Alaska Air Group Reports Record Adjusted Full-Year Results
SEATTLE, Jan. 26, 2012 /PRNewswire/ —
Fourth quarter and full-year highlights with comparison to 2010:
- Fourth quarter net income, excluding special items, of $37.2 million, or $1.02 per diluted share, compared to net income of $47.4 million, or $1.28 per diluted share. This quarter’s results compare to a First Call mean estimate of $1.14 per share.
- Record full-year net income, excluding special items, of $287.4 million, or $7.83 per diluted share, compared to $262.6 million, or $7.14 per diluted share.
- Net income for the fourth quarter under Generally Accepted Accounting Principles (GAAP) of $64.0 million, or $1.76 per diluted share, compared to net income of $64.8 million, or $1.75 per diluted share. Full-year GAAP net income of $244.5 million, or $6.66 per diluted share, compared to net income of $251.1 million, or $6.83 per diluted share.
- 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 ended November 2011.
- Air Group employees earned $72 million in incentive pay, or nearly one month’s pay for most employees.
- Contributed $133 million to the defined-benefit pension plans during 2011, despite having no required contribution.
- Improved employee productivity by 2.7 percent compared to the fourth quarter of 2010.
- Alaska Airlines signed a five-year agreement with the Aircraft Mechanics Fraternal Association (AMFA) representing aircraft technicians in December.
- Redesigned alaskaair.com to establish more direct customer relationships, leading to a December record of more than 55 percent of total bookings.
- Completed the current $50 million share repurchase program in early January 2012. Since 2007, Air Group has used $262 million to repurchase 8.4 million shares.
- Twelve-month return on invested capital of 12 percent.
- Lowered adjusted debt-to-total capitalization ratio by 5 points since Dec. 31, 2010 to 62 percent.
- Held $1.1 billion in unrestricted cash and marketable securities as of Dec. 31, 2011.
Over the last twelve months, Alaska earned recognition for the following:
- Awarded 2011 On-Time Performance Service Award among major North American airlines by FlightStats.com.
- Ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” in 2011 by J.D. Power and Associates for the fourth year in a row.
- Received the Joseph S. Murphy Industry Service Award for outstanding public and community service by Air Transport World magazine, the first North America carrier to win the industry service award.
- Won Seattle Business Magazine’s 2011 Green Award in the Large Services company category.
Alaska Air Group Inc. (NYSE: ALK) today reported fourth quarter 2011 GAAP net income of $64.0 million, or $1.76 per diluted share, compared to GAAP net income of $64.8 million, or $1.75 per diluted share in 2010. Excluding mark-to-market fuel hedge gains of $43.1 million ($26.8 million after tax, or $0.74 per diluted share), the company reported fourth quarter 2011 net income of $37.2 million, or $1.02 per diluted share, compared to net income excluding special items of $47.4 million, or $1.28 per diluted share, in 2010.
The company reported full-year 2011 GAAP net income of $244.5 million, compared to $251.1 million in the prior year. Excluding the impact of the items noted in the table below, the company reported record net income of $287.4 million, or $7.83 per diluted share for 2011, compared to net income of $262.6 million, or $7.14 per diluted share in 2010. This marks the company’s eighth consecutive year of adjusted profits.
“We are pleased to report record adjusted earnings for the second year in a row,” said Bill Ayer, chairman and chief executive officer. “The improvement was due to schedule optimization and network expansion, high load factors, lower non-fuel unit costs, and industry-leading customer service and operational performance. I want to thank our employees who are working hard together to accomplish these results. We have made many changes over the past decade to transform our business and build a foundation for sustained profitability and measured growth, and we will continue to make the necessary changes as we move forward.”
The following table reconciles the company’s adjusted net income and earnings per diluted share (EPS) during the full year and fourth quarters of 2011 and 2010 to amounts as reported in accordance with GAAP:
Three Months Ended December 31,
-------------------------------
2011 2010
---- ----
(in millions, except per Diluted Diluted
share amounts) Dollars EPS Dollars EPS
------- -------- ------- --------
Net income and diluted EPS,
excluding the items noted
below: $37.2 $1.02 $47.4 $1.28
Mark-to-market fuel hedge
adjustments, net of tax 26.8 0.74 17.4 0.47
---- ---- ---- ----
Reported GAAP amounts $64.0 $1.76 $64.8 $1.75
===== ===== ===== =====
Twelve Months Ended December 31,
--------------------------------
2011 2010
---- ----
(in millions, except per Diluted Diluted
share amounts) Dollars EPS Dollars EPS
------- -------- ------- --------
Net income and diluted EPS,
excluding the items noted
below: $287.4 $7.83 $262.6 $7.14
Fleet transition costs, net
of tax (24.2) (0.66) (8.2) (0.22)
Mark-to-market fuel hedge
adjustments, net of tax (18.7) (0.51) (3.3) (0.09)
----- ----- ---- -----
Reported GAAP amounts $244.5 $6.66 $251.1 $6.83
====== ===== ====== =====
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 13 of this release.
A conference call regarding the fourth quarter and full year results will be simulcast via the Internet at 8:30 a.m. Pacific time on Jan. 26, 2012. It can be accessed through the company’s Website 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 Dec. 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.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air
Group, Inc.
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions,
except per
share
amounts) 2011 2010 Change 2011 2010 Change
---- ---- ------ ---- ---- ------
Operating
Revenues:
Passenger
Mainline $766.5 $694.9 10.3% $3,176.2 $2,763.4 14.9%
Regional 190.3 178.2 6.8% 774.5 725.2 6.8%
----- ----- ----- -----
Total
passenger
revenue 956.8 873.1 9.6% 3,950.7 3,488.6 13.2%
Freight and
mail 24.8 25.7 (3.5)% 108.7 106.2 2.4%
Other - net 62.7 59.7 5.0% 258.4 237.5 8.8%
Total
Operating
Revenues 1,044.3 958.5 9.0% 4,317.8 3,832.3 12.7%
------- ----- ------- -------
Operating
Expenses:
Wages and
benefits 253.3 241.8 4.8% 990.5 960.9 3.1%
Variable
incentive
pay 18.5 29.5 (37.3)% 71.9 92.0 (21.8)%
Aircraft
fuel,
including
hedging
gains and
losses 285.6 217.7 31.2% 1,297.7 900.9 44.0%
Aircraft
maintenance 53.3 50.4 5.8% 205.6 216.5 (5.0)%
Aircraft rent 28.0 32.6 (14.1)% 116.3 138.9 (16.3)%
Landing fees
and other
rentals 58.4 59.2 (1.4)% 238.2 232.8 2.3%
Contracted
services 48.9 41.6 17.5% 185.1 163.0 13.6%
Selling
expenses 42.3 37.7 12.2% 175.3 153.8 14.0%
Depreciation
and
amortization 62.7 58.5 7.2% 246.9 230.5 7.1%
Food and
beverage
service 17.4 15.3 13.7% 67.2 57.5 16.9%
Other 61.8 54.9 12.6% 235.3 200.7 17.2%
Fleet
transition
costs - - NM 38.9 13.2 NM
--- --- ---- ----
Total
Operating
Expenses 930.2 839.2 10.8% 3,868.9 3,360.7 15.1%
Operating
Income 114.1 119.3 (4.4)% 448.9 471.6 (4.8)%
----- ----- ----- -----
Nonoperating
Income
(Expense):
Interest
income 3.5 6.7 (47.8)% 21.9 29.4 (25.5)%
Interest
expense (18.2) (26.9) (32.3)% (87.3) (108.3) (19.4)%
Interest
capitalized 7.0 1.5 NM 12.5 6.2 NM
Other - net (5.7) 2.9 NM (2.3) 7.0 NM
(13.4) (15.8) (15.2)% (55.2) (65.7) (16.0)%
Income Before
Income Tax 100.7 103.5 (2.7)% 393.7 405.9 (3.0)%
Income tax
expense 36.7 38.7 (5.2)% 149.2 154.8 (3.6)%
Net Income $64.0 $64.8 (1.2)% $244.5 $251.1 (2.6)%
----- ----- ------ ------
Basic
Earnings Per
Share: $1.80 $1.80 $6.81 $7.01
Diluted
Earnings Per
Share: $1.76 $1.75 $6.66 $6.83
Shares Used
for
Computation:
Basic 35.561 36.019 35.878 35.822
Diluted 36.318 36.951 36.710 36.786
NM – Not Meaningful
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
Alaska Air Group, Inc.
December 31, December 31,
(in millions) 2011 2010
------------- -------------
Cash and marketable securities $1,140.9 $1,208.2
======== ========
Total current assets 1,595.5 1,662.0
Property and equipment-net 3,401.5 3,148.4
Other assets 198.0 206.2
----- -----
Total assets $5,195.0 $5,016.6
======== ========
Current liabilities $1,510.6 $1,424.7
Long-term debt 1,099.0 1,313.0
Other liabilities and credits 1,418.4 1,173.5
Shareholders' equity 1,167.0 1,105.4
------- -------
Total liabilities and shareholders'
equity $5,195.0 $5,016.6
======== ========
Debt to Capitalization, adjusted for
operating leases 62%:38% 67%:33%
======= =======
Number of common shares outstanding 35.475 35.924
====== ======
OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air
Group, Inc.
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
2011 2010 Change 2011 2010 Change
---- ---- ------ ---- ---- ------
Mainline
Operating
Statistics:
Revenue
passengers
(000) 4,331 4,141 4.6% 17,810 16,514 7.8%
RPMs (000,000)
"traffic" 5,575 5,226 6.7% 22,586 20,350 11.0%
ASMs (000,000)
"capacity" 6,526 6,237 4.6% 26,517 24,434 8.5%
Load factor 85.4% 83.8% 1.6 pts 85.2% 83.3% 1.9 pts
Yield (in
cents) 13.75 13.30 3.4% 14.06 13.58 3.5%
PRASM (in
cents) 11.75 11.14 5.5% 11.98 11.31 5.9%
CASM excluding
fuel(a) (in
cents) 7.89 7.75 1.8% 7.60 7.85 (3.2)%
Economic fuel
cost per
gallon(b) $3.33 $2.56 30.1% $3.18 $2.37 34.2%
Fuel gallons
(000,000) 85.6 82.2 4.1% 346.4 319.6 8.4%
Average number
of full-time
equivalent
employees 8,920 8,711 2.4% 8,916 8,651 3.1%
Aircraft
utilization 10.2 10.1 1.0% 10.5 10.0 5.0%
Average
aircraft
stage length 1,129 1,104 2.3% 1,114 1,085 2.7%
Mainline
operating
fleet at
period-end 117 114 3 a/c 117 114 3 a/c
Regional
Operating
Statistics:(c)
Revenue
passengers
(000) 1,752 1,704 2.8% 6,980 6,820 2.3%
RPMs (000,000)
"traffic" 608 602 1.0% 2,446 2,491 (1.8)%
ASMs (000,000)
"capacity" 772 790 (2.3)% 3,110 3,302 (5.8)%
Load factor 78.8% 76.2% 2.6 pts 78.6% 75.4% 3.2 pts
Yield (in
cents) 31.30 29.60 5.7% 31.66 29.11 8.8%
PRASM (in
cents) 24.65 22.56 9.3% 24.90 21.96 13.4%
Consolidated
Operating
Statistics:(d)
Revenue
passengers
(000) 6,083 5,845 4.1% 24,790 23,334 6.2%
RPMs (000,000)
"traffic" 6,183 5,828 6.1% 25,032 22,841 9.6%
ASMs (000,000)
"capacity" 7,298 7,027 3.9% 29,627 27,736 6.8%
Load factor 84.7% 82.9% 1.8 pts 84.5% 82.4% 2.1 pts
Yield (in
cents) 15.47 14.98 3.3% 15.78 15.27 3.3%
PRASM (in
cents) 13.11 12.42 5.6% 13.33 12.58 6.0%
CASM excluding
fuel and
fleet
transition
costs(a) (in
cents) 8.83 8.84 (0.1)% 8.55 8.82 (3.1)%
Economic fuel
cost per
gallon(b) $3.34 $2.56 30.5% $3.18 $2.37 34.2%
Fuel gallons
(000,000) 98.5 96.2 2.4% 398.3 377.3 5.6%
Average number
of full-time
equivalent
employees 11,807 11,649 1.4% 11,840 11,696 1.2%
(a) See page 8 for a reconciliation of this non-GAAP measure and Note A on page 10 for a discussion of why these measures may be important to investors.
(b) See page 9 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 full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.
ALASKA AIRLINES NON-GAAP FINANCIAL DATA (unaudited)
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Operating Revenues:
Passenger
Mainline $766.5 $694.9 $3,176.2 $2,763.4
Regional 190.3 83.0 774.5 330.6
----- ---- ----- -----
Total passenger
revenue 956.8 777.9 3,950.7 3,094.0
Other revenue 85.6 82.5 358.9 332.6
Total Operating
Revenues 1,042.4 860.4 4,309.6 3,426.6
------- ----- ------- -------
Operating Expenses:
Mainline
operating
expenses,
excluding fuel 515.2 483.4 2,015.4 1,916.9
Mainline
economic
fuel(a) 285.2 209.9 1,101.2 757.3
Regional
expense -paid
to Horizon Air
under CPA 90.1 71.6 369.4 274.4
Other regional
operating
expense,
excluding fuel 45.4 5.8 174.1 24.5
Regional
economic
fuel(a) 43.5 - 166.4 -
---- --- ----- ---
Total Adjusted
Operating
Expenses(b) 979.4 770.7 3,826.5 2,973.1
Adjusted
Operating
Income 63.0 89.7 483.1 453.5
---- ---- ----- -----
Nonoperating
Expense (10.0) (12.4) (39.4) (48.6)
Adjusted Income
before Income
Tax(b) $53.0 $77.3 $443.7 $404.9
===== ===== ====== ======
HORIZON AIR NON-GAAP FINANCIAL DATA (unaudited)
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Operating Revenues:
Passenger
Brand revenue $ - $95.1 $ - $394.5
Revenue from
CPA with
Alaska
Airlines 90.1 71.6 369.4 274.4
---- ---- ----- -----
Total passenger
revenue 90.1 166.7 369.4 668.9
Other revenue 1.9 2.9 8.2 11.1
Total Operating
Revenues 92.0 169.6 377.6 680.0
---- ----- ----- -----
Operating Expenses:
Landing fees,
rents &
selling
expenses(c) - 31.3 - 124.5
All other non-
fuel operating
expenses 83.4 100.3 340.3 377.6
---- ----- ----- -----
Non-fuel
operating
expenses 83.4 131.6 340.3 502.1
Economic fuel
costs(a) - 35.9 - 138.3
--- ---- --- -----
Total Adjusted
Operating
Expenses(b) 83.4 167.5 340.3 640.4
Adjusted
Operating
Income 8.6 2.1 37.3 39.6
Nonoperating
expense (3.5) (3.3) (15.6) (16.8)
Adjusted Income
Before Income
Tax(b) $5.1 $(1.2) $21.7 $22.8
==== ===== ===== =====
(a) See page 9 for a reconciliation of economic fuel cost.
(b) See Note A on page 10 for a discussion about why this measure may be important to investors. “Adjusted” refers to these measures excluding certain items. See page 8 and 9 for reconciliation between adjusted amounts and the most directly comparable GAAP amount.
(c) See Note B on page 10 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 December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Alaska Airlines
operating
revenues $1,042.4 $860.4 $4,309.6 $3,426.6
Horizon Air
operating
revenues 92.0 169.6 377.6 680.0
Elimination of
intercompany
revenue (90.1) (71.5) (369.4) (274.3)
----- ----- ------ ------
Consolidated
operating
revenues $1,044.3 $958.5 $4,317.8 $3,832.3
======== ====== ======== ========
Reconciliation of operating expenses:
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Alaska Airlines
adjusted
operating
expenses $979.4 $770.7 $3,826.5 $2,973.1
Horizon Air
adjusted
operating
expenses 83.4 167.5 340.3 640.4
Parent company
expenses 0.6 0.7 2.5 3.1
Intercompany
eliminations (90.1) (71.6) (369.4) (274.4)
----- ----- ------ ------
Adjusted
consolidated
operating
expenses 973.3 867.3 3,799.9 3,342.2
Fleet
transition
costs - - 38.9 13.2
Mark-to-
market fuel-
hedge (gains)
losses (43.1) (28.1) 30.1 5.3
----- ----- ---- ---
Consolidated
operating
expenses -
GAAP $930.2 $839.2 $3,868.9 $3,360.7
====== ====== ======== ========
Reconciliation of income before income taxes:
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Alaska Airlines
adjusted
income before
income taxes $53.0 $77.3 $443.7 $404.9
Horizon Air
adjusted
income before
income taxes 5.1 (1.2) 21.7 22.8
Parent company
expenses (0.5) (0.7) (2.7) (3.3)
---- ---- ---- ----
Adjusted income
before income
taxes 57.6 75.4 462.7 424.4
Fleet
transition
costs - - (38.9) (13.2)
Mark-to-
market fuel-
hedge gains
(losses) 43.1 28.1 (30.1) (5.3)
Income before
income taxes -
GAAP $100.7 $103.5 $393.7 $405.9
====== ====== ====== ======
Reconciliation of consolidated CASM, excluding fuel:
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Adjusted
consolidated
operating
expenses $973.3 $867.3 $3,799.9 $3,342.2
Less: economic
fuel (328.7) (245.8) (1,267.6) (895.6)
------ ------ -------- ------
Adjusted
consolidated
operating
expenses,
excluding fuel $644.6 $621.5 $2,532.3 $2,446.6
Consolidated
ASMs 7,298 7,027 29,627 27,736
----- ----- ------ ------
CASM, excluding
fuel and fleet
transition
costs (in
cents) 8.83 8.84 8.55 8.82
==== ==== ==== ====
FUEL RECONCILIATIONS
(unaudited)
Alaska Air Group, Inc.
Three Months Ended December 31,
-------------------------------
2011 2010
---- ----
(in millions,
except for per
gallon
amounts) Dollars Cost/Gal Dollars Cost/Gal
------- -------- ------- --------
Raw or "into-
plane" fuel
cost $319.5 $3.24 $247.0 $2.57
Minus gains, or
plus the
losses, during
the period on
settled hedges 9.2 0.10 (1.2) (0.01)
--- ---- ---- -----
Consolidated
economic fuel
expense $328.7 $3.34 $245.8 $2.56
------ ----- ------ -----
Adjustments to
reflect timing
of (gain) or
loss
recognition
resulting from
mark-to-
market
accounting (43.1) (0.44) (28.1) (0.29)
GAAP fuel
expense $285.6 $2.90 $217.7 $2.27
====== ===== ====== =====
Fuel gallons 98.5 96.2
==== ====
Twelve Months Ended December 31,
--------------------------------
2011 2010
---- ----
(in millions,
except for per
gallon
amounts) Dollars Cost/Gal Dollars Cost/Gal
------- -------- ------- --------
Raw or "into-
plane" fuel
cost $1,289.0 $3.24 $898.9 $2.38
Minus gains, or
plus the
losses, during
the period on
settled hedges (21.4) (0.06) (3.3) (0.01)
----- ----- ---- -----
Consolidated
economic fuel
expense $1,267.6 $3.18 $895.6 $2.37
-------- ----- ------ -----
Adjustments to
reflect timing
of (gain) or
loss
recognition
resulting from
mark-to-
market
accounting 30.1 0.08 5.3 0.01
GAAP fuel
expense $1,297.7 $3.26 $900.9 $2.38
======== ===== ====== =====
Fuel gallons 398.3 377.3
===== =====
Breakout of Fuel Expense:
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions) 2011 2010 2011 2010
---- ---- ---- ----
Mainline
economic fuel
expense $285.2 $209.9 $1,101.2 $757.3
Regional
economic fuel
expense 43.5 35.9 166.4 138.3
Consolidated
economic fuel
expense $328.7 $245.8 $1,267.6 $895.6
====== ====== ======== ======
Mainline Economic Cost per Gallon Reconciliation:
Three Months Ended December Twelve Months Ended
31, December 31,
---------------------------- --------------------
(in millions,
except for per
gallon
amounts) 2011 2010 2011 2010
---- ---- ---- ----
Mainline
economic fuel
expense $285.2 $209.9 $1,101.2 $757.3
Mainline fuel
gallons 85.6 82.2 346.4 319.6
---- ---- ----- -----
Mainline
economic cost
per gallon $3.33 $2.56 $3.18 $2.37
===== ===== ===== =====
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 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.
Glossary of Terms
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
RPMs – revenue passenger miles, or “traffic”; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM
ASMs – available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown
Load Factor – RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers
Yield – passenger revenue per RPM; represents the average revenue for flying one passenger one mile
PRASM – passenger revenue per ASM; commonly called “passenger unit revenue”
RASM – operating revenue per ASMs, or “unit revenue”; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; represents the average total revenue for flying one seat one mile
CASM – operating costs per ASM, or “unit cost”; represents all operating expenses including fuel and special items
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
Aircraft Utilization – block hours per day; this represents the average number of hours our aircraft are flying
Aircraft Stage Length – represents the average miles flown per aircraft departure
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 – number of revenue passengers per full-time equivalent employee
SOURCE Alaska Air Group Inc.
