted
     consolidated
     operating
     expenses                               968.6                858.0              2,826.6              2,474.9
    Fleet
     transition
     costs                                    2.0                  9.8                 38.9                 13.2
    Mark-to-
     market fuel-
     hedge (gains)
     losses                                  84.3                (16.7)                73.2                 33.4
                                             ----                -----                 ----                 ----
    Consolidated
     operating
     expenses -
     GAAP                                $1,054.9               $851.1             $2,938.7             $2,521.5
                                         ========               ======             ========             ========

    Reconciliation of income before income taxes:
                                            Three Months Ended             Nine Months Ended September
                                              September 30,                                  30,
                                           -------------------                  ----------------------------
                                                2011                 2010                 2011                 2010
                                                ----                 ----                 ----                 ----
    Alaska Airlines
     adjusted
     income before
     income taxes                          $205.9               $173.0               $390.7               $327.6
    Horizon Air
     adjusted
     income before
     income taxes                             6.4                 18.8                 16.6                 24.0
    Parent company
     expenses                                (0.7)                (0.5)                (2.2)                (2.6)
                                             ----                 ----                 ----                 ----
    Adjusted income
     before income
     taxes                                  211.6                191.3                405.1                349.0
    Fleet
     transition
     costs                                   (2.0)                (9.8)               (38.9)               (13.2)
    Mark-to-
     market fuel-
     hedge gains
     (losses)                               (84.3)                16.7                (73.2)               (33.4)
    Income before
     income taxes -
     GAAP                                  $125.3               $198.2               $293.0               $302.4
                                           ======               ======               ======               ======

    Reconciliation of consolidated CASM, excluding fuel:
                                            Three Months Ended             Nine Months Ended September
                                              September 30,                                  30,
                                           -------------------                  ----------------------------
                                                2011                 2010                 2011                 2010
                                                ----                 ----                 ----                 ----
    Adjusted
     consolidated
     operating
     expenses                              $968.6               $858.0             $2,826.6             $2,474.9
    Less: economic
     fuel                                   335.8                237.6                938.9                649.8
                                            -----                -----                -----                -----
    Adjusted
     consolidated
     operating
     expenses,
     excluding fuel                      $632.8         $620.4       $1,887.7       $1,825.1
    Consolidated
     ASMs                                   7,748                7,394               22,329               20,709
                                            -----                -----               ------               ------
    CASM, excluding
     fuel and fleet
     transition
     costs (in
     cents)                                  8.17             8.39             8.45             8.81
                                             ====                 ====                 ====                 ====


    FUEL RECONCILIATIONS
     (unaudited)
    Alaska Air Group, Inc.

    (in millions, except for
     per gallon amounts)                       Three Months Ended September 30,
                                               --------------------------------
                                                           2011                                        2010
                                                           ----                                        ----
                              Dollars               Cost/Gal                Dollars               Cost/Gal
                             -------            --------             -------            --------
    Raw or "into-plane"
     fuel cost                  $337.4                 $3.25                $233.8                 $2.33
    Minus gains, or plus the
     losses, during the
     period on settled
     hedges                       (1.6)                (0.01)                  3.8                  0.04
                                  ----                 -----                   ---                  ----
    Economic fuel expense       $335.8                 $3.24                $237.6                 $2.37
                                ------                 -----                ------                 -----
    Adjustments to reflect
     timing of (gain) or
     loss recognition
     resulting from mark-
     to-market accounting         84.3              0.81             (16.7)            (0.17)
    GAAP fuel expense           $420.1                 $4.05                $220.9                 $2.20
                                ======                 =====                ======                 =====
    Fuel gallons                 103.8                                     100.3
                                 =====                                     =====

    (in millions, except for
     per gallon amounts)                    Nine Months Ended September 30,
                                            -------------------------------
                                                           2011                                        2010
                                                           ----                                        ----
                             Dollars            Cost/Gal             Dollars            Cost/Gal
                             -------            --------             -------            --------
    Raw or "into-plane"
     fuel cost                  $969.5                 $3.23                $651.9                 $2.32
    Minus gains, or plus the
     losses, during the
     period on settled
     hedges                      (30.6)                (0.10)                 (2.1)                (0.01)
                                 -----                 -----                  ----                 -----
    Economic fuel expense       $938.9                 $3.13                $649.8                 $2.31
                                ------                 -----                ------                 -----
    Adjustments to reflect
     timing of (gain) or
     loss recognition
     resulting from mark-
     to-market accounting         73.2              0.25              33.4              0.12
    GAAP fuel expense         $1,012.1                 $3.38                $683.2                 $2.43
                              ========                 =====                ======                 =====
    Fuel gallons                 299.8                                     281.1
                                 =====                                     =====

    Breakout of Fuel
     Expense:
    (in millions, except for     Three Months Ended               Nine Months Ended September
     per gallon amounts)           September 30,                                    30,
                                -------------------                    ----------------------------
                                     2011                  2010                  2011                  2010
                                     ----                  ----                  ----                  ----
    Mainline economic fuel
     expense                    $292.4                $202.1                $816.0                $547.4
    Regional economic fuel
     expense                      43.4                  35.5                 122.9                 102.4
    Consolidated economic
     fuel expense               $335.8                $237.6                $938.9                $649.8
                                ======                ======                ======                ======

    Mainline Economic Cost
     per Gallon
     Reconciliation:
    (in millions, except for     Three Months Ended               Nine Months Ended September
     per gallon amounts)           September 30,                                    30,
                                -------------------                    ----------------------------
                                     2011                  2010                  2011                  2010
                                     ----                  ----                  ----                  ----
    Mainline economic fuel
     expense                    $292.4                $202.1                $816.0                $547.4
    Mainline fuel gallons         90.6                  85.5                 260.8                 237.4
                                  ----                  ----                 -----                 -----
    Mainline economic cost
     per gallon                  $3.23                 $2.37                 $3.13                 $2.30
                                 =====                 =====                 =====                 =====

Note A: Pursuant to Regulation G, we are providing disclosure of the reconciliation of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

  • By eliminating fuel expense and certain special items from our cost and unit cost metrics, we believe that we have better visibility into the results of our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.
  • Cost per ASM (CASM) excluding fuel and certain special items is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.
  • Adjusted Income before Income Taxes and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all Air Group employees.
  • CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.
  • Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as fleet transition costs, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.
  • Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

Note B: Air Group’s operations are treated as an integrated route network intended to maximize the results of the company. However, the Company has historically had two primary operating and reporting segments, consisting of Alaska Airlines and Horizon Air, for which separate financial information is available and regularly evaluated by our chief operating decision maker in deciding how to allocate resources and assess performance.

Alaska operates a fleet of passenger jets (“mainline operations”) and contracts with affiliated (Horizon) and non-affiliated third party carriers for regional capacity under which Alaska receives all passenger revenue from those flights. Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase arrangement (the Horizon CPA). The Horizon CPA reflects what the Company believes are current market rates received by other regional carriers for similar flying. Amounts paid by Alaska to Horizon are available to pay for various Horizon operating expenses such as crew expenses, maintenance, and aircraft ownership costs.

Effective January 1, 2011, Horizon’s business model changed such that 100% of its capacity is sold to Alaska under the Horizon CPA. As is typical for similar arrangements, certain costs such landing fees, selling and distribution costs, and fuel costs directly related to regional flights operated by Horizon are now recorded by Alaska. Because of this change, Horizon’s revenues and expenses and Alaska’s Regional revenues and expenses have changed significantly on a year over year basis.

All inter-company revenues and expenses are eliminated in consolidated, and these changes have no impact on our consolidated results.

SOURCE Alaska Air Group, Inc.


Source: PR Newswire