form10q.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
(Mark One)
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009.
OR
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to ___________

Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
 
   
Delaware
91-1292054
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

19300 International Boulevard, Seattle, Washington 98188
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (206) 392-5040
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes  ¨    No  x 

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  The registrant has 35,117,308 common shares, par value $1.00, outstanding at July 31, 2009.  
 
 

 
 
 

 


ALASKA AIR GROUP, INC.
Quarterly Report on Form 10-Q for the three months ended June 30, 2009

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 






2


As used in this Form 10-Q, the terms “Air Group,” “our,” “we” and the “Company” refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise.  Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”

Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of 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.   Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words.  Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are:

 
 
·
general economic conditions, including the impact of the economic recession on customer travel behavior;
·      changes in our operating costs, including fuel, which can be volatile;
·      the competitive environment in our industry;
 
·
labor disputes and our ability to attract and retain qualified personnel;
 
·
the amounts of potential lease termination payments with lessors for our remaining CRJ-700 and Q200 leased aircraft and related sublease payments from sublessees, if applicable;
 
·
our significant indebtedness;
 
·
compliance with our financial covenants;
 
·
potential downgrades of our credit ratings and the availability of financing;
 
·
our ability to meet our cost reduction goals;
 
·
operational disruptions;
 
·
the concentration of our revenue from a few key markets;
 
·
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
 
·
insurance costs;
 
·
our inability to achieve or maintain profitability;
 
·
fluctuations in our quarterly results;
 
·
an aircraft accident or incident;
 
·
liability and other claims asserted against us;
 
·
our reliance on automated systems and the risks associated with changes made to those systems;
 
·
our reliance on third-party vendors and partners;
 
·
changes in laws and regulations; and
 
·
increases in government fees and taxes.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.  Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC.  We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements.  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 to our shareholders.  For a discussion of these and other risk factors,  see "Item 1A: Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2008.  Please consider our forward-looking statements in light of those risks as you read this report.



3

PART I.    FINANCIAL INFORMATION
            
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            
             
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
            
Alaska Air Group, Inc.
            
             
ASSETS
 
            
(in millions)
  
June 30, 2009
    
December 31, 2008
  
Current Assets
            
Cash and cash equivalents
   $ 163.3     $ 283.1  
Marketable securities
     958.5       794.3  
  Total cash and marketable securities
     1,121.8       1,077.4  
Receivables - net
     156.5       116.7  
Inventories and supplies - net
     43.6       51.9  
Deferred income taxes
     158.2       164.4  
Fuel hedge contracts
     39.4       16.5  
Prepaid expenses and other current assets
     74.4       82.0  
Total Current Assets
     1,593.9       1,508.9  
                 
Property and Equipment
                
Aircraft and other flight equipment
     3,594.6       3,431.0  
Other property and equipment
     627.1       608.6  
Deposits for future flight equipment
     179.3       309.8  
      4,401.0       4,349.4  
Less accumulated depreciation and amortization
     1,246.8       1,181.7  
Total Property and Equipment - Net
     3,154.2       3,167.7  
                 
Fuel Hedge Contracts
     39.9       35.9  
                 
Other Assets
     153.3       123.1  
                 
Total Assets
   $ 4,941.3     $ 4,835.6  
                 
See accompanying notes to condensed consolidated financial statements.
                


4

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
            
Alaska Air Group, Inc.
            
             
LIABILITIES AND SHAREHOLDERS' EQUITY
 
            
(in millions except share amounts)
  
June 30, 2009
    
December 31, 2008
  
Current Liabilities
            
Accounts payable
   $ 52.5     $ 59.6  
Accrued aircraft rent
     61.6       64.4  
Accrued wages, vacation and payroll taxes
     124.4       119.5  
Other accrued liabilities
     509.0       475.4  
Air traffic liability
     421.5       372.7  
Fuel hedge contracts liability
     4.1       24.1  
Current portion of long-term debt
     167.3       244.9  
Total Current Liabilities
     1,340.4       1,360.6  
                 
Long-Term Debt, Net of Current Portion
     1,669.7       1,596.3  
                 
Other Liabilities and Credits
                
Deferred income taxes
     46.1       36.7  
Deferred revenue
     454.3       421.3  
Obligation for pension and postretirement medical benefits
     583.3       584.7  
Other liabilities
     159.1       174.1  
      1,242.8       1,216.8  
Commitments and Contingencies
                
Shareholders' Equity
                
Preferred stock, $1 par value
                
  Authorized:       5,000,000 shares, none issued or outstanding
     -       -  
Common stock, $1 par value
                
  Authorized:      100,000,000 shares
                
  Issued:  2009 - 43,319,031 shares
                
               2008 - 43,171,404 shares
     43.3       43.2  
  Capital in excess of par value
     924.5       915.0  
  Treasury stock (common), at cost: 2009 - 7,577,806 shares
                
                                              2008 - 6,896,506 shares
     (172.8 )     (161.4 )
Accumulated other comprehensive loss
     (309.9 )     (328.3 )
Retained earnings
     203.3       193.4  
      688.4       661.9  
Total Liabilities and Shareholders' Equity
   $ 4,941.3     $ 4,835.6  
                 
See accompanying notes to condensed consolidated financial statements.
                


5

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
              
Alaska Air Group, Inc.
                        
                         
   
Three Months Ended June 30
    
Six Months Ended June 30
  
(in millions except per-share amounts)
  
2009
    
2008
    
2009
    
2008
  
Operating Revenues
                        
Passenger
   $ 757.2     $ 863.5     $ 1,441.3     $ 1,639.2  
Freight and mail
     25.2       27.7       44.6       49.9  
Other - net
     61.5       39.6       100.4       81.2  
Total Operating Revenues
     843.9       930.8       1,586.3       1,770.3  
Operating Expenses
                                
Wages and benefits
     247.1       234.4       493.1       479.1  
Variable incentive pay
     18.9       5.1       28.2       8.7  
Aircraft fuel, including hedging gains and losses
     128.4       182.0       286.1       464.0  
Aircraft maintenance
     59.6       54.2       119.3       112.2  
Aircraft rent
     39.1       42.3       77.1       85.9  
Landing fees and other rentals
     54.4       56.9       108.6       112.9  
Contracted services
     36.8       43.6       75.2       88.1  
Selling expenses
     35.3       44.1       60.3       78.6  
Depreciation and amortization
     53.9       51.5       106.7       100.8  
Food and beverage service
     12.4       13.4       24.0       25.7  
Other
     50.3       61.5       107.1       118.7  
New pilot contract transition costs
     35.8       -       35.8       -  
Fleet transition costs - MD-80
     -       26.0       -       26.0  
Fleet transition costs - CRJ-700
     -       6.1       -       6.1  
Fleet transition costs - Q200
     5.2       3.2       10.0       9.0  
Total Operating Expenses
     777.2       824.3       1,531.5       1,715.8  
Operating Income
     66.7       106.5       54.8       54.5  
Nonoperating Income (Expense)
                                
Interest income
     7.8       10.5       16.1       20.8  
Interest expense
     (25.1 )     (25.0 )     (51.9 )     (48.4 )
Interest capitalized
     1.8       6.1       4.6       12.6  
Other - net
     (3.5 )     0.1       (5.5 )     0.3  
      (19.0 )     (8.3 )     (36.7 )     (14.7 )
Income before income tax
     47.7       98.2       18.1       39.8  
Income tax expense
     18.6       35.1       8.2       14.0  
Net Income
   $ 29.1     $ 63.1     $ 9.9     $ 25.8  
                                 
Basic Earnings Per Share:
   $ 0.80     $ 1.75     $ 0.27     $ 0.71  
Diluted Earnings Per Share:
   $ 0.79     $ 1.74     $ 0.27     $ 0.70  
Shares used for computation:
                                
  Basic
     36.354       36.059       36.340       36.542  
  Diluted
     36.591       36.255       36.742       36.876  
                                 
See accompanying notes to condensed consolidated financial statements.
                          

6

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
              
Alaska Air Group, Inc.
                                          
                                           
                                     
   
Common
          
Capital in
    
Treasury
    
 
              
   
Shares
    
Common
    
Excess of
    
Stock,
    
Accumulated Other
    
Retained
        
(in millions)
  
Outstanding
    
Stock
    
Par Value
    
at Cost
    
Comprehensive Loss
    
Earnings
    
Total
  
Balances at December 31, 2008
     36.275     $ 43.2     $ 915.0     $ (161.4 )   $ (328.3 )   $ 193.4     $ 661.9  
Net income for the six months ended June 30, 2009
                                       9.9       9.9  
Other comprehensive income (loss):
                                                        
                                                         
Related to marketable securities:
                                                        
  Change in fair value
                                     12.0                  
  Reclassification to earnings
                                     0.3                  
  Income tax effect
                                     (4.6 )                
                                      7.7               7.7  
                                                         
Adjustments related to employee benefit plans:
                                     17.1                  
   Income tax effect
                                     (6.4 )                
                                      10.7               10.7  
Total comprehensive income
                                                     28.3  
                                                         
Purchase of treasury stock
     (0.700 )                     (11.8 )                     (11.8 )
Stock-based compensation
                     7.6                               7.6  
Common stock issued under stock plans
     0.051               0.5                               0.5  
Treasury stock issued under stock plans
     0.018                       0.4                       0.4  
Stock issued for employee stock purchase plan
     0.097       0.1       1.4                               1.5  
Balances at June 30, 2008
     35.741     $ 43.3     $ 924.5     $ (172.8 )   $ (309.9 )   $ 203.3     $ 688.4  
                                                         
                                                         
See accompanying notes to condensed consolidated financial statements.
                                  


7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
            
Alaska Air Group, Inc.
            
             
   
Six Months Ended June 30
  
(in millions)
  
2009
    
2008
  
Cash flows from operating activities:
            
Net income
   $ 9.9     $ 25.8  
Adjustments to reconcile net income to net cash
                
 provided by operating activities:
                
   Non-cash impact of pilot contract transition costs
     15.5       -  
   Fleet transition costs, including impairment charge
     10.0       41.1  
   Depreciation and amortization
     106.7       100.8  
   Stock-based compensation
     7.6       8.0  
   Changes in fair values of open fuel hedge contracts
     (46.9 )     (192.7 )
   Changes in deferred income taxes
     2.9       13.9  
   Increase in receivables - net
     (39.8 )     (27.0 )
   Changes in prepaid expenses and other current assets
     14.6       (27.1 )
   Increase in air traffic liability
     48.8       167.7  
   Increase in other current liabilities
     18.3       5.9  
   Decrease in deferred revenue and other-net
     (21.6 )     (12.3 )
Net cash provided by operating activities
     126.0       104.1  
Cash flows from investing activities:
                
Property and equipment additions:
                
  Aircraft and aircraft purchase deposits
     (269.1 )     (242.4 )
  Other flight equipment
     (19.6 )     (20.5 )
  Other property and equipment
     (19.8 )     (21.2 )
Total property and equipment additions
     (308.5 )     (284.1 )
Proceeds from disposition of assets
     4.2       5.4  
Purchases of marketable securities
     (515.0 )     (474.1 )
Sales and maturities of marketable securities
     361.0       262.6  
Restricted deposits and other
     (4.3 )     1.5  
Net cash used in investing activities
     (462.6 )     (488.7 )
Cash flows from financing activities:
                
Proceeds from issuance of long-term debt
     162.6       530.5  
Proceeds from sale-leaseback transactions, net
     230.0       -  
Long-term debt payments
     (166.8 )     (123.9 )
Purchase of treasury stock
     (11.8 )     (48.9 )
Proceeds and tax benefit from issuance of common stock
     2.8       1.7  
Net cash provided by financing activities
     216.8       359.4  
Net change in cash and cash equivalents
     (119.8 )     (25.2 )
Cash and cash equivalents at beginning of year
     283.1       204.3  
Cash and cash equivalents at end of period
   $ 163.3     $ 179.1  
Supplemental disclosure of cash paid (received) during the period for:
                
  Interest (net of amount capitalized)
   $ 48.3     $ 31.1  
  Income taxes
     (8.9 )     3.9  
                 
See accompanying notes to condensed consolidated financial statements.
                


8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Alaska Air Group, Inc.

NOTE 1.                      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Alaska Air Group, Inc. (Air Group or the Company) include the accounts of the parent company, Alaska Air Group, Inc., and its principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. These interim condensed consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of June 30, 2009, as well as the results of operations for the three months and six months ended June 30, 2009 and 2008. The adjustments made were of a normal recurring nature.
 
The Company’s interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates made include assumptions used to record liabilities; expenses and revenues associated with the Company’s Mileage Plan; amounts paid to lessors upon aircraft lease terminations; the fair market value of surplus or impaired aircraft, engines and parts; assumptions used in the calculations of pension expense in the Company’s defined-benefit plans; and the amounts of certain accrued liabilities. Actual results may differ from the Company’s estimates.

New and Proposed Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.  SFAS 161 requires entities that use derivative instruments to provide certain qualitative disclosures about their objectives and strategies for using such instruments, amounts and location of the derivatives in the financial statements, among other disclosures. SFAS 161 was adopted as of January 1, 2009.  The required disclosures are included in Note 4.  The adoption of SFAS 161 did not have a material impact on the disclosures historically provided.

1BIn December 2008, the FASB issued Staff Position No. FAS 132(R)-1 amending SFAS 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits, which, among other things, expands the disclosure regarding assets in an employer’s pension and postretirement benefit plans.  The primary change would be to add the fair value hierarchy disclosures required by SFAS No. 157 as it relates to the underlying assets of the pension and postretirement benefit plans.  The disclosures required by this position are effective in annual financial statements for fiscal years ending after December 15, 2009.  This position will impact the Company’s financial statement disclosures, but will have no impact on its financial position or results of operations.

2BIn April 2009, the FASB issued Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which clarifies the determination of fair value in SFAS 157 for assets and liabilities that may be involved in transactions that would not be considered orderly as defined in the position statement.  In April 2009, the FASB also issued FASB Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This position statement provides additional guidance in determining whether a debt3Bsecurity is other-than-temporarily impaired and how

entities should record the impairment in the financial statements.  The standard requires credit losses, as defined, to be recorded through the statement of operations and the remaining impairment loss to be recorded through accumulated other comprehensive income.  Both of these staff positions were effective for the Company as of June 30, 2009.  See Note 2 for a discussion of the impact of these new positions to the Company’s financial statements. 

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.  This position requires companies to provide, on an interim basis, disclosures that are currently required in annual statements for the fair value of financial instruments.  This staff position was effective for the Company as of June 30, 2009.  See Note 2 for a discussion of the impact of this new position to the Company’s financial statements.

In May 2009, the FASB issued statement No. 165, Subsequent Events (SFAS 165). SFAS 165 modifies the definition of what qualifies as a subsequent event—those events or transactions that occur following the balance sheet date, but before the financial statements are issued, or are available to be issued—and requires companies to disclose the date through which it has evaluated subsequent events and the basis for determining that date.  The Company adopted SFAS 165 as of June 30, 2009.  The Company has performed an evaluation of subsequent events through August 7, 2009, which is the date these financial statements were issued.

In June 2009, the FASB issued statement No. 167, Amendments to FASB Interpretation No. 46R (SFAS 167).  Among other items, SFAS 167 revises the approach to determine the primary beneficiary of a variable interest entity (VIE) and requires companies to more frequently reassess whether they must consolidate VIEs.  SFAS 167 is effective for the Company beginning on January 1, 2010.  The Company does not expect this standard will have a material impact on its financial position, results of operations or cash flows.

NOTE 2.                      FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair Value Measurements
SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair-value measurements required under other accounting pronouncements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash, Cash Equivalents and Marketable Securities
The Company uses the “market approach” under SFAS 157 in determining the fair value of its cash, cash equivalents and marketable securities. The securities held by the Company are valued based on observable prices in active markets and considered to be liquid and easily tradable.    

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Amounts measured at fair value as of June 30, 2009 are as follows (in millions):
 
   
Level 1
    
Level 2
    
Level 3
    
Total
  
Cash and cash equivalents
   $ 163.3     $ —     $ —     $ 163.3  
Marketable securities
     107.1       851.4       —       958.5  
Total
   $ 270.4     $ 851.4     $ —     $ 1,121.8  
                                 
 
All of the Company’s marketable securities are classified as available-for-sale.  The securities are carried at fair value, with the unrealized gains and losses, excluding credit losses, reported in shareholders’ equity under the caption “accumulated other comprehensive loss.”  Realized gains and losses are included in other nonoperating income (expense) in the condensed consolidated statements of operations.

The cost of securities sold is based on the specific identification method.  Interest and dividends on marketable securities are included in interest income in the condensed consolidated statements of operations.

Marketable securities consisted of the following (in millions):

   
June 30, 2009
    
December 31, 2008
  
Amortized cost:
            
Government securities/agencies
   $ 370.2     $ 329.1  
Asset-backed obligations
     234.3       198.0  
Other corporate obligations
     345.6       263.7  
    $ 950.1     $ 790.8  
Fair value:
                
Government securities/agencies
   $ 376.3     $ 342.8  
Asset-backed obligations
     230.7       187.7  
Other corporate obligations
     351.5       263.8  
    $ 958.5     $ 794.3  

As of June 30, 2009, the Company had a net unrealized gain of $8.4 million in its cash and marketable securities portfolio recorded in “accumulated other comprehensive loss.” Gross unrealized gains were $15.3 million and gross unrealized losses, net of credit losses, were $6.9 million at June 30, 2009, which management believes is not “other-than-temporarily” impaired as defined by FASB Staff Positions FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.

The Company determined that credit losses, as defined in the Staff Position, existed as of June 30, 2009 with respect to certain asset-backed obligations.  Based on a future cash flow analysis, the Company determined that it does not expect to recover the full amortized cost basis of the asset-backed obligations that were in an unrealized loss position as of June 30, 2009.  This analysis estimated the expected future cash flows by using a discount rate equal to the effective interest rate implicit in the securities at the date of acquisition.  The inputs used to estimate future cash flows included the default, foreclosure, and bankruptcy rates on the underlying mortgages and expected home pricing trends.  The Company also looked at the average credit scores of the individual mortgage holders and the average loan-to-value percentage.  Although management believes the underlying securities are performing well considering the current market, all of the factors mentioned result in expected future cash flows that are less than the current amortized cost of the portfolio of asset-backed

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obligations.  Therefore, the Company recorded a credit loss in other nonoperating expense of $1.8 million in the second quarter of 2009 to reflect the difference between the present value of future cash flows and the amortized cost basis at June 30, 2009.  Management does not believe the remaining $6.9 million unrealized loss recorded in AOCI is other-than-temporary based on the current facts and circumstances.  Management currently does not intend to sell these securities prior to their recovery nor does it believe that it will be more-likely-than-not that the Company would need to sell these securities for liquidity or other reasons.

Gross unrealized gains and losses, including credit losses, at June 30, 2009 are presented in the table below (in millions):

         
Unrealized Losses
                
   
Unrealized Gains in AOCI
    
Less than 12 months
    
Greater than 12 months
    
Total Unrealized Losses
    
Less: Credit Loss Recorded in Earnings
    
Net Unrealized Losses in AOCI
    
Net Unrealized Gains/(Losses) in AOCI
    
Fair Value of Securities with Unrealized Losses
    
Government Securities/Agencies
   $ 6.4     $ (0.3 )   $ --     $ (0.3 )   $ --     $ (0.3 )   $ 6.1     $ 93.7  
Asset-backed obligations
     2.3       (0.3 )     (7.4 )     (7.7 )     (1.8 )     (5.9 )     (3.6 )     52.0  
Other corporate obligations
     6.6       (0.4 )     (0.3 )     (0.7 )     --       (0.7 )     5.9       79.6  
Total
   $ 15.3     $ (1.0 )   $ (7.7 )   $ (8.7 )   $ (1.8 )     (6.9 )   $ 8.4     $ 225.3  

Of the marketable securities on hand at June 30, 2009, 11% mature in 2009, 27% in 2010, and 62% thereafter.  Gross realized gains and losses for the three and six-month periods ended June 30, 2009 and 2008 were not material to the condensed consolidated financial statements.

Fair Value of Financial Instruments
The majority of the Company’s financial instruments are carried at fair value.  These include cash and cash equivalents, marketable securities (Note 2), restricted deposits (Note 9), and fuel hedge contracts (Note 4).  The Company’s long-term fixed-rate debt is not carried at fair value.  The estimated fair value of the Company’s long-term debt was as follows (in millions):
             
   
Carrying Amount
    
Fair Value
  
Long-term debt at June 30, 2009
   $ 1,837.0     $ 1,775.1  
Long-term debt at December 31, 2008
   $ 1,841.2     $ 2,006.8  
 
The fair value of cash and cash equivalents approximates carrying values due to the short maturity of these instruments.  The fair value of marketable securities is based on market prices.  The fair value of fuel hedge contracts is based on commodity exchange prices.  The fair value of restricted deposits approximates the carrying amount.  The fair value of long-term debt is based on a discounted cash flow analysis using the Company’s current borrowing rate.

NOTE 3.                      NEW PILOT CONTRACT TRANSITION COSTS AND RESTRUCTURING CHARGES
 
On May 19, 2009, Alaska announced that its pilots, represented by the Air Line Pilots Association, ratified a new four-year contract.  Among other items, the contract has a provision that allows for pilots to receive, at retirement, a cash payment equal to 25% of their accrued sick leave balance multiplied by their hourly rate. The transition expense associated with establishing this sick-leave payout program was $15.5 million.  Pilots also received a one-time cash bonus following ratification of the contract of $20.3 million in the aggregate.  These

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items have been combined and reported as “New pilot contract transition costs” in the condensed consolidated statements of operations.

In the third quarter of 2008, Alaska announced reductions in work force among union and non-union employees.  The Company recorded a $12.9 million charge in 2008 representing the severance payments and estimated medical coverage obligation for the affected employees. The obligation of $7.2 million as of December 31, 2008 was relieved in the first six months of 2009.
 
NOTE 4.                      FUEL HEDGE CONTRACTS
 
The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risk associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options, collar structures and swap agreements for crude oil and, more recently, for jet fuel refining margins, among other initiatives.
 
The Company records derivative instruments, all of which are currently fuel hedge contracts, on the balance sheet at their fair value.  Changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.

The following table summarizes the components of aircraft fuel expense for the three and six months ended June 30, 2009 and 2008 (in millions):
 
   
Three Months Ended June 30
    
Six Months Ended June 30
  
   
2009
    
2008
    
2009
    
2008
  
Raw or “into-plane” fuel cost
   $ 158.5     $ 393.3     $ 300.4     $ 705.2  
Impact of hedging activity
     (30.1 )     (211.3 )     (14.3 )     (241.2 )
Aircraft fuel expense
   $ 128.4     $ 182.0     $ 286.1     $ 464.0  

The net cash received (paid) for hedges that settled during the period was $0.3 million and $(19.3) million during the three and six months ended June 30, 2009, respectively.  The net cash received for the three and six months ended June 30, 2008 was $64.2 million and $100.9 million, respectively.

The Company uses the “market approach” in determining the fair value of its hedge portfolio. The Company’s fuel hedging contracts consist of over-the-counter contracts, which are not traded on an exchange.  The fair value of these contracts is determined based on observable inputs that are readily available in active markets or can be derived from information available in active, quoted markets.  Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy described in SFAS 157.

The Company continually monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its fuel-hedging contracts and does not anticipate nonperformance by the counterparties.


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Outstanding future fuel hedge positions are as follows:

 
Approximate % of Expected Fuel
Requirements
Gallons Hedged
(in millions)
Approximate Crude Oil Price
per Barrel
Third Quarter 2009
50%
48.0
$76
Fourth Quarter 2009
50%
43.5
$76
  Full Year 2009
50%
91.5
$76
First Quarter 2010
47%
40.0
$68
Second Quarter 2010
48%
43.0
$68
Third Quarter 2010
46%
44.4
$72
Fourth Quarter 2010
34%
30.0
$78
  Full Year 2010
44%
157.4
$71
First Quarter 2011
27%
23.7
$86
Second Quarter 2011
20%
18.4
$76
Third Quarter 2011
17%
16.4
$79
Fourth Quarter 2011
10%
9.0
$78
  Full Year 2011
18%
67.5
$81
First Quarter 2012
5%
4.6
$87
  Full Year 2012
1%
4.6
$87

The Company also uses fixed-price physical contracts and financial swaps to fix the refining margin component for approximately 47% and 29% of our third and fourth quarter 2009 jet fuel purchases, respectively, at an average price per gallon of 22 cents per gallon.

As of June 30, 2009 and December 31, 2008, the net fair values of the Company’s fuel hedge positions were as follows (in millions):
 
   
June 30, 2009
    
December 31, 2008
  
Crude oil call options or “caps”
   $ 79.3     $ 52.4  
Crude oil collar contracts
     (2.7 )     (24.1 )
Refining margin swap contracts
     (1.4 )     ---  
   Total
   $ 75.2     $ 28.3  

The Company paid premiums of $86.1 million and $89.1 million to purchase the call options that were in the portfolio at June 30, 2009 and December 31, 2008, respectively.  The Company does have agreements with its counterparties for the collar contracts requiring cash collateral if certain liability levels are met.  The Company did not have any cash collateral held by these counterparties at June 30, 2009 or December 31, 2008.

NOTE 5.                      FLEET TRANSITION
 
Horizon Transition to All-Q400 Fleet
Horizon’s long-term goal is to transition to an all-Q400 fleet.  As of June 30, 2009, Horizon still had six Q200 aircraft remaining, none of which were in the operational fleet.  These aircraft were removed from operation in the first quarter of 2009 and the Company recorded an associated charge of $4.8 million at that time.  In the second quarter, the Company refined its estimate of the total estimated loss on disposal of these aircraft based on more recent market data and recorded an additional $5.2 million charge.  This charge represents the estimated loss under potential disposal transactions.

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During the three months ended June 30, 2008, two of Horizon’s Q200s were subleased to a third party under a sublease arrangement, resulting in a sublease loss of $2.9 million. During the six months ended June 30, 2008, five of the aircraft were subleased, resulting in an $8.7 million loss.  One other Q200 aircraft was removed from service during the second quarter of 2008 and the associated lease was terminated resulting in a net $0.3 million charge to Horizon.

In the second quarter of 2008 and in connection with Horizon’s long-term fleet transition plan, Horizon recorded an impairment charge on its two owned CRJ-700 aircraft and related spare parts as a result of the decision to exit from the CRJ-700 fleet earlier than originally planned.  The total charge associated with this decision was $5.5 million.

As noted above, Horizon’s long-term goal is to transition to an all-Q400 fleet.  As market conditions have hindered the remarketing efforts on the CRJ-700 aircraft and as Horizon has successfully deferred future Q400 deliveries, the fleet transition plan has been delayed until market conditions improve. Depending on the ultimate disposition of the CRJ-700 aircraft, there may be associated exit charges. The nature, timing or amount of any potential gain or loss associated with these transactions cannot be reasonably estimated at this time.

Alaska Transition to All-Boeing 737 Fleet
In 2006, the Company’s Board of Directors approved a plan to accelerate the retirement of its MD-80 fleet and remove those aircraft from service by the end of 2008. All of the MD-80s were removed from operation by the end of the third quarter of 2008.  Two of the aircraft were retired during the second quarter of 2008 and placed in temporary storage at an aircraft storage facility. As a result, the Company recorded a $26.0 million charge in the second quarter of 2008 reflecting the remaining discounted future lease payments and other contract-related costs.

NOTE 6.                      LONG-TERM DEBT
 
Long-term debt obligations were as follows (in millions):
   
June 30, 2009
    
December 31, 2008
  
Fixed-rate notes payable due through 2024
   $ 1,497.2     $ 1,458.9  
Variable-rate notes payable due through 2019
     316.6       267.4  
16BBank line-of-credit facility expiring in 2010
     --       75.0  
19BPre-delivery payment facility expiring in 2011
     20B23.2       21B39.9  
Long-term debt
     1,837.0       1,841.2  
22BLess current portion
     (167.3 )     (244.9 )
    $ 1,669.7     $ 1,596.3  
 
During the first six months of 2009, Alaska borrowed $119.9 million using fixed-rate and variable-rate debt secured by flight equipment and another $10.4 million from its pre-delivery payment facility.  Alaska made payments of $156.8 million, including $27.1 million on its pre-delivery payment facility and $75 million on its bank line-of-credit facility.  Horizon financed two of its recently delivered Q400 aircraft using fixed-rate debt arrangements with proceeds totaling $32.3 million and made scheduled debt payments of $10.0 million.

Alaska’s $90.5 million pre-delivery payment facility expires on August 31, 2011.  During the second quarter of 2009, the available amount on the facility was reduced from $152 million to $90.5 million.  The reduction was primarily driven by the decline in the remaining future obligations under the purchase agreement with Boeing.  The available amount is scheduled to be further reduced to $80.0 million on August 31, 2009.

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NOTE 7.                      COMMON STOCK REPURCHASE
 
In June 2009, the Board of Directors authorized the Company to repurchase up to $50 million of its common stock. Through June 30, 2009, the Company had repurchased 700,000 shares of its common stock for approximately $11.8 million under this program.  Through August 6, 2009, the Company had repurchased 1,324,578 shares for approximately $23.8 million.

NOTE 8.                      EMPLOYEE BENEFIT PLANS
 
Pension Plans - Qualified Defined Benefit
Net pension expense for the three and six months ended June 30, 2009 and 2008 included the following components (in millions):
 
   
Three Months Ended June 30
    
Six Months Ended June 30
  
   
2009
    
2008
    
2009
    
2008
  
Service cost
   $ 11.1     $ 11.1     $ 22.2     $ 23.3  
Interest cost
     16.7       15.6       33.4       31.3  
Expected return on assets
     (12.8 )     (18.0 )     (25.6 )     (35.9 )
Amortization of prior service cost
     1.1       1.1       2.2       2.2  
Actuarial loss
     7.2       1.4       14.4       2.8  
Net pension expense
   $ 23.3     $ 11.2     $ 46.6     $ 23.7  

The Company contributed $21.3 million and $31.9 million to its qualified defined-benefit plans during the three and six months ended June 30, 2009, respectively, and expects to contribute an additional $15.9 million to these plans during the remainder of 2009.  The Company made $17.2 million and $34.4 million in contributions to its qualified defined-benefit pension plans during the three and six months ended June 30, 2008, respectively.
 
Pension Plans - Nonqualified Defined Benefit
Net pension expense for the unfunded, noncontributory defined-benefit plans was $0.7 million and $0.9 million for the three months ended June 30, 2009 and 2008 and $1.5 million and $1.8 million for the six months ended June 30, 2009 and 2008.

Postretirement Medical Benefits
Net periodic benefit cost for the post-retirement medical plans for the three months ended June 30, 2009 and 2008 was $5.6 million and $2.8 million, respectively.  The net periodic benefit cost for the six months ended June 30, 2009 and 2008 was $8.9 million and $5.6 million, respectively.

NOTE 9.                      OTHER ASSETS
 
Other assets consisted of the following (in millions):
   
June 30, 2009
    
December 31, 2008
  
Restricted deposits (primarily restricted investments)
   $ 82.9     $ 78.6  
Deferred costs and other*
     70.4       44.5  
    $ 153.3     $ 123.1  
*Deferred costs and other includes deferred financing costs, long-term prepaid rent, lease deposits and other items.

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NOTE 10.                      MILEAGE PLAN
 
Alaska’s Mileage Plan deferrals and liabilities are included under the following balance sheet captions (in millions):
 
   
June 30, 2009
    
December 31, 2008
  
Current Liabilities:
            
Other accrued liabilities
   $ 282.0     $ 280.4  
Other Liabilities and Credits (non-current):
                
Deferred revenue
     409.8       394.1  
Other liabilities
     12.3       15.9  
    $ 704.1     $ 690.4  

Alaska’s Mileage Plan revenue is included under the following condensed consolidated statement of operations captions for the three and six months ended June 30 (in millions):

                                                           
  
Three Months Ended June 30
    
Six Months Ended June 30
  
                                                                                                             
  
2009
    
2008
    
2009
    
2008
  
Passenger revenues
   $ 48.2     $ 35.5     $ 86.9     $ 60.9  
Other - net revenues
     45.8        24.4       70.3       51.1  
                                                                                                  
   $ 94.0     $ 59.9     $ 157.2     $ 112.0  

NOTE 11.                      STOCK-BASED COMPENSATION PLANS
 
The Company accounts for stock-based awards using Statement of Financial Accounting Standards SFAS No. 123R, Share-Based Payment: An Amendment of SFAS Nos. 123 and 95. All stock-based compensation expense is recorded in wages and benefits in the condensed consolidated statements of operations.  See Note 13 for discussion of an error in prior periods related to stock-based compensation.

The Company has stock awards outstanding under a number of long-term incentive equity plans, one of which continues to provide for the grant of stock awards to directors, officers and employees of the Company and its subsidiaries.  Compensation expense is recorded over the shorter of the vesting period or the period between the grant date and the date the employee becomes retirement-eligible as defined in the applicable plan.

Stock Options
During the six months ended June 30, 2009, the Company granted 384,268 options with a weighted-average fair value of $14.00 per share.  During the same period in the prior year, the Company granted 388,111 options with a weighted-average fair value of $11.13 per share.

The Company recorded stock-based compensation expense related to stock options of $0.7 million and $1.0 million for the three months ended June 30, 2009 and 2008, respectively.  The Company recorded expense of $3.0 million and $3.3 million for the six months ended June 30, 2009 and 2008, respectively.  As of June 30, 2009, $5.5 million of compensation cost associated with unvested stock option awards attributable to future service had not yet been recognized.  This amount will be recognized as expense over a weighted-average period of 2.5 years.

As of June 30, 2009, options to purchase 2,630,943 shares of common stock were outstanding with a weighted-average exercise price of $29.51.  Of that total, 1,721,939 were exercisable at a weighted-average exercise price of $29.49.

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Restricted Stock Awards
During the six months ended June 30, 2009, the Company awarded 246,037 restricted stock units (RSUs) to certain employees, with a weighted-average grant date fair value of $27.25.  This amount reflects the value of the RSU awards at the grant date based on the closing price of the Company’s common stock.  The Company recorded stock-based compensation expense related to RSUs of $1.1 million and $1.5 million for the three months ended June 30, 2009 and 2008, respectively, and $3.8 million in each of the six-month periods ended June 30, 2009 and 2008.

As of June 30, 2009, $7.2 million of compensation cost associated with unvested restricted stock awards attributable to future service had not yet been recognized.  This amount will be recognized as expense over a weighted-average period of 2.1 years.

Deferred Stock Awards
In the second quarter of 2008, the Company awarded 13,976 Deferred Stock Unit awards (DSUs) to members of its Board of Directors as a portion of their retainers.  The underlying common shares are issued upon retirement from the Board, but require no future service period.  As a result, the entire intrinsic value of the awards on the date of grant was expensed in the second quarter of 2008.  The total amount of compensation expense recorded was $0.3 million.

Employee Stock Purchase Plan
Compensation expense recognized under the Employee Stock Purchase Plan was $0.5 million and $0.4 million for the three months ended June 30, 2009 and 2008, respectively, and $0.8 million and $1.1 million for the six months ended June 30, 2009 and 2008, respectively.

Summary of Stock-Based Compensation
The table below summarizes the components of total stock-based compensation for the three and six months ended June 30 (in millions):
 
                                                            
  
Three Months Ended June 30
    
Six Months Ended June 30
  
                                                                                                            
  
2009
    
2008
    
2009
    
2008
  
Stock options
   $ 0.7     $ 1.0     $ 3.0     $ 3.3  
Restricted stock units
     1.1       1.5       3.8       3.8  
Performance share units
     ---       (0.7 )     ---       (0.5 )
Deferred stock units
     ---       0.3       ---       0.3  
Employee stock purchase plan
     0.5       0.4       0.8       1.1  
    $ 2.3     $ 2.5     $ 7.6     $ 8.0  


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NOTE 12.                      OPERATING SEGMENT INFORMATION
 
Operating segment information for Alaska and Horizon for the three- and six-month periods ended June 30 was as follows (in millions):
 
   
Three Months Ended June 30
    
Six Months Ended June 30
  
   
2009
    
2008
    
2009
    
2008
  
Operating revenues:
                        
  Alaska – mainline (1)
   $ 681.6     $ 742.6     $ 1,272.9     $ 1,405.6  
  Alaska – purchased capacity (1)
     67.7       77.8       129.5       148.2  
  Total Alaska
     749.3       820.4       1,402.4       1,553.8  
  Horizon
     157.9       188.9       304.7       366.1  
  Other (2)
     0.2       0.2       0.5       0.5  
Elimination of intercompany revenues
     (63.5 )     (78.7 )     (121.3 )     (150.1 )
Consolidated
   $ 843.9     $ 930.8     $ 1,586.3     $ 1,770.3  
Income (loss) before income tax:
                                
  Alaska – mainline
   $ 43.3     $ 94.0     $ 25.9     $ 60.5  
  Alaska – purchased capacity
     (1.2 )     (6.7 )     (2.1 )     (13.0 )
  Total Alaska
     42.1       87.3       23.8       47.5  
  Horizon
     6.5       12.6       (4.0 )     (5.0 )
  Other (2)
     (0.9 )     (1.7 )     (1.7 )     (2.7 )
Consolidated
   $ 47.7     $ 98.2     $ 18.1     $ 39.8  
 
 
  
   
June 30, 2009
    
December 31, 2008
  
Total assets at end of period:
            
Alaska
   $ 4,537.6     $ 4,428.6  
Horizon
     719.1