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Alaska Air Group Reports Record First Quarter Results

April 21, 2011

SEATTLE, April 21, 2011 /PRNewswire/ –

First quarter highlights:

  • Record first-quarter net income, excluding special items, of $29.5 million, or $0.80 per diluted share–more than double the $13.1 million, or $0.36 per diluted share, reported in the first quarter of 2010. This compares to a First Call mean estimate of $0.71 per share.
  • Net income under Generally Accepted Accounting Principles (GAAP) of $74.2 million, or $2.01 per diluted share, compared to net income of $5.3 million, or $0.15 per diluted share, in 2010.
  • Air Group posts a 16 percent improvement in revenues compared to the first quarter of 2010.
  • Air Group reduces non-fuel unit costs by 6.3 percent.
  • Employee productivity improves 8 percent compared to the first quarter of 2010.
  • Air Group remains well hedged against rising oil prices, saving $12.5 million in the first quarter.
  • Air Group held $1.0 billion in unrestricted cash and marketable securities as of March 31, 2011.
  • Air Group prepaid $52 million of long-term debt during the quarter. Adjusted debt-to-total capitalization ratio now stands at 65 percent–the lowest since 1999.
  • Air Group trailing 12-month return on invested capital is 11.3 percent.
  • Beginning Jan. 1, 2011, Horizon Air began operating 100 percent of its flights under a capacity purchase agreement with Alaska Airlines. Four Horizon Q400 aircraft now feature the Alaska livery.
  • Alaska Airlines holds the No. 1 spot in U.S. Department of Transportation on-time performance among the 10 largest U.S. airlines for the 12 months ending in February.
  • Air Group completed its current $50 million share repurchase program in early April. Since 2007, Air Group has repurchased approximately 7.6 million shares at an average price of $28 per share.
  • Alaska’s employees represented by the International Association of Machinists, including customer service and reservation agents and certain clerical staff, ratified a new contract on Jan. 31. Alaska reached tentative agreement on a new contract with its dispatchers, represented by the Transport Workers Union, on March 24.

Alaska Air Group Inc. (NYSE: ALK) today reported first quarter 2011 net income of $74.2 million, or $2.01 per diluted share, compared to net income of $5.3 million, or $0.15 per diluted share, in the first quarter of 2010. Excluding mark-to-market fuel hedge gains of $82.0 million ($51.0 million after tax, or $1.38 per diluted share) and CRJ-700 fleet transition costs of $10.1 million ($6.3 million after tax, or $0.17 per diluted share), the company reported record first quarter 2011 net income of $29.5 million, or $0.80 per diluted share, compared to net income of $13.1 million, or $0.36 per diluted share, excluding special items, in the first quarter of 2010.

“We are pleased to report a record first quarter profit. This quarter’s results are due to strong passenger demand leading to a 16 percent, or $136 million, improvement in revenue. This profit is especially gratifying given the significant increase in fuel costs,” Chairman and CEO Bill Ayer said. “As we look ahead, fuel prices will be an even bigger challenge, but we are well positioned with our efficient fleet, diversified network and the fundamental changes we’ve made to our business over the past several years. Our people are operating a great airline and their hard work is paying off.”

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


                                      Three months ended March 31
                                      ---------------------------
                                                                2011
                                                                ----
                                                           Diluted
                                        Dollars                          EPS
                                        -------           --------
    Net income and diluted EPS,
     excluding the items noted
     below:                               $29.5             $0.80
    CRJ-700 fleet transition
     costs, net of tax                     (6.3)            (0.17)
    Adjustments to reflect the
     timing of gain or loss
     recognition resulting from
     mark-to-market fuel-hedge
     accounting, net of tax                51.0          1.38
                                           ----              ----
    Reported GAAP amounts                 $74.2             $2.01
                                          =====             =====


                                     Three months ended March 31
                                     ---------------------------
                                                              2010
                                                              ----
                                                          Diluted
                                        Dollars                         EPS
                                        -------          --------
    Net income and diluted EPS,
     excluding the items noted
     below:                               $13.1              $0.36
    CRJ-700 fleet transition
     costs, net of tax                       -                 -
    Adjustments to reflect the
     timing of gain or loss
     recognition resulting from
     mark-to-market fuel-hedge
     accounting, net of tax                (7.8)         (0.21)
                                           ----              -----
    Reported GAAP amounts                  $5.3              $0.15
                                           ====              =====

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 at the end of this release.

A conference call regarding the first quarter results will be simulcast via the Internet at 8:30 a.m. Pacific time on April 21. It can be accessed through the company’s website at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call at www.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 current economic conditions, increases in operating costs including fuel, competition, labor costs and relations, 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 and 2010 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 and, to a much lesser extent, 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.

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

                                               Three Months Ended March
                                                             31,
                                                 -------------------------
    (in millions, except per share amounts)         2011                2010
                                                    ----                ----
    Operating Revenues:
    Passenger
    Mainline                                   $702.4              $587.0
    Regional                                    176.5               165.4
                                                -----               -----
    Total passenger revenue                     878.9               752.4
    Freight and mail                             24.9                23.0
    Other - net                                  61.4                54.2
    Total Operating Revenues                    965.2               829.6
                                                -----               -----

    Operating Expenses:
    Wages and benefits                          249.3               239.3
    Variable incentive pay                       16.4                17.9
    Aircraft fuel, including hedging gains and
     losses                                     194.5               207.3
    Aircraft maintenance                         53.3                57.0
    Aircraft rent                                30.5                37.0
    Landing fees and other rentals               57.9                55.9
    Contracted services                          43.5                39.6
    Selling expenses                             39.8                33.6
    Depreciation and amortization                60.3                56.2
    Food and beverage service                    15.1                12.3
    Other                                        60.7                47.8
    CRJ-700 fleet transition costs               10.1                  -
    Total Operating Expenses                    831.4               803.9
    Operating Income                            133.8                25.7
                                                -----                ----

    Nonoperating Income (Expense):
    Interest income                               7.6                 7.5
    Interest expense                            (23.4)              (25.6)
    Interest capitalized                          1.8                 1.7
    Other - net                                   0.9                 0.9
                                                (13.1)              (15.5)
    Income Before Income Tax                    120.7                10.2
    Income tax expense                           46.5                 4.9
    Net Income                                  $74.2                $5.3
                                                -----                 ---

    Basic Earnings Per Share:                   $2.06               $0.15
    Diluted Earnings Per Share:                 $2.01               $0.15
    Shares Used for Computation:
    Basic                                      35.994              35.667
    Diluted                                    36.841              36.393

    CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
    Alaska Air Group, Inc.
                                                     March 31,       December
    (in millions)                                         2011       31, 2010
                                                    ----------       --------

    Cash and marketable securities                 $1,042.5      $1,208.2
                                                   ========      ========

    Total current assets                            1,596.0       1,662.0
    Property and equipment-net                      3,202.2       3,117.1
    Other assets                                      313.2         237.5
    Total assets                                   $5,111.4      $5,016.6
                                                   ========      ========

    Current liabilities                            $1,484.4      $1,424.7
    Long-term debt                                  1,275.2       1,313.0
    Other liabilities and credits                   1,181.7       1,173.5
    Shareholders' equity                            1,170.1       1,105.4
    Total liabilities and shareholders' equity     $5,111.4      $5,016.6
                                                   ========      ========

    Debt to Capitalization, adjusted for operating
     leases                                        65%:35%     67%:33%
                                                   =======      =======

    Number of common shares outstanding              36.031        35.924
                                                     ======        ======

    OPERATING STATISTICS SUMMARY (unaudited)
    Alaska Air Group, Inc.

    Consolidated Operations:(a)
                                   Three Months Ended March 31,
                                   ----------------------------
                                        2011          2010        Change
                                        ----          ----        ------
    Revenue passengers (000)        5,752         5,225          10.1%
    RPMs (000,000) "traffic"        5,853         5,048          15.9%
    ASMs (000,000) "capacity"       7,112         6,350          12.0%
    Passenger load factor            82.3%         79.5%          2.8   pts
    Operating revenue per ASM
     (RASM) (in cents)              13.57         13.06           3.9%
    Passenger revenue per ASM
     (PRASM) (in cents)             12.36         11.85           4.3%
    CASM excluding fuel and CRJ-
     700 fleet transition costs(b)
     (in cents)                      8.81          9.40         (6.3)%
    Economic fuel cost per
     gallon(c)                      $2.87         $2.26          27.0%
    Fuel gallons (000,000)           96.3          86.5          11.3%
    Average number of full-time
     equivalent employees          11,884        11,698           1.6%

    (a)    Except for revenue passengers, fuel gallons and full-time
    equivalent employees, data presented also includes information
    related to third party regional capacity purchase flying
    arrangements.
    (b)    See page 10 for a reconciliation of this non-GAAP measure and
    Note A on page 12 for a discussion about why this measure may be
    important to investors.
    (c)    See page 11 for a reconciliation of economic fuel cost.

    ALASKA AIRLINES NON-GAAP FINANCIAL AND STATISTICAL DATA (unaudited)

                                            Three Months Ended March
                                                         31,
                                              -------------------------
    (in millions)                               2011                 2010
                                                ----                 ----
    Operating Revenues:
    Passenger
    Mainline                               $702.4               $587.0
    Regional                                176.5                 76.1
                                            -----                 ----
    Total passenger revenue                 878.9                663.1
    Other revenue                            83.9                 74.5
    Total Operating Revenues                962.8                737.6
                                            -----                -----

    Operating Expenses:
    Mainline operating expenses, excluding
     fuel                                   497.7                465.3
    Mainline economic fuel(a)               238.4                162.4
    Regional expense -paid to Horizon Air
     under CPA                               94.6                 66.4
    Other regional operating expense,
     excluding fuel                          38.3                  6.0
    Regional economic fuel(a)                38.1                   -
    Total Adjusted Operating Expenses(b)    907.1                700.1
                                             55.7                 37.5
                                             ----                 ----

    Nonoperating Expense                     (8.9)               (10.9)
    Adjusted Income before Income Tax(b)    $46.8                $26.6
                                            =====                =====


    Alaska Airlines
     Statistics:
                                    Three Months Ended March 31,
                                    ----------------------------
    Mainline Jet Operating
     Statistics:                  2011                 2010         Change
                                  ----                 ----         ------
    Revenue passengers (000)  4,107                3,641          12.8%
    RPMs (000,000) "traffic"  5,279                4,472          18.0%
    ASMs (000,000) "capacity" 6,353                5,541          14.7%
    Passenger load factor      83.1%                80.7%          2.4   pts
    Yield per passenger mile
     (in cents)               13.31                13.13           1.4%
    Operating revenue per ASM
     (RASM) (in cents)        12.36                11.93           3.6%
    Passenger revenue per ASM
     (PRASM) (in cents)       11.06                10.59           4.4%
    CASM excluding fuel(b)
     (in cents)                7.83                 8.40         (6.8)%
    Economic fuel cost per
     gallon(a)                $2.87                $2.25          27.6%
    Fuel gallons (000,000)     83.1                 72.3          14.9%
    Average number of full-
     time equivalent
     employees                8,884                8,537           4.1%
    Aircraft utilization (blk
     hrs/day)                  10.4                  9.3          11.8%
    Average aircraft stage
     length (miles)           1,119                1,068           4.8%
    Mainline operating fleet
     at period-end              117                  112             5   a/c

    Regional Operating
     Statistics:
    RPMs (000,000) "traffic"    574                  271
    ASMs (000,000) "capacity"   759                  369
    Passenger load factor      75.6%                73.4%
    Passenger revenue per ASM
     (PRASM) (in cents)       23.25                20.62

    (a)    See page 11 for a reconciliation of economic fuel cost.
    (b)    See Note A on page 12 for a discussion about why this measure
    may be important to investors.  "Adjusted" refers to these measures
    excluding certain items.  See page 10 and 11 for reconciliation
    between adjusted amounts and the most directly comparable GAAP
    amount.

    HORIZON AIR NON-GAAP FINANCIAL AND STATISTICAL DATA (unaudited)

                                                Three Months Ended March
                                                             31,
                                                  -------------------------
    (in millions)                                   2011                 2010
                                                    ----                 ----
    Operating Revenues:
    Passenger
    Brand revenue                             $     -                $89.3
    Revenue from CPA with Alaska Airlines        94.6                 66.4
                                                 ----                 ----
    Total passenger revenue                      94.6                155.7
    Other revenue                                 2.4                  2.7
    Total Operating Revenues                     97.0                158.4
                                                 ----                -----

    Operating Expenses:
    Landing fees, rents & selling expenses(a)      -                 30.4
    All other non-fuel operating expenses        90.2                 94.0
                                                 ----                 ----
    Non-fuel operating expenses                  90.2                124.4
    Economic fuel costs(a)                         -                 32.4
    Total Adjusted Operating Expenses(b)         90.2                156.8
                                                  6.8                  1.6
                                                  ---                  ---

    Nonoperating Expense                         (3.9)                (4.6)
    Adjusted Income (Loss) Before Income
     Tax(b)                                      $2.9                $(3.0)
                                                 ====                =====

    Horizon Air Operating Statistics:
                                      Three Months Ended March 31,
                                      2011                2010      Change
                                      ----                ----      ------
    ASMs (000,000) "capacity"       742                 793        (6.4)%
    CASM excluding fuel(b) (in
     cents)                       12.16               15.69           NM   (a)
    Average number of full-time
     equivalent employees         3,000               3,161        (5.1)%
    Operating fleet at period-end    54                  58           (4)  a/c
    (a)    See Note B on page 12 for a discussion regarding Horizon Air's
    CPA agreement with Alaska Airlines.
    (b)    See Note A on page 12 for a discussion about why this measure
    may be important to investors.  "Adjusted" refers to these measures
    excluding certain items.  See page 10 and 11 for reconciliation
    between adjusted amounts and the most directly comparable GAAP
    amount.
    NM    Not meaningful

    ALASKA AIR GROUP CONSOLIDATED FINANCIAL AND STATISTICAL DATA
    (unaudited)

    Reconciliation of operating revenues:
                                                 Three Months Ended March
                                                              31,
                                                   -------------------------
                                                     2011                 2010
                                                     ----                 ----
    Alaska Airlines operating revenues          $962.8               $737.6
    Horizon Air operating revenues                97.0                158.4
    Elimination of intercompany revenue          (94.6)               (66.4)
                                                 -----                -----
    Consolidated operating revenues             $965.2               $829.6
                                                ======               ======

    Reconciliation of operating expenses:
                                              Three Months Ended March
                                                              31,
                                                   -------------------------
                                                     2011                 2010
                                                     ----                 ----
    Alaska Airlines adjusted operating
     expenses                                   $907.1               $700.1
    Horizon Air adjusted operating expenses       90.2                156.8
    Parent company expenses                        0.6                  0.9
    Intercompany eliminations                    (94.6)               (66.4)
                                                 -----                -----
    Adjusted consolidated operating expenses     903.3                791.4
    CRJ-700 fleet transition costs                10.1                   -
    Mark-to-market fuel-hedge (gains) losses     (82.0)                12.5
    Consolidated operating expenses - GAAP      $831.4               $803.9
                                                ======               ======

    Reconciliation of income before income
     taxes:
                                              Three Months Ended March
                                                              31,
                                                   -------------------------
                                                     2011                 2010
                                                     ----                 ----
    Alaska Airlines adjusted income before
     income taxes                                $46.8                $26.6
    Horizon Air adjusted income before income
     taxes                                         2.9                 (3.0)
    Parent company income                         (0.9)                (0.9)
                                                  ----                 ----
    Adjusted income before income taxes           48.8                 22.7
    CRJ-700 fleet transition costs               (10.1)                  -
    Mark-to-market fuel-hedge gains (losses)      82.0                (12.5)
    Income before income taxes - GAAP           $120.7                $10.2
                                                ======                =====

    Reconciliation of consolidated CASM,
     excluding fuel:
                                              Three Months Ended March
                                                              31,
                                                   -------------------------
                                                     2011                 2010
                                                     ----                 ----
    Adjusted consolidated operating expenses    $903.3               $791.4
    Less: economic fuel                         (276.5)              (194.8)
                                                ------               ------
    Adjusted consolidated operating expenses,
     excluding fuel                             $626.8               $596.6
    Consolidated ASMs                            7,112                6,350
    CASM, excluding fuel and CRJ-700 fleet
     transition costs (in cents)                  8.81                 9.40
                                                  ====                 ====

    FUEL RECONCILIATIONS (unaudited)
    Alaska Air Group, Inc.
    (in millions, except for per gallon
     amounts)                                 Three Months Ended March 31,
                                              ----------------------------
                                                                         2011
                                                                         ----
                                                Dollars             Cost/Gal
                                                -------             --------
    Raw or "into-plane" fuel cost                $289.0              $3.00
    Minus gains, or plus the losses, during
     the period on settled hedges                 (12.5)             (0.13)
                                                  -----              -----
    Economic fuel expense                        $276.5              $2.87
                                                 ------              -----
    Adjustments to reflect timing of (gain)
     or loss recognition resulting from mark-
     to-market accounting                         (82.0)             (0.85)
    GAAP fuel expense                            $194.5              $2.02
                                                 ======              =====
    Fuel gallons                                   96.3
                                                   ====

    Breakout of Fuel Expense:
    (in millions, except for per gallon          Three Months Ended
     amounts)                                         March 31,
                                                -------------------
                                                      2011               2010
                                                      ----               ----
    Mainline economic fuel expense               $238.4             $162.4
    Regional economic fuel expense                 38.1               32.4
    Consolidated economic fuel expense           $276.5             $194.8
                                                 ======             ======

    Mainline Economic Cost per Gallon
     Reconciliation:
    (in millions, except for per gallon          Three Months Ended
     amounts)                                         March 31,
                                                  ------------------
                                                      2011               2010
                                                      ----               ----
    Mainline economic fuel expense               $238.4             $162.4
    Mainline fuel gallons                          83.1               72.3
                                                   ----               ----
    Mainline economic cost per gallon             $2.87              $2.25
                                                  =====              =====


    (in millions, except for per gallon
     amounts)                                 Three Months Ended March 31,
                                              ----------------------------
                                                                          2010
                                                                          ----
                                                 Dollars             Cost/Gal
                                                 -------             --------
    Raw or "into-plane" fuel cost                 $195.2              $2.26
    Minus gains, or plus the losses, during
     the period on settled hedges                   (0.4)                   -
                                                    ----                  ---
    Economic fuel expense                         $194.8              $2.26
                                                  ------              -----
    Adjustments to reflect timing of (gain)
     or loss recognition resulting from mark-
     to-market accounting                           12.5               0.14
    GAAP fuel expense                             $207.3              $2.40
                                                  ======              =====
    Fuel gallons                                    86.5
                                                    ====

    Breakout of Fuel Expense:
    (in millions, except for per gallon
     amounts)

    Mainline economic fuel expense
    Regional economic fuel expense
    Consolidated economic fuel expense

    Mainline Economic Cost per Gallon
     Reconciliation:
    (in millions, except for per gallon
     amounts)

    Mainline economic fuel expense
    Mainline fuel gallons
    Mainline economic cost per gallon

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 and regional jet 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 it’s 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: newswire