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Alaska Air Group Reports Record Adjusted Fourth Quarter And Full-Year Results

January 24, 2013

SEATTLE, Jan. 24, 2013 /PRNewswire/ —

Highlights and achievements:

  • Record fourth quarter net income, excluding special items, of $50 million, or $0.70 per diluted share, compared to $37 million, or $0.51 per diluted share. This quarter’s results compare to a First Call analyst consensus estimate of $0.71 per share.
  • Record full-year net income, excluding special items, of $339 million, or $4.73 per diluted share, compared to $287 million, or $3.92 per diluted share.
  • Net income for the fourth quarter under Generally Accepted Accounting Principles (GAAP) of $44 million, or $0.61 per diluted share, compared to net income of $64 million, or $0.88 per diluted share. Full-year GAAP net income of $316 million, or $4.40 per diluted share, compared to net income of $245 million, or $3.33 per diluted share.
  • Air Group employees earned $88 million in incentive pay, or more than one-month’s pay for most employees. Over the last four years, employees have earned more than $325 million in incentive pay, averaging 8% of annual pay for most employees.
  • Ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” by J.D. Power and Associates for the fifth year in a row.
  • Signed an aircraft purchase agreement with The Boeing Company for 50 new 737 aircraft, including 37 of Boeing’s new 737 MAX aircraft with deliveries expected in 2015 through 2024.
  • Carried a record number passengers in 2012 and achieved a record load factor of 85.9 percent, up 1.4 points from the prior year.
  • Improved employee productivity by 3.5 percent compared to the fourth quarter of 2011.
  • Completed renovation of Terminal 6 at Los Angeles International Airport (LAX) in March, which includes the Airport of the Future design, new common use systems, additional gates and convenient connections with international flights.
  • Ratified a six-year agreement in December with the International Brotherhood of Teamsters (IBT) representing Horizon’s pilots.
  • Ratified a six-year agreement in July with the International Association of Machinists and Aerospace Workers (IAMAW) representing Alaska’s ramp service and stores agents.
  • Repurchased 1,685,951 shares of common stock for approximately $60 million. Since 2007, Air Group has used $320 million to repurchase 18 million shares.
  • Lowered adjusted debt-to-total capitalization ratio by 8 points to 54 percent since Dec. 31, 2011 and by 27 points from 81 percent at the end of 2008.
  • Held $1.3 billion in unrestricted cash and marketable securities as of December 31, 2012.
  • Achieved twelve-month return on invested capital of 13 percent, surpassing the 10 percent goal for the third year in a row.
  • Contributed $110 million to the defined-benefit pension plans during 2012, bringing the total over four years to approximately $540 million, despite having no required contribution.

New routes:

  • Began new service from San Diego to Orlando, Portland to Lihue, Bellingham to Maui, and Anchorage to Kona in the fourth quarter, bringing the full year up to 21 new routes.
  • Announced service from San Diego to Boston and Lihue, and from Seattle to Salt Lake City beginning in 2013.

Alaska Air Group, Inc. (NYSE: ALK) today reported fourth quarter 2012 GAAP net income of $44 million, or $0.61 per diluted share, compared to GAAP net income of $64 million, or $0.88 per diluted share in 2011. Excluding mark-to-market fuel hedge losses of $10 million ($6 million after tax, or $0.09 per diluted share), the company reported record fourth quarter 2012 net income of $50 million, or $0.70 per diluted share, compared to net income excluding mark-to-market fuel hedge gains of $37 million, or $0.51 per diluted share, in 2011.

The company reported full-year 2012 GAAP net income of $316 million, compared to $245 million in the prior year. Excluding the impact of the items noted in the table below, the company reported record net income of $339 million, or $4.73 per diluted share for 2012, compared to net income of $287 million, or $3.92 per diluted share in 2011. This marks the company’s ninth consecutive year of adjusted profits and the third year in a row the company has exceeded its goal of a 10 percent return on invested capital.

“We’re very pleased with our strong performance in 2012, and we are moving ahead in 2013 to make Alaska a great business as well as a great airline,” Chief Executive Officer Brad Tilden said. “I want to thank our 13,000 employees who are dedicated to providing our award-winning service, along with our loyal customers for their business and our investors who continue to put their trust in our company and our future.”

The following table reconciles the Company’s adjusted net income and earnings per diluted share (EPS) during the full year and fourth quarters of 2012 and 2011 to amounts as reported in accordance with GAAP:

                                      Three Months Ended December 31,
                                      -------------------------------
                                           2012                                    2011
                                           ----                                    ----
    (in millions,
     except per share
     amounts)         Dollars       Diluted EPS             Dollars         Diluted EPS
                      -------       -----------             -------         -----------
    Reported GAAP net
     income                     $44                                   $0.61                 $64 $0.88
    Mark-to-market
     fuel hedge
     adjustments, net
     of tax                  6                      0.09                            (27) (0.37)
                           ---                      ----                            ---   -----
    Non-GAAP
     adjusted income
     and per share
     amounts                    $50                                   $0.70                 $37 $0.51
                                ===                                   =====                 === =====

                                      Twelve Months Ended December 31,
                                      --------------------------------
                                           2012                                    2011
                                           ----                                    ----
    (in millions,
     except per share
     amounts)         Dollars       Diluted EPS             Dollars         Diluted EPS
                      -------       -----------             -------         -----------
    Reported GAAP net
     income                    $316                                   $4.40                $245 $3.33
    Fleet transition
     costs, net of
     tax                     -                         -                             24    0.33
    Mark-to-market
     fuel hedge
     adjustments, net
     of tax                 23                      0.33                             18    0.26
    Non-GAAP
     adjusted income
     and per share
     amounts                   $339                                   $4.73                $287 $3.92
                               ====                                   =====                ==== =====

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 the last page of this release.

A conference call regarding the fourth quarter and full year results will be simulcast via the Internet at 9:30 a.m. Pacific time on January 24, 2013. 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, 2011. 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, a subsidiary of Alaska Air Group (NYSE: ALK), together with its partner regional airlines, serves 95 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines has ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” in the J.D. Power and Associates North America Airline Satisfaction Study(SM) for five consecutive years from 2008 to 2012. For reservations, visit www.alaskaair.com. For more news and information, visit the Alaska Airlines newsroom at www.alaskaair.com/newsroom.

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

                                                    Three Months Ended December 31,                           Twelve Months Ended December 31,
                                                    -------------------------------                           --------------------------------
    (in millions, except
     per share amounts)                            2012                  2011              Change       2012              2011                 Change
                                                   ----                  ----              ------       ----              ----                 ------
    Operating Revenues:
    Passenger
    Mainline                                                $793                                   $726                      9%                               $3,284        $2,995 10%
    Regional                                        188                               176                  7%                           746                      713     5%
                                                    ---                               ---                                               ---                      ---
    Total passenger
     revenue                                        981                               902                  9%                         4,030                    3,708     9%
    Freight and mail                                 26                                25                  4%                           111                      109     2%
    Other - net                                     125                               117                  7%                           516                      501     3%
    Total Operating
     Revenues                                     1,132                             1,044                  8%                         4,657                    4,318     8%
                                                  -----                             -----                                             -----                    -----

    Operating Expenses:
    Wages and benefits                              267                               253                  6%                         1,038                      991     5%
    Variable incentive pay                           27                                19                 42%                            88                       72    22%
    Aircraft fuel,
     including hedging
     gains and losses                               372                               286                 30%                         1,459                    1,298    12%
    Aircraft maintenance                             61                                53                 15%                           222                      206     8%
    Aircraft rent                                    30                                28                  7%                           116                      116     -
    Landing fees and other
     rentals                                         59                                58                  2%                           243                      238
                                                                                                                                                                         2%
    Contracted services                              51                                49                  4%                           200                      185     8%
    Selling expenses                                 37                                42               (12)%                           168                      175   (4)%
    Depreciation and
     amortization                                    69                                63                 10%                           264                      247     7%
    Food and beverage
     service                                         21                                17                 24%                            79                       67    18%
    Other                                            64                                62                  3%                           248                      235     6%
    Fleet transition costs                            -                                 -                 NM                              -                       39    NM
                                                    ---                               ---                                               ---                      ---
    Total Operating
     Expenses                                     1,058                               930                 14%                         4,125                    3,869     7%
    Operating Income                                 74                               114               (35)%                           532                      449    18%
                                                    ---                               ---                                               ---                      ---

    Nonoperating Income
     (Expense):
    Interest income                                   5                                 4                                   19                            22
    Interest expense                                (15)                              (18)                                 (64)                          (87)
    Interest capitalized                              5                                 7                                   18                            12
    Other - net                                       3                                (6)                                   9                            (2)
                                                     (2)                              (13)                                 (18)                          (55)
    Income Before Income
     Tax                                             72                               101               (29)%                           514                      394    30%
    Income tax expense                               28                                37                                  198                           149
    Net Income                                               $44                                    $64                   (31)%                                 $316          $245 29%
                                                             ===                                    ===                                                         ====          ====

    Basic Earnings Per
     Share:                                                $0.62                                  $0.90                                                $4.47         $3.41
    Diluted Earnings Per
     Share:                                                $0.61                                  $0.88                                                $4.40         $3.33
    Shares Used for
     Computation:
    Basic                                        71.112                            71.122                               70.708                        71.755
    Diluted                                      72.149                            72.635                               71.784                        73.421

NM – Not Meaningful

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

    (in millions)                        December 31,         December 31,
                                             2012                 2011
                                        -------------        -------------
    Cash and
     marketable
     securities                                       $1,252                        $1,141
                                                      ======                        ======

    Total current
     assets                                     1,737                         1,596
    Property and
     equipment-net                              3,609                         3,373
    Other assets                                  159                           198
                                                  ---                           ---
    Total assets                                      $5,505                        $5,167
                                                      ======                        ======

    Current
     liabilities                                      $1,501                        $1,510
    Long-term debt                                871                         1,099
    Other liabilities
     and credits                                1,712                         1,384
    Shareholders'
     equity                                     1,421                         1,174
                                                -----                         -----
    Total liabilities
     and
     shareholders'
     equity                                           $5,505                        $5,167
                                                      ======                        ======

    Debt to
     Capitalization,
     adjusted for
     operating leases                         54%:46%                      62%:38%
                                               ======                        ======

    Number of common
     shares
     outstanding                               70.377                        70.950
                                               ======                        ======

    OPERATING STATISTICS SUMMARY (unaudited)
    Alaska Air Group, Inc.
                                                Three Months Ended December 31,                               Twelve Months Ended December 31,
                                                -------------------------------                               --------------------------------
                                               2012                  2011              Change              2012                 2011              Change
                                               ----                  ----              ------              ----                 ----              ------
    Consolidated Operating
     Statistics:(a)
    Revenue passengers
     (000)                                    6,387                             6,083                       5.0%                           25,896              24,790           4.5%
    RPMs (000,000)
     "traffic"                                6,720                             6,183                       8.7%                           27,007              25,032           7.9%
    ASMs (000,000)
     "capacity"                               7,870                             7,298                       7.8%                           31,428              29,627           6.1%
    Load factor                                85.4%                             84.7%              0.7 pts                     85.9%                    84.5%        1.4 pts
    Yield                                    14.59¢                            14.59¢               -                                      14.92¢              14.81¢           0.7%
    PRASM                                    12.46¢                            12.36¢                       0.8%                           12.82¢              12.51¢           2.5%
    RASM                                     14.39¢                            14.31¢                       0.6%                           14.82¢              14.57¢           1.7%
    CASM excluding fuel
     and fleet transition
     costs(b)                                 8.72¢                             8.83¢                     (1.2)%                            8.48¢               8.55¢         (0.8)%
    Economic fuel cost per
     gallon(c)                                         $3.43                                  $3.34                              2.7%                           $3.37                $3.18 6.0%
    Fuel gallons (000,000)                      105                                99                       6.1%                              422                 398           6.0%
    Average number of
     full-time equivalent
     employees                               11,984                            11,807                       1.5%                           11,955              11,840           1.0%

    Mainline Operating
     Statistics:
    Revenue passengers
     (000)                                    4,513                             4,331                       4.2%                           18,526              17,810           4.0%
    RPMs (000,000)
     "traffic"                                6,065                             5,575                       8.8%                           24,417              22,586           8.1%
    ASMs (000,000)
     "capacity"                               7,056                             6,526                       8.1%                           28,180              26,517           6.3%
    Load factor                                86.0%                             85.4%              0.6 pts                     86.6%                    85.2%        1.4 pts
    Yield                                    13.08¢                            13.01¢                       0.5%                           13.45¢              13.26¢           1.4%
    PRASM                                    11.24¢                            11.12¢                       1.1%                           11.65¢              11.29¢           3.2%
    RASM                                     13.15¢                            13.04¢                       0.8%                           13.62¢              13.31¢           2.3%
    CASM excluding fuel(b)                    7.77¢                             7.89¢                     (1.5)%                            7.56¢               7.60¢         (0.5)%
    Economic fuel cost per
     gallon(c)                                         $3.43                                  $3.33                              3.0%                           $3.36                $3.18 5.7%
    Fuel gallons (000,000)                       92                                86                       7.0%                              368                 346           6.4%
    Average number of
     full-time equivalent
     employees                                9,228                             8,920                       3.5%                            9,178               8,916           2.9%
    Aircraft utilization                       10.5                              10.2                       2.9%                             10.7                10.5           1.9%
    Average aircraft stage
     length                                   1,189                             1,129                       5.3%                            1,161               1,114           4.2%
    Mainline operating
     fleet                                      124                               117               7 a/c                        124                      117         7 a/c

    Regional Operating
     Statistics:(d)
    Revenue passengers
     (000)                                    1,873                             1,752                       6.9%                            7,371               6,980           5.6%
    RPMs (000,000)
     "traffic"                                  655                               608                       7.7%                            2,590               2,446           5.9%
    ASMs (000,000)
     "capacity"                                 814                               772                       5.4%                            3,247               3,110           4.4%
    Load factor                                80.4%                             78.8%              1.6 pts                     79.8%                    78.6%        1.2 pts
    Yield                                    28.64¢                            28.82¢                     (0.6)%                           28.81¢              29.13¢         (1.1)%
    PRASM                                    23.03¢                            22.84¢                       0.8%                           22.98¢              22.94¢           0.2%
    Operating fleet
     (Horizon only)                              48                                48                         -                                48                  48             -

    (a)            Except for full-time equivalent
                   employees, data includes
                   information related to third-
                   party regional capacity purchase
                   flying arrangements.
    (b)            See a reconciliation of this non-
                   GAAP measure and Note A for a
                   discussion of why these measures
                   may be important to investors in
                   the accompanying pages.
    (c)            See a reconciliation of economic
                   fuel cost in the accompanying
                   pages.
    (d)            Data presented includes information
                   related to flights operated by
                   Horizon Air and third-party
                   carriers.

    OPERATING SEGMENTS (unaudited)
    Alaska Air Group, Inc.

                                                                         Three Months Ended December 31, 2012
                                                                         ------------------------------------
                                               Alaska
                                               ------
    (in millions)                  Mainline           Regional      Horizon                 Consolidating       Air Group
                                                                                                               Adjusted(a)      Special Items Consolidated
                                    --------           --------      -------                -------------     ------------      ------------- ------------
    Operating revenues
    Passenger
    Mainline                                    $793                       $             -                               $   -                           $    -       $793        $    -  $793
    Regional                               -                    188                                     -                    -                         188         -         188
                                         ---                    ---                                   ---                  ---                         ---       ---         ---
    Total passenger
     revenues                            793                    188                                     -                    -                         981         -         981
    Revenue from CPA with
     Alaska                                -                      -                                    97                  (97)                          -         -           -
    Freight and mail                      25                      1                                     -                    -                          26         -          26
    Other-net                            110                     14                                     1                    -                         125         -         125
                                         ---                    ---                                   ---                  ---                         ---       ---         ---
    Total operating
     revenues                            928                    203                                    98                  (97)                      1,132         -       1,132
                                         ---                    ---                                   ---                  ---                       -----       ---       -----

    Operating expenses
    Operating expenses,
     excluding fuel                      548                    145                                    90                  (97)                        686         -         686
    Economic fuel                        315                     47                                     -                    -                         362        10         372
                                         ---
    Total operating
     expenses                            863                    192                                    90                  (97)                      1,048        10       1,058
                                         ---                    ---                                   ---                  ---                       -----       ---       -----

    Nonoperating income
     (expense)
    Interest income                        5                      -                                     -                    -                           5         -           5
    Interest expense                     (11)                     -                                    (4)                   -                         (15)        -         (15)
    Other                                  8                      -                                     1                   (1)                          8         -           8
                                         ---                    ---                                   ---                  ---                         ---       ---         ---
                                           2                      -                                    (3)                  (1)                         (2)        -          (2)
    Income (loss) before
     income tax                                  $67                                   $11                                  $5                              $(1)       $82          $(10)  $72
                                                 ===                                   ===                                 ===                              ===        ===          ====   ===

                                                                         Three Months Ended December 31, 2011
                                                                         ------------------------------------
                                             Alaska
                                             ------
    (in millions)                  Mainline           Regional      Horizon                 Consolidating       Air Group
                                                                                                               Adjusted(a)      Special Items Consolidated
                                    --------           --------      -------                -------------     ------------      ------------- ------------
    Operating revenues
    Passenger
    Mainline                                    $726                       $             -                               $   -                           $    -       $726        $    -  $726
    Regional                               -                    176                                     -                    -                         176         -         176
                                         ---                    ---                                   ---                  ---                         ---       ---         ---
    Total passenger
     revenues                            726                    176                                     -                    -                         902         -         902
    Revenue from CPA with
     Alaska                                -                      -                                    90                  (90)                          -         -           -
    Freight and mail                      24                      1                                     -                    -                          25         -          25
    Other-net                            101                     14                                     2                    -                         117         -         117
                                         ---                    ---                                   ---                  ---                         ---       ---         ---
    Total operating
     revenues                            851                    191                                    92                  (90)                      1,044         -       1,044
                                         ---                    ---                                   ---                  ---                       -----       ---       -----

    Operating expenses
    Operating expenses,
     excluding fuel                      515                    135                                    83                  (89)                        644         -         644
    Economic fuel                        285                     44                                     -                    -                         329       (43)        286
                                         ---
    Total operating
     expenses                            800                    179                                    83                  (89)                        973       (43)        930
                                         ---                    ---                                   ---                  ---                         ---       ---         ---

    Nonoperating income
     (expense)
    Interest income                        3                      -                                     -                    1                           4         -           4
    Interest expense                     (14)                     -                                    (4)                   -                         (18)        -         (18)
    Other                                  1                      -                                     -                    -                           1         -           1
                                         ---                    ---                                   ---                  ---                         ---       ---         ---
                                         (10)                     -                                    (4)                   1                         (13)        -         (13)
    Income (loss) before
     income tax                                  $41                                   $12                                  $5                           $    -        $58           $43  $101
                                                 ===                                   ===                                 ===                         ===  ===        ===           ===  ====

    OPERATING SEGMENTS (unaudited)
    Alaska Air Group, Inc.

                                                                        Twelve Months Ended December 31, 2012
                                                                        -------------------------------------
                                               Alaska
                                               ------
    (in millions)                  Mainline           Regional      Horizon                 Consolidating       Air Group
                                                                                                               Adjusted(a)       Special Items     Consolidated
                                    --------           --------      -------                -------------     ------------       -------------     ------------
    Operating revenues
    Passenger
    Mainline                                   $3,284                      $             -                               $    -                               $    -          $3,284        $    -  $3,284
    Regional                               -                    746                                     -                     -                             746             -          746
                                         ---                    ---                                   ---                   ---                             ---           ---          ---
    Total passenger
     revenues                          3,284                    746                                     -                     -                           4,030             -        4,030
    Revenue from CPA with
     Alaska                                -                      -                                   369                  (369)                              -             -            -
    Freight and mail                     107                      4                                     -                     -                             111             -          111
    Other-net                            448                     61                                     7                     -                             516             -          516
                                         ---                    ---                                   ---                   ---                             ---           ---          ---
    Total operating
     revenues                          3,839                    811                                   376                  (369)                          4,657             -        4,657
                                       -----                    ---                                   ---                  ----                           -----           ---        -----

    Operating expenses
    Operating expenses,
     excluding fuel                    2,131                    566                                   338                  (369)                          2,666             -        2,666
    Economic fuel                      1,238                    183                                     -                     -                           1,421            38        1,459
                                       -----
    Total operating
     expenses                          3,369                    749                                   338                  (369)                          4,087            38        4,125
                                       -----                    ---                                   ---                  ----                           -----           ---        -----

    Nonoperating income
     (expense)
    Interest income                       19                      -                                     -                     -                              19             -           19
    Interest expense                     (47)                     -                                   (16)                   (1)                            (64)            -          (64)
    Other                                 24                      -                                     2                     1                              27             -           27
                                         ---                    ---                                   ---                   ---                             ---           ---          ---
                                          (4)                     -                                   (14)                    -                             (18)            -          (18)
    Income (loss) before
     income tax                                  $466                                  $62                                  $24                               $    -            $552          $(38)   $514
                                                 ====                                  ===                                  ===                             ===  ===            ====          ====    ====

                                                                        Twelve Months Ended December 31, 2011
                                                                        -------------------------------------
                                             Alaska
                                             ------
    (in millions)                  Mainline           Regional      Horizon                 Consolidating       Air Group
                                                                                                               Adjusted(a)       Special Items     Consolidated
                                    --------           --------      -------                -------------     ------------       -------------     ------------
    Operating revenues
    Passenger
    Mainline                                   $2,995                      $             -                               $    -                               $    -          $2,995        $    -  $2,995
    Regional                               -                    713                                     -                     -                             713             -          713
                                         ---                    ---                                   ---                   ---                             ---           ---          ---
    Total passenger
     revenues                          2,995                    713                                     -                     -                           3,708             -        3,708
    Revenue from CPA with
     Alaska                                -                      -                                   369                  (369)                              -             -            -
    Freight and mail                     105                      4                                     -                     -                             109             -          109
    Other-net                            431                     62                                     8                     -                             501             -          501
                                         ---                    ---                                   ---                   ---                             ---           ---          ---
    Total operating
     revenues                          3,531                    779                                   377                  (369)                          4,318             -        4,318
                                       -----                    ---                                   ---                  ----                           -----           ---        -----

    Operating expenses
    Operating expenses,
     excluding fuel(b)                 2,015                    544                                   340                  (367)                          2,532            39        2,571
    Economic fuel                      1,101                    167                                     -                     -                           1,268            30        1,298
                                       -----
    Total operating
     expenses                          3,116                    711                                   340                  (367)                          3,800            69        3,869
                                       -----                    ---                                   ---                  ----                           -----           ---        -----

    Nonoperating income
     (expense)
    Interest income                       24                      -                                     -                    (2)                             22             -           22
    Interest expense                     (72)                     -                                   (17)                    2                             (87)            -          (87)
    Other                                  8                      -                                     2                                       10                      -         10
                                         ---                    ---                                   ---                                      ---                    ---        ---
                                         (40)                     -                                   (15)                    -                             (55)            -          (55)
    Income (loss) before
     income tax                                  $375                                  $68                                  $22                                  $(2)           $463          $(69)   $394
                                                 ====                                  ===                                  ===                                  ===            ====          ====    ====

    (a)            The adjusted column represents the
                   financial information that is
                   reviewed by management to assess
                   performance of operations and
                   determine capital allocations and
                   does not include certain charges.
                   See Note A for further information
                   in the accompanying pages.
    (b)            Special charges related to CRJ-700
                   fleet transitions costs.

    FUEL RECONCILIATIONS (unaudited)
    Alaska Air Group, Inc.

                                                                  Three Months Ended December 31,
                                                                  -------------------------------
                                                                    2012                                            2011
                                                                    ----                                            ----
    (in millions, except
     for per gallon
     amounts)                                Dollars            Cost/Gal             Dollars           Cost/Gal
                                             -------            --------             -------           --------
    Raw or "into-plane"
     fuel cost                                            $351                                  $3.33                      $320   $3.24
    (Gains) losses on
     settled hedges                                11                        0.10                             9            0.10
                                                  ---                        ----                           ---            ----
    Consolidated economic
     fuel expense                                         $362                                  $3.43                      $329   $3.34
                                                          ----                                  -----                      ----   -----
    Mark-to-market fuel
     hedge adjustments                             10                        0.10                           (43)          (0.44)
    GAAP fuel expense                                     $372                                  $3.53                      $286   $2.90
                                                          ====                                  =====                      ====   =====
    Fuel gallons                                  105                                              99
                                                  ===                                             ===

                                                               Twelve Months Ended December 31,
                                                               --------------------------------
                                                                    2012                                            2011
                                                                    ----                                            ----
    (in millions, except
     for per gallon
     amounts)                                Dollars            Cost/Gal             Dollars           Cost/Gal
                                             -------            --------             -------           --------
    Raw or "into-plane"
     fuel cost                                          $1,397                                  $3.31                    $1,289   $3.24
    (Gains) losses on
     settled hedges                                24                        0.06                           (21)          (0.06)
                                                  ---                        ----                           ---           -----
    Consolidated economic
     fuel expense                                       $1,421                                  $3.37                    $1,268   $3.18
                                                        ------                                  -----                    ------   -----
    Mark-to-market fuel
     hedge adjustments                             38                        0.09                            30            0.08
    GAAP fuel expense                                   $1,459                                  $3.46                    $1,298   $3.26
                                                        ======                                  =====                    ======   =====
    Fuel gallons                                  422                                             398
                                                  ===                                             ===

    Breakout of Fuel Expense:
                                           Three Months Ended December 31,            Twelve Months Ended December 31,
                                           -------------------------------            --------------------------------
    (in millions)                                2012               2011                 2012              2011
                                                 ----               ----                 ----              ----
    Mainline economic fuel
     expense                                              $315                                   $285                    $1,238  $1,101
    Regional economic fuel
     expense                                       47                          44                           183             167
    Consolidated economic
     fuel expense                                         $362                                   $329                    $1,421  $1,268
                                                          ====                                   ====                    ======  ======

    Mainline Economic Cost per Gallon Reconciliation:
                                           Three Months Ended December 31,            Twelve Months Ended December 31,
                                           -------------------------------            --------------------------------
    (in millions, except
     for per gallon
     amounts)                                    2012               2011                 2012              2011
                                                 ----               ----                 ----              ----
    Mainline economic fuel
     expense                                              $315                                   $285                    $1,238  $1,101
    Mainline fuel gallons                          92                          86                           368             346
                                                  ---                         ---                           ---             ---
    Mainline economic cost
     per gallon                                          $3.43                                  $3.33                     $3.36   $3.18
                                                         =====                                  =====                     =====   =====

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.
  • 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.

All inter-company revenues and expenses are eliminated in consolidation.

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.


Source: PR Newswire