UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE
REQUIRED]
|
For the
fiscal year ended December 31, 2009
OR
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE
REQUIRED]
|
For the
transition period from
to
Commission
File Number 1-8957
ALASKA
AIR GROUP, INC.
A
Delaware Corporation
|
91-1292054
|
19300 International Boulevard, Seattle, Washington 98188
Telephone:
(206) 392-5040
|
|
(I.R.S.
Employer Identification No.)
|
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock, $1.00 Par Value
|
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes No x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
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, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” 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
As of
January 31, 2010, shares of common stock outstanding totaled 35,645,955.
The aggregate market value of the shares of common stock of Alaska Air Group,
Inc. held by nonaffiliates on June 30, 2009, was approximately $653.0
million (based on the closing price of $18.26 per share on the New York Stock
Exchange on that date).
DOCUMENTS
INCORPORATED BY REFERENCE
|
Title
of Document
|
Part
Hereof Into Which Document is to be Incorporated
|
|
Definitive
Proxy Statement Relating to
2010
Annual Meeting of Shareholders
|
Part
III
|
ALASKA
AIR GROUP, INC.
ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009
As used
in this Form 10-K, 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-K 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.
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 in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our
forward-looking statements in light of those risks as you read this
report.
|
ITEM 1. OUR
BUSINESS
|
We are a
Delaware corporation incorporated in 1985 and we have two principal
subsidiaries: Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc.
(Horizon). Through these subsidiaries, we provide passenger air service to more
than 22 million passengers per year to more than 90 destinations. We also
provide freight and mail services, primarily to and within the state of Alaska
and on the West Coast. Although Alaska and Horizon both operate as airlines,
their business plans, competition, and economic risks differ substantially.
Alaska is a major airline that operates an all-jet fleet with an average
passenger trip length in 2009 of 1,180 miles. Horizon is a regional airline,
operates turboprop and jet aircraft, and its average passenger trip length for
2009 was 356 miles. Individual financial information about Alaska and Horizon is
in Note 13 to the consolidated financial statements and throughout this report,
specifically in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Both of
our airlines continue to distinguish themselves from competitors by providing
award-winning customer service and differentiating amenities. Our outstanding
employees and excellent service in the form of advance seat assignments,
expedited check-in with Airport of the Future®, web check-in, flight alerts, an
award-winning frequent flyer program, well-maintained aircraft, a first-class
section aboard Alaska aircraft, and other amenities are regularly recognized by
independent studies, awards, and surveys of air travelers. For example, Alaska
has ranked “Highest in Customer Satisfaction among Traditional Network Carriers”
in both 2009 and 2008 by J.D. Power and Associates and won the “Program of the
Year” Freddie award for 2008 and 2007 for our Mileage Plan program. Horizon won
the 2007 “Regional Airline of the Year” from Air Transport World. We
are very proud of these awards and we continue to strive to have the best
customer service in the industry.
WHERE YOU CAN FIND MORE INFORMATION
Our
filings with the Securities and Exchange Commission, including our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports are available on our website at www.alaskaair.com, free of
charge, as soon as reasonably practicable after the electronic filing of these
reports with the Securities and Exchange Commission. The information contained
on our website is not a part of this annual report on Form 10-K.
| ALASKA RANKED “HIGHEST IN CUSTOMER SATISFACTION AMONG TRADITIONAL NETWORK CARRIERS” IN BOTH 2009 AND 2008 BY J.D. POWER AND ASSOCIATES. HORIZON WON THE 2007 “REGIONAL AIRLINE OF THE YEAR” FROM AIR TRANSPORT |
OUR AIRLINES
ALASKA
Alaska
Airlines is an Alaska corporation that was organized in 1932 and incorporated in
1937. We offer extensive north/south service within the western U.S., Canada and
Mexico, and passenger and dedicated cargo services to and within the state of
Alaska. We also provide long-haul east/west service to Hawaii and twelve cities
in the mid-continental and eastern U.S., primarily from Seattle, where we have
our largest concentration of departures; although we do offer long-haul
departures from other cities as well.
In 2009,
we carried 15.6 million revenue passengers in our mainline operations, and
we carry more passengers between Alaska and the U.S. mainland than any other
airline. Based on the number of passengers carried in 2009, Alaska’s leading
airports are Seattle, Los Angeles, Anchorage and Portland. Based on 2009
revenues, the leading nonstop routes are Seattle-Anchorage, Seattle-Los Angeles,
and Seattle-San Diego. At December 31, 2009, Alaska’s operating fleet
consisted of 115 jet aircraft, compared to 110 aircraft as of December 31,
2008.
Alaska’s passenger traffic by market is
presented below:
|
2009
|
2008
|
|||||||
|
West
Coast
|
36 | % | 41 | % | ||||
|
Within
Alaska and between Alaska and the U.S. mainland
|
21 | % | 23 | % | ||||
|
Transcon/midcon
|
23 | % | 20 | % | ||||
|
Mexico
|
9 | % | 8 | % | ||||
|
Hawaii
|
9 | % | 5 | % | ||||
|
Canada
|
2 | % | 3 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
HORIZON
Horizon
Air Industries is a Washington corporation that first began service, was
incorporated in 1981 and was acquired by Air Group in 1986. It is the largest
regional airline in the Pacific Northwest, and serves a number of cities in
seven states, five cities in Canada, and two cities in Mexico.
In 2009,
Horizon carried 6.8 million revenue passengers. Approximately 90% of
Horizon’s revenue passenger miles in 2009 were flown domestically, primarily in
the states of Washington, Oregon, Idaho and California, compared to 91% in 2008.
The Canada markets accounted for 8% of revenue passenger miles in both 2009 and
2008. Flying to Mexico accounted for about 2% of total traffic in 2009 compared
to less than 1% in 2008.
Based on
2009 passenger enplanements, Horizon’s leading airports are Seattle, Portland,
Boise, and Spokane. Based on revenues in 2009, the leading nonstop routes are
Portland-Seattle, Spokane-Seattle, and Boise-Seattle. At December 31, 2009,
Horizon’s operating fleet consisted of 18 jets and 40 turboprop aircraft.
Horizon flights are listed under the Alaska Airlines designator code in airline
reservation systems.
Alaska
and Horizon integrate their flight schedules to provide convenient, competitive
connections between most points served by their systems. In 2009 and 2008,
approximately 22% and 23%, respectively, of Horizon’s passengers connected to
flights operated by Alaska.
INDUSTRY CONDITIONS
GENERAL
The
airline industry is highly competitive and has historically been characterized
by low profit margins and high fixed costs, primarily for wages, aircraft fuel,
aircraft ownership, and facilities rents. Because expenses of a flight do not
vary significantly with the number of passengers carried, a relatively small
change in the number of passengers or in pricing has a disproportionate effect
on an airline’s operating and financial results. In other words, a minor
shortfall in expected revenue levels could cause a disproportionately negative
impact on our results of operations. Passenger demand and ticket prices are, to
a large measure, influenced by the general state of the economy, current global
economic and political events and total available airline seat
capacity.
2009
2009 was
a year plagued by economic woes and the worst recession the United States has
experienced since the Great Depression. The result was a steep
decline in the demand for air travel, causing a double-digit percentage decline
in unit revenue and passenger count across the industry. In response
to this decline and the high price of oil in 2008, airlines reduced domestic
capacity by approximately 7% in 2009 compared to 2008. The significant decline
in the average price of jet fuel from its 2008 high helped mitigate an otherwise
difficult year for the industry. In order to maximize revenue to help
offset the demand decline, airlines continued down the path of adding or
increasing ancillary fees for checked baggage, buy-on-board items, ticket fees,
etc. These fees helped to recover some of the lost revenue from the
decline in traffic, but certainly not all of it.
During
2009, our key initiative was to optimize revenue. We reduced and
redeployed capacity to better match demand, and the new markets we have entered
are performing well. Our revenue initiatives, combined with lower
fuel costs, our continued focus on customer service and our strong operational
performance resulted in financial results that significantly improved from 2008
and were among the best in the industry.
|
OUR
REVENUE INITIATIVES, COMBINED WITH LOWER FUEL COSTS, OUR CONTINUED FOCUS
ON CUSTOMER SERVICE AND OUR STRONG OPERATIONAL PERFORMANCE RESULTED IN
2009 FINANCIAL RESULTS THAT WERE AMONG THE BEST IN THE
INDUSTRY.
|
Our
business and financial results are highly affected by the price and,
potentially, the availability of jet fuel. Fuel prices have been extremely
volatile over the past few years. The price of crude oil averaged over $106 per
barrel in 2008, with a high of nearly $150 per barrel in July 2008. The average
price in 2009 was a more moderate $62 per barrel, although that price is still
historically high. For us, a $1 per barrel increase in the price of
oil equates to approximately $9 million of additional fuel cost
annually. A one-cent change in our fuel price per gallon will impact
our expected annual fuel cost by approximately $3.5 million per
year.
We refer
to the price we pay for fuel at the airport, including applicable taxes, as our
“raw” fuel price. Raw fuel prices are impacted by world oil prices and refining
costs, which can vary by region in the U.S. Generally, West Coast jet fuel
prices are somewhat higher and more volatile than prices in the Gulf Coast or on
the East Coast, putting our airlines at a slight competitive disadvantage.
Historically, fuel costs have generally represented 10% to 15% of an airline’s
operating costs, but due to volatility in prices over the past few years, fuel
costs have been in the range of 20% to 40% of total operating costs. Both the
crude oil and refining cost components of jet fuel are volatile and outside of
our control, and they can have a significant and immediate impact on our
operating results.
As
depicted in the charts below, our average raw fuel cost per gallon declined 43%
in 2009, and increased 42% and 8% in 2008 and 2007, respectively.
We use
crude oil call options and jet fuel refining margin swap contracts as hedges to
decrease our exposure to the volatility of jet fuel prices. Call options
effectively cap our pricing on the crude oil component of fuel prices, limiting
our exposure to increasing fuel prices for about half of our planned fuel
consumption. With these call option contracts, we still benefit from the decline
in crude oil prices, as there is no future cash exposure above the premiums we
pay to enter into the contracts.
|
OUR
AIRCRAFT ARE AMONG THE MOST FUEL-EFFICIENT IN THEIR RESPECTIVE
CLASSES.
|
We
believe that operating fuel-efficient aircraft also helps to mitigate the effect
of high fuel prices. Alaska operates an all-Boeing 737 fleet. At Horizon, the
long-term goal is to transition to an all-Q400 turboprop fleet. Because of these
changes, Alaska’s fuel burn expressed in available seat miles flown per gallon
(ASMs/g) improved from 65.9 ASMs/g in 2006 to 75.9 ASMs/g in 2009. Similarly,
Horizon’s fuel burn has improved from 51.7 ASMs/g in 2006 to 54.8 ASMs/g in
2009.
These
reductions have not only reduced our fuel cost, but also the amount of
greenhouse gases and other pollutants that our operations emit.
MARKETING AND COMPETITION
ALLIANCES WITH OTHER AIRLINES
We have
marketing alliances with several airlines that provide reciprocal frequent flyer
mileage credit and redemption privileges as well as code sharing on certain
flights as shown in the table below. Alliances are an important part of our
strategy and enhance our revenues by:
|
|
•
|
offering
our customers more travel destinations and better mileage
credit/redemption opportunities;
|
|
|
•
|
offering
our Mileage Plan program a competitive advantage because of our
partnership with carriers from two major global alliances (Oneworld and
Skyteam);
|
|
|
•
|
giving
us access to more connecting traffic from other airlines;
and
|
|
|
•
|
providing
members of our alliance partners’ frequent flyer programs an opportunity
to travel on Alaska and Horizon while earning mileage credit in our
partners’ programs.
|
Most of
our codeshare relationships are free-sell codeshares, where the marketing
carrier sells seats on the operating carrier’s flights from the operating
carrier’s inventory, but takes no inventory risk. Our marketing agreements have
various termination dates, and at any time, one or more may be in the process of
renegotiation.
Our marketing alliances with other
airlines as of December 31, 2009 are as follows:
|
Frequent
Flyer
Agreement
|
Codeshare—
Alaska
Flight
#
on
Flights
Operated
by
Other
Airline
|
Codeshare—
Other Airline
Flight
# On
Flights
Operated
by
Alaska/
Horizon
|
|
|
Major
U.S. or International
Airlines
|
|||
|
American
Airlines/American
Eagle
|
Yes
|
Yes
|
Yes
|
|
Air
France
|
Yes
|
No
|
Yes
|
|
British
Airways
|
Yes
|
No
|
No
|
|
Cathay
Pacific Airways
|
Yes
|
No
|
No
|
|
Delta
Air Lines/Delta Connection
(2)
|
Yes
|
Yes
|
Yes
|
|
KLM
|
Yes
|
No
|
Yes
|
|
Korean
Air
|
Yes
|
No
|
Yes
|
|
Lan
S.A.
|
Yes
|
No
|
Yes
|
|
Air
Pacific (1)
|
Yes
|
No
|
Yes
|
|
Qantas
|
Yes
|
No
|
Yes
|
|
Regional
Airlines
|
|||
|
Era
Alaska
|
Yes (1)
|
Yes
|
No
|
|
PenAir
|
Yes (1)
|
Yes
|
No
|
|
(1)
|
These
airlines do not have their own frequent flyer program. However, Alaska’s
Mileage Plan members can earn and redeem miles on these airlines’ route
systems.
|
|
(2)
|
Alaska
has codeshare agreements with the Delta Connection carriers Skywest and
ASA as part of its agreement with Delta. This agreement also
includes former Northwest Airlines
flights.
|
|
COMPETITION
|
Competition
in the airline industry is intense. We believe the principal competitive factors
in the industry that are important to customers are:
|
|
•
|
safety
record and reputation,
|
|
|
•
|
flight
schedules,
|
|
|
•
|
fares,
|
|
|
•
|
customer
service,
|
|
|
•
|
routes
served,
|
|
|
•
|
frequent
flyer programs,
|
|
|
•
|
on-time
arrivals,
|
|
|
•
|
baggage
handling,
|
|
|
•
|
on-board
amenities,
|
|
|
•
|
type
of aircraft, and
|
|
|
•
|
code-sharing
relationships.
|
Together,
Alaska and Horizon carry approximately 3.5% of all U.S. domestic passenger
traffic. We compete with one or more domestic or foreign airlines on most of our
routes, including Southwest Airlines, United Airlines, Delta Air Lines,
Continental Airlines, American Airlines, US Airways, JetBlue Airways, Virgin
America, Allegiant and regional affiliates associated with some of these
carriers.
Due to
its short-haul markets, Horizon also competes with ground transportation in many
markets, including train, bus and automobile transportation. Both
carriers, to some extent, also compete with technology such as video
conferencing and internet-based meeting tools that have resulted in a change in
business travel.
TICKET DISTRIBUTION
Airline
tickets are distributed through three primary channels:
|
|
•
|
Alaskaair.com. It is
less expensive for us to sell through this direct channel and, as a
result, we continue to take steps to drive more business to our website.
In addition, we believe this channel is preferable from a branding and
customer-relationship standpoint in that we can establish ongoing
communication with the customer and tailor offers
accordingly.
|
|
|
•
|
Traditional and online travel
agencies. Consumer reliance on traditional travel agencies
continues to shrink, giving way to online travel agencies. Both
traditional and online travel agencies typically use Global Distribution
Systems (GDS), such as Sabre, to obtain their fare and inventory data from
airlines. Bookings made through these agencies result in a fee that is
charged to the airline. Many of our large corporate customers require that
we use these agencies. Some of our competitors do not use this
distribution channel and, as a result, have lower ticket distribution
costs.
|
|
|
•
|
Reservation call
centers. These call centers are located in Phoenix, Ariz.; Kent,
Wash.; and Boise, Idaho. We generally charge a $15 fee for booking
reservations through these call
centers.
|
|
|
Our
sales by channel are as follows:
|
|
2009
|
2008
|
|||||||
|
Alaskaair.com
|
48 | % | 45 | % | ||||
|
Traditional
and online travel agencies
|
42 | % | 43 | % | ||||
|
Reservation
call centers
|
9 | % | 11 | % | ||||
|
All
other channels
|
1 | % | 1 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
EMPLOYEES
Labor
costs have historically made up 30% to 40% of an airline’s total operating
costs. Most major airlines, including ours, have employee groups that are
covered by collective
bargaining agreements. Airlines with unionized work forces have higher labor
costs than carriers without unionized work forces, and they may not have the
ability to adjust labor costs downward quickly enough to respond to new
competition. New entrants into the U.S. airline industry generally do not have
unionized work forces, which can be a competitive advantage for those
airlines.
We had
12,440 (9,046 at Alaska and 3,394 at Horizon) active full-time and part-time
employees at December 31, 2009, compared to 14,143 (10,250 at Alaska and
3,893 at Horizon) as of December 31, 2008. Wages, salaries and benefits
(including variable incentive pay) represented approximately 43% and 40% of our
total non-fuel operating expenses in 2009 and 2008, respectively.
At
December 31, 2009, labor unions represented 82% of Alaska’s and 46% of
Horizon’s employees. Our relations with our labor organizations are governed by
the Railway Labor Act (RLA). Under this act, collective bargaining agreements do
not expire but instead become amendable as of a stated date. If either party
wishes to modify the terms of any such agreement, it must notify the other party
in the manner prescribed by the RLA and/or described in the agreement. After
receipt of such notice, the parties must meet for direct negotiations, and if no
agreement is reached, either party may request the National Mediation Board
(NMB) to initiate a process including mediation, arbitration, and a potential
“cooling off” period that must be followed before either party may engage in
self-help.
Alaska’s
union contracts at December 31, 2009 were as follows:
|
Union
|
Employee Group
|
Number of
Active
Employees
|
Contract Status
|
|
Air
Line Pilots Association International
(ALPA)
|
Pilots
|
1,253
|
Amendable
4/1/2013
|
|
Association of Flight Attendants (AFA)
|
Flight
attendants
|
2,268
|
Amendable 4/27/2012
|
|
International
Association of Machinists and Aerospace Workers
(IAM)
|
Ramp service and stock
clerks
|
733
|
Amendable
7/17/2012
|
|
IAM
|
Clerk,
office and passenger service
|
2,387
|
Amendable
7/17/2010
|
|
Aircraft
Mechanics Fraternal Association
(AMFA)
|
Mechanics,
inspectors and cleaners
|
634
|
Amendable 10/17/2011
|
|
Mexico
Workers Association of Air Transport
|
Mexico airport personnel
|
70
|
Amendable
9/29/2010
|
|
Transport Workers Union
of America (TWU)
|
Dispatchers
|
35
|
Amendable
7/01/2010*
|
|
*
|
Collective
bargaining agreement contains interest arbitration
provision.
|
|
|
|
|
|
Horizon’s
union contracts at December 31, 2009 were as
follows:
|
|
Union
|
Employee
Group
|
Number
of
Active
Employees
|
Contract
Status
|
|
International
Brotherhood of Teamsters (IBT)
|
Pilots
|
531
|
In Negotiations
|
|
AFA
|
Flight
attendants
|
519
|
Amendable
12/21/2011
|
|
IBT
|
Mechanics
and related classifications
|
450
|
In
Negotiations
|
|
TWU
|
Dispatchers
|
16
|
Amendable
10/06/2010
|
|
National
Automobile, Aerospace, Transportation and General Workers
|
Station personnel in Vancouver
and Victoria, BC, Canada
|
60
|
Expires 2/14/2010
|
EXECUTIVE OFFICERS
The
executive officers of Alaska Air Group, Inc. and executive officers of Alaska
and Horizon who have significant decision-making responsibilities, their
positions and their respective ages (as of February 1, 2010) are as
follows:
|
Name
|
Position
|
Age
|
Air
Group
or Subsidiary
Officer
Since
|
|
William
S. Ayer
|
Chairman,
President and Chief Executive Officer of Alaska Air Group, Inc. and
Chairman and Chief Executive Officer of Alaska Airlines,
Inc.
|
55
|
1985
|
|
Glenn
S. Johnson
|
Executive
Vice President/Finance and Chief Financial Officer of Alaska Air Group,
Inc. and Alaska Airlines, Inc.
|
51
|
1991
|
|
Keith
Loveless
|
Vice
President/Legal and Corporate Affairs, General Counsel and Corporate
Secretary of Alaska Air Group, Inc. and Alaska Airlines,
Inc.
|
53
|
1996
|
|
Bradley
D. Tilden
|
President
of Alaska Airlines, Inc.
|
49
|
1994
|
|
Jeffrey
D. Pinneo
|
President
and Chief Executive Officer of Horizon Air Industries,
Inc.
|
53
|
1990
|
|
Benito
Minicucci
|
Executive
Vice President/Operations and Chief Operating Officer of Alaska Airlines,
Inc.
|
43
|
2004
|
|
Kelley
Dobbs
|
Vice
President/Human Resources and Labor Relations of Alaska Airlines,
Inc.
|
43
|
2004
|
|
Brandon S. Pedersen
|
Vice
President/Finance and Controller of Alaska Air Group, Inc. and Alaska
Airlines, Inc. (Principal Accounting Officer)
|
43
|
2003
|
Mr. Ayer has been
President since February 2003 and became Chairman and Chief Executive Officer in
May 2003. Mr. Ayer is also Chairman and Chief Executive Officer of Alaska
Airlines. He has served as Alaska Airlines’ Chairman since February 2003, as
Chief Executive Officer since January 2002 and as President from November 1997
to December 2008. Prior to that, he was Sr. Vice President/Customer Service,
Marketing and Planning of Alaska Airlines from January 1997, and Vice
President/Marketing and Planning from August 1995. Prior thereto, he served as
Sr. Vice President/Operations of Horizon Air from January 1995. Mr. Ayer
serves on the boards of Alaska Airlines, Puget Energy, Inc., the Alaska Airlines
Foundation, Angel Flight West, Inc., and the Museum of Flight. He also serves on
the University of Washington Business School Advisory Board, and as a director
of the Seattle branch of the Federal Reserve Board.
Mr. Johnson joined
Alaska Airlines in 1982, became Vice President/Controller and Treasurer of
Horizon Air Industries in 1991 and Vice President/Customer Services in 2002. He
returned to Alaska Airlines in 2003 where he has served in several roles,
including Vice President/Finance and Controller and Vice President/Finance and
Treasurer. He served as Senior Vice President/Customer Service – Airports from
January 2006 through April 2007 and in April 2007, he was elected Executive Vice
President/Airports and Maintenance and Engineering. He was elected Executive
Vice President/Finance and Chief Financial Officer of Alaska Air Group and
Alaska Airlines in December 2008. He is a member of Air Group’s Management
Executive Committee.
Mr. Loveless became
Corporate Secretary and Assistant General Counsel of Alaska Air Group and Alaska
Airlines in 1996. In 1999, he was named Vice President/Legal and Corporate
Affairs, General Counsel and Corporate Secretary of Alaska Air Group and Alaska
Airlines. He is a member of Air Group’s Management Executive
Committee.
Mr. Tilden joined Alaska
Airlines in 1991, became controller of Alaska Airlines and Alaska Air Group in
1994, Chief Financial Officer in February 2000, Executive Vice President/Finance
in January 2002, Executive Vice President/Finance and Planning in 2007, and
President of Alaska Airlines in December 2008. He is a member of Air Group’s
Management Executive Committee.
Mr. Pinneo became Vice
President/Passenger Service of Horizon Air Industries in 1990 following nine
years at Alaska Airlines in various marketing roles. In January 2002, he was
named President and CEO of Horizon Air. He is a member of Air Group’s Management
Executive Committee.
Mr. Minicucci joined
Alaska Airlines in 2004 as Staff Vice President of Maintenance and Engineering
and was promoted to Vice President of Seattle Operations in June 2008. In
December 2008 he was elected Executive Vice President/Operations and Chief
Operating Officer of Alaska Airlines. He is a member of Air Group’s Management
Executive Committee.
Ms. Dobbs joined Alaska
Airlines in 1987, became Staff Vice President/Human Resources – Staffing and
Development in 2004, Vice President/Human Resources – Strategy, Culture and
Inclusion in June 2007, and Vice President/Human Resources and Labor Relations
in 2009. She is a member of Air Group’s Management Executive
Committee.
Mr. Pedersen joined
Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska
Air Group and Alaska Airlines and was elected Vice President/Finance and
Controller for both entities in 2006.
REGULATION
GENERAL
The
airline industry is highly regulated.
The
Department of Transportation (DOT) and the Federal Aviation Administration (FAA)
exercise significant regulatory authority over air carriers.
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DOT: In order to provide passenger
and cargo air transportation in the U.S., a domestic airline is required
to hold a certificate of public convenience and necessity issued by the
DOT. Subject to certain individual airport capacity, noise and other
restrictions, this certificate permits an air carrier to operate between
any two points in the U.S. Certificates do not expire, but may be revoked
for failure to comply with federal aviation statutes, regulations, orders
or the terms of the certificates. In addition, the DOT has jurisdiction over the
approval of international codeshare agreements, alliance agreements
between domestic major airlines, international route authorities and
certain consumer protection matters, such as advertising, denied boarding
compensation and baggage liability. International treaties may also
contain restrictions or requirements for flying outside of the
U.S.
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FAA: The FAA, through
Federal Aviation Regulations (FARs), generally regulates all aspects of
airline operations, including establishing personnel, maintenance and
flight operation standards. Domestic airlines are required to hold a valid
air carrier operating certificate issued by the FAA. Pursuant to these
regulations we have established, and the FAA has approved, our operations
specifications and a maintenance program for each type of aircraft we
operate. The maintenance program provides for the ongoing maintenance of
such aircraft, ranging from frequent routine inspections to major
overhauls. From time to time the FAA issues airworthiness directives (ADs)
that must be incorporated into our aircraft maintenance program and
operations. All airlines are subject to enforcement actions that are
brought by the FAA from time to time for alleged violations of FARs or
ADs. At this time, we are not aware of any enforcement proceedings that
could either materially affect our financial position or impact our
authority to operate.
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The
Aviation and Transportation Security Act (the Security Act) generally provides
for enhanced aviation security measures. Pursuant to the Security Act, the
Transportation Security Administration (TSA) is responsible for aviation
security. The Security Act imposes a $2.50 per enplanement security
service fee (maximum $5.00 one-way fee), which is collected by the air carriers
and submitted to the government to pay for these enhanced security measures. In
addition, carriers are required to pay an amount to the TSA to cover the cost of
providing security measures equal to the amount the air carriers paid for
screening passengers and property in 2000. We paid $12.6 million each year to
the TSA for this security charge in 2009, 2008 and 2007.
The
Department of Justice has jurisdiction over airline antitrust matters. The U.S.
Postal Service has jurisdiction over certain aspects of the transportation of
mail and related services. Labor relations in the air transportation industry
are regulated under the Railway Labor Act. To the extent we continue to fly to
foreign countries and pursue alliances with international carriers, we may be
subject to certain regulations of foreign agencies.
AIRLINE FARES
Airlines
are permitted to establish their own domestic fares without governmental
regulation, and the industry is characterized by vigorous price competition. The
DOT maintains authority over international (generally outside of North America)
fares, rates and charges. International fares and rates are also subject to the
jurisdiction of the governments of the foreign countries we serve. Although air
carriers are required to file and adhere to international fare and rate tariffs,
substantial commissions, overrides and discounts given to travel agents, brokers
and wholesalers characterize many international markets.
ENVIRONMENTAL MATTERS
We are
subject to various laws and government regulations concerning environmental
matters and employee safety and health in the U.S. and other countries. U.S.
federal laws that have a particular effect on us include the Airport Noise and
Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery
Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive
Environmental Response, Compensation and Liability Act, or Superfund Act. We are
also subject to the oversight of the Occupational Safety and Health
Administration (OSHA) concerning employee safety and health matters. The U.S.
Environmental Protection Agency, OSHA, and other federal agencies have been
authorized to create and enforce regulations that have an impact on our
operations. In addition to these federal activities, various states have been
delegated certain authorities under these federal statutes. Many state and local
governments have adopted environmental and employee safety and health laws and
regulations. We maintain our safety, health and environmental programs in order
to meet or exceed these requirements.
It is
expected that the current federal administration will likely move forward with
legislation to reduce carbon and other
greenhouse gas emissions. We do not believe legislation is necessary to motivate
airlines to reduce fuel burn and, in turn, reduce emissions. For example, Alaska
and Horizon have transitioned or are transitioning to more fuel-efficient
aircraft fleets, thereby greatly reducing our total
emissions.
The
Airport Noise and Capacity Act recognizes the rights of airport operators with
noise problems to implement local noise abatement programs so long as they do
not interfere unreasonably with interstate or foreign commerce or the national
air transportation system. Authorities in several cities have established
aircraft noise reduction programs, including the imposition of nighttime
curfews. We believe we have sufficient scheduling flexibility to accommodate
local noise restrictions.
Although
we do not currently anticipate that these regulatory matters, individually or
collectively, will have a material effect on our financial condition, results of
operations or cash flows, new regulations or compliance issues that we do not
currently anticipate could have the potential to harm our financial condition,
results of operations or cash flows in future periods.
CUSTOMER SERVICE
Along
with other domestic airlines, we have implemented a customer service commitment
plan to address a number of service goals, including, but not limited to, goals
relating to lowest fare availability, delays, cancellations and diversions,
baggage delivery and liability, guaranteed fares and ticket refunds. All of our
employees are required to periodically attend our Customer Experience Workshop
to enhance our customer service focus and ultimately improve the experience our
customers have when traveling with us.
In
December 2009, the DOT adopted new rules effective in April 2010 that set fines
of as much as $27,500 per passenger when airlines leave passengers on the
aircraft for more than three hours while on the ground. These new
rules are in response to recent incidents involving other airlines that resulted
in lengthy tarmac delays. Bills have been introduced in several
states, including the state of Washington, which propose to regulate airlines
when operating in those specific states. However, we believe these bills would
be preempted by federal law. We do not believe these bills are
necessary.
MILEAGE PLAN PROGRAM
All major
airlines have developed frequent flyer programs as a way of increasing passenger
loyalty. Alaska’s Mileage Plan allows members to earn mileage by flying on
Alaska, Horizon and other participating airlines and by using the services of
non-airline partners, which include a credit card partner, a grocery store
chain, a telephone company, hotels, car rental agencies, and other businesses.
Alaska is paid by non-airline partners for the miles it credits to member
accounts. With advance notice, Alaska has the ability to change the Mileage Plan
terms, conditions, partners, mileage credits, and award levels or to terminate
the program.
Mileage
can be redeemed for free or discounted travel and for various other awards. Upon
accumulating the necessary mileage, members notify Alaska of their award
selection. Mileage Plan accounts are generally deleted after two years of
inactivity in a member’s account. Over 80% of the free flight awards on Alaska
and Horizon in 2009 were subject to capacity-controlled seating.
As of
December 31, 2009 and 2008, approximately 3.0 million and
3.4 million, respectively, round-trip flight awards were eligible for
redemption by Mileage Plan members. Of those eligible awards, we estimate that
approximately 88% will ultimately be redeemed. For the years 2009, 2008 and
2007, approximately 1,190,000, 685,000 and 600,000 round-trip awards and
260,000, 410,000 and 250,000 one-way flight awards were redeemed and flown on
Alaska and Horizon. These awards represent approximately 15.0%, 9.3%, and 7.0%
for 2009, 2008, and 2007, respectively, of the total passenger miles flown on
Alaska and Horizon. For the years 2009, 2008, and 2007, approximately 181,000,
214,000, and 243,000, respectively, round-trip flight awards were redeemed and
flown on airline partners. In November 2008, we began charging a $25 fee for
awards redeemed on our airline partners.
We also
have awards that allow for redemption of one-half the mileage redemption rate
plus 50% of the fare for eligible award travel. Our members redeemed
approximately 730,000, 620,000, and 560,000 one-way equivalent awards under this
program in 2009, 2008, and 2007, respectively.
We sell
mileage credits to our non-airline partners. We defer a majority of the sales
proceeds and recognize revenue when award transportation is
provided.
SEASONALITY AND OTHER FACTORS
Our
results of operations for any interim period are not necessarily indicative of
those for the entire year because our business is subject to seasonal
fluctuations. Our profitability is generally lowest during the first and fourth
quarters due principally to lower traffic. It typically increases in the second
quarter and then reaches its highest level during the third quarter as a result
of vacation travel, including increased activity in the state of
Alaska.
In
addition to passenger loads, factors that could cause our quarterly operating
results to vary include:
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general
economic conditions and resulting changes in passenger
demand,
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• pricing
initiatives by us and our competitors,
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changes
in fuel costs,
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the
timing and amount of maintenance expenditures (both planned and
unplanned),
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increases
or decreases in passenger and volume-driven variable costs,
and
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labor
actions.
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In
addition to those factors listed above, seasonal variations in traffic, the
timing of various expenditures and adverse weather conditions may affect our
operating results from quarter to quarter. Many of the markets we serve
experience inclement weather conditions in the winter, causing increased costs
associated with deicing aircraft, canceled flights and reaccommodation of
displaced passengers. Due to our geographic area of operations, we can be more
susceptible to adverse weather conditions (particularly in the state of Alaska
and the Pacific Northwest) than some of our competitors, who may be better able
to spread weather-related risks over larger route systems.
No
material part of our business or that of our subsidiaries is dependent upon a
single customer, or upon a few high-volume customers.
INSURANCE
We carry
Airline Hull, Spares and Comprehensive Legal Liability Insurance in amounts and
of the type generally consistent with industry practice to cover damage to
aircraft, spare parts and spare engines, as well as bodily injury and property
damage to passengers and third parties. Since the September 11, 2001
attacks, this insurance program excludes coverage for War and Allied Perils,
including hijacking, terrorism, malicious acts, strikes, riots, civil commotion
and other identified perils. So, like other airlines, the company has purchased
war risk coverage for such events through the U.S. government.
We
believe that our emphasis on safety and our state-of-the-art flight deck safety
technology help to control the cost of aviation insurance.
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ITEM 1A.RISK
FACTORS
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If any of
the following occurs, our business, financial condition and results of
operations could suffer. In such case, the trading price of our common stock
could also decline. We operate in a continually changing business
environment. In this environment, new risks may emerge and already
identified risks may vary significantly in terms of impact and likelihood of
occurrence. Management cannot predict such developments, nor can it assess the
impact, if any, on our business of such new risk factors or of events described
in any forward-looking statements.
ECONOMY
AND FINANCE
The
current economic climate has impacted demand for our product and could harm our
financial condition and results of operations if the environment does not
improve.
The
recent economic recession resulted in a decline in demand for air travel. If the
economic climate does not improve and traffic does not improve as we expect, we
will likely need to adjust our capacity plans, which could harm our business,
financial condition and results of operations.
Our
business, financial condition, and results of operations are substantially
exposed to the volatility of jet fuel prices. Increases in jet fuel costs would
harm our business.
Fuel
costs constitute a significant portion of our total operating expenses,
accounting for 21% and 36% of total operating expenses for the years ended
December 31, 2009 and 2008, respectively. Significant increases in average
fuel costs during the past several years have negatively affected our results of
operations.
Future
increases in the price of jet fuel will harm our financial condition and results
of operations, unless we are able to increase fares or add additional ancillary
fees to attempt to recover increasing fuel costs.
Our
indebtedness and other fixed obligations could increase the volatility of
earnings and otherwise restrict our activities and potentially lead to liquidity
constraints.
We have,
and will continue to have for the foreseeable future, a significant amount of
debt. Due to our high fixed costs, including aircraft lease commitments and debt
service, a decrease in revenues results in a disproportionately greater decrease
in earnings.
Our
outstanding long-term debt and other fixed obligations could have important
consequences. For example, they could:
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limit
our ability to obtain additional financing to fund our future capital
expenditures, acquisitions, working capital or other
purposes;
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require
us to dedicate a material portion of our operating cash flow to fund lease
payments and interest payments on indebtedness, thereby reducing funds
available for other purposes; and
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limit
our ability to withstand competitive pressures and reduce our flexibility
in responding to changing business and economic conditions, including
reacting to the current economic
slowdown.
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Although
we have historically been able to generate sufficient cash flow from our
operations to pay our debt and other fixed obligations as they become due, we
cannot ensure we will be able to do so in the future. If we fail to do so, our
business could be harmed.
Alaska is
required to comply with specific financial covenants in certain agreements. We
cannot be certain that Alaska will be able to comply with these covenants or
provisions or that these requirements will not limit our ability to finance our
future operations or capital needs.
See
“Liquidity and Capital Resources” on page 44 for more detailed information about
our obligations and commitments.
Our
continuing obligation to fund our traditional defined-benefit pension plans
could negatively affect our ability to compete in the marketplace.
Our
defined-benefit pension plan assets are subject to market risk. If market
returns are poor in the future, as they were in 2008, any future obligation to
make additional cash contributions in accordance with the Pension Protection Act
of 2006 could increase and harm our liquidity. Poor market returns also lead to
higher pension expense in our statement of operations. The calculation of
pension expense is dependent on many assumptions that are more fully described
in “Critical Accounting Estimates” on page 42 and Note 8 to our
consolidated financial statements.
Increases
in insurance costs or reductions in insurance coverage would harm our business,
financial condition and results of operations.
Aviation
insurers could increase their premiums in the event of additional terrorist
attacks, hijackings, airline accidents or other events adversely affecting the
airline industry. Furthermore, the full hull and liability war risk insurance
provided by the government is currently mandated through August 31, 2010.
Although the government may again extend the deadline for providing such
coverage, we cannot be certain that any extension will occur, or if it does, for
how long the extension will last. It is expected that, should the government
stop providing such coverage to the airline industry, the premiums charged by
aviation insurers for this coverage will be substantially higher than the
premiums currently charged by the government and the coverage will be much more
limited, including smaller aggregate limits and shorter cancellation periods.
Significant increases in insurance premiums would adversely affect our business,
financial condition and results of operations.
SAFETY,
COMPLIANCE AND OPERATIONAL EXCELLENCE
Our
reputation and financial results could be harmed in the event of an airline
accident or incident.
An
accident or incident involving one of our aircraft could involve a significant
loss of life and result in a loss of confidence in our airlines by the flying
public. We could experience significant potential claims from injured passengers
and surviving relatives, as well as costs for the repair or replacement of a
damaged aircraft and its consequential temporary or permanent loss from service.
We maintain liability insurance in amounts and of the type generally consistent
with industry practice. However, the amount of such coverage may not be adequate
to fully cover all claims and we may be forced to bear substantial losses from
an accident. Substantial claims resulting from an accident in excess of our
related insurance coverage would harm our business and financial results.
Moreover, any aircraft accident or incident, even if fully insured and even if
it does not involve one of our airlines, could cause a public perception that
our airlines or the equipment they fly is less safe or reliable than other
transportation alternatives, which would harm our business.
Changes
in government regulation imposing additional requirements and restrictions on
our operations or on the airports at which we operate could increase our
operating costs and result in service delays and disruptions.
Airlines
are subject to extensive regulatory and legal requirements, both domestically
and internationally, that involve significant compliance costs. In the last
several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA
have issued regulations that have required significant expenditures relating to
the maintenance and operation of airlines. Similarly, many aspects of an
airline’s operations are subject to increasingly stringent federal, state and
local laws protecting the environment.
Because
of significantly higher security and other costs incurred by airports since
September 11, 2001, many airports have increased their rates and charges to
air carriers. Additional laws, regulations, taxes, and airport rates and charges
have been proposed from time to time that could significantly increase the cost
of airline operations or reduce the demand for air travel. Although lawmakers
may impose these additional fees and view them as “pass-through” costs, we
believe that a higher total ticket price will influence consumer purchase and
travel decisions and may result in an overall decline in passenger traffic,
which would harm our business.
If
we do not maintain the privacy and security of customer-related information, we
could damage our reputation, incur substantial additional costs and become
subject to litigation.
We
receive, retain, and transmit certain personal information about our
customers. In addition, our online operations at alaskaair.com depend
on the secure transmission of confidential information over public networks,
including credit card information. A compromise of our security
systems or those of other business partners that results in our customers’
personal information being obtained by unauthorized persons could adversely
affect our reputation with our customers and others, as well as our operations,
results of operations, financial position and liquidity, and could result in
litigation against us or the imposition of penalties. In addition, a
security breach could require that we expend significant additional resources
related to the security of information systems and could result in a disruption
of our operations, particularly our online sales operations.
Additionally,
the use of individually identifiable data by our business and our business
partners is regulated at the international, federal and state
levels. Privacy and information security laws and regulations change,
and compliance with them may result in cost increases due to necessary systems
changes and the development of new administrative processes.
The
airline industry continues to face potential security concerns and related
costs.
The
terrorist attacks of September 11, 2001 and their aftermath negatively
affected the airline industry, including our company. Additional terrorist
attacks, the fear of such attacks or other hostilities involving the U.S. could
have a further significant negative effect on the airline industry, including
us, and could:
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significantly
reduce passenger traffic and yields as a result of a potentially dramatic
drop in demand for air travel;
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significantly
increase security and insurance
costs;
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make
war risk or other insurance unavailable or extremely
expensive;
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increase
fuel costs and the volatility of fuel
prices;
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increase
costs from airport shutdowns, flight cancellations and delays resulting
from security breaches and perceived safety threats;
and
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result
in a grounding of commercial air traffic by the
FAA.
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The
occurrence of any of these events would harm our business, financial condition
and results of operations.
Our
operations are often affected by factors beyond our control, including delays,
cancellations, and other conditions, which could harm our financial condition
and results of operations.
Like
other airlines, our operations often are affected by delays, cancellations and
other conditions caused by factors largely beyond our control.
A local
dam in the Kent Valley near the Seattle-Tacoma International Airport is partly
compromised. Many of the services necessary for the operation of our
airlines are located in the valley, e.g., fuel supply, power, catering,
reservations call centers, etc. If the area experiences heavy rains,
flooding could occur and our operations could be disrupted. The Army
Corps of Engineers estimates that the dam will be repaired within three to five
years. We have contingency plans in place and are continuing to
monitor the situation.
Other
conditions that might impact our operations include:
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air
traffic congestion at airports or other air traffic control
problems;
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adverse
weather conditions;
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increased
security measures or breaches in
security;
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international
or domestic conflicts or terrorist activity;
and
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other
changes in business conditions.
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Due to
our geographic area of operations, we believe a large portion of our operation
is more susceptible to adverse weather conditions than that of many of our
competitors. A general reduction in airline passenger traffic as a result of any
of the above-mentioned factors could harm our business, financial condition and
results of operations.
STRATEGY
We
depend on a few key markets to be successful.
Our
strategy is to focus on serving a few key markets, including Seattle, Portland,
Los Angeles and Anchorage. A significant portion of our flights occurs to and
from our Seattle hub. In 2009, passengers to and from Seattle accounted for 64%
of our total passengers.
We
believe that concentrating our service offerings in this way allows us to
maximize our investment in personnel, aircraft, and ground facilities, as well
as to gain greater advantage from sales and marketing efforts in those regions.
As a result, we remain highly dependent on our key markets. Our business could
be harmed by any circumstances causing a reduction in demand for air
transportation in our key markets. An increase in competition in our key markets
could also cause us to reduce fares or take other competitive measures that
could
harm our business, financial condition and results of
operations.
Our
failure to successfully meet cost reduction goals at both Alaska and Horizon
could harm our business.
We
continue to strive toward aggressive cost-reduction goals that are an important
part of our business strategy of offering the best value to passengers through
competitive fares while achieving acceptable profit margins and return on
capital. However, with our capacity reductions in 2009 and increased costs in
areas such as wages and benefits, we experienced a 10% increase in non-fuel unit
cost at Alaska and a 6% increase at Horizon. If we are unable to reduce our
non-fuel unit costs over the long-term and achieve targeted profitability, we
will likely not be able to grow our business in the future and therefore our
financial results may suffer.
We
rely on third-party vendors for certain critical activities.
We have
historically relied on outside vendors for a variety of services and functions
critical to our business, including airframe and engine maintenance, ground
handling, fueling, computer reservation system hosting and software maintenance.
As part of our cost-reduction efforts, our reliance on outside vendors has
increased and may continue to do so in the future. In recent years, Alaska has
subcontracted its heavy aircraft maintenance, fleet service, facilities
maintenance, and ground handling services at certain airports, including
Seattle-Tacoma International Airport, to outside vendors.
Our use
of outside vendors increases our exposure to several risks. In the event that
one or more vendors goes into bankruptcy, ceases operation or fails to perform
as promised, replacement services may not be readily available at competitive
rates, or at all. Although we believe that our vendor oversight and quality
control is among the best in the industry, if one of our vendors fails to
perform adequately we may experience increased costs, delays, maintenance
issues, safety issues or negative public perception of our airline. Vendor
bankruptcies, unionization, regulatory compliance issues or significant changes
in the competitive marketplace among suppliers could adversely affect vendor
services or force Alaska to renegotiate existing agreements on less favorable
terms. These events could result in disruptions in Alaska’s operations or
increases in its cost structure.
We
are dependent on a limited number of suppliers for aircraft and
parts.
Alaska is
dependent on Boeing as its sole supplier for aircraft and many of its aircraft
parts. Horizon is similarly dependent on Bombardier. Additionally, each carrier
is dependent on sole suppliers for aircraft engines. As a result, we are more
vulnerable to any problems associated with the supply of those aircraft and
parts, including design defects, mechanical problems, contractual performance by
the manufacturers, or adverse perception by the public that would result in
customer avoidance or in actions by the FAA resulting in an inability to operate
our aircraft.
INFORMATION
TECHNOLOGY
We
rely heavily on automated systems to operate our business, and a failure of
these systems or by their operators could harm our business.
We depend
on automated systems to operate our business, including our airline reservation
system, our telecommunication systems, our website, our maintenance systems, our
kiosk check-in terminals, and other systems. Substantially all of our tickets
are issued to passengers as electronic tickets and the majority of our customers
check in using our website or our airport kiosks. We depend on our reservation
system to be able to issue, track and accept these electronic tickets. In order
for our operations to work efficiently, our website, reservation system, and
check-in systems must be able to accommodate a high volume of traffic, maintain
secure information, and deliver important flight information. Substantial or
repeated website, reservations system or telecommunication systems failures
could reduce the attractiveness of our services and cause our customers to
purchase tickets from another airline. In addition, we rely on other automated
systems for crew scheduling, flight dispatch, and other operational needs.
Disruption in, changes to, or a breach of these systems could result in the loss
of important data, an increase of our expenses and a possible temporary
cessation of our operations.
BRAND
AND REPUTATION
A
significant increase in labor costs or change in key personnel could adversely
affect our business and results of operations.
We
compete against the major U.S. airlines and other businesses for labor in many
highly skilled positions. If we are unable to hire, train and retain qualified
employees at a reasonable cost, or if we lose the services of key personnel, we
may be unable to grow or sustain our business. In such case, our operating
results and business prospects could be harmed. We may also have difficulty
replacing management or other key personnel who leave and, therefore, the loss
of any of these individuals could harm our business.
Labor
costs are a significant component of our total expenses, accounting for
approximately 34% and 25% of our total operating expenses in 2009 and 2008,
respectively. As of December 31, 2009, labor unions represented
approximately 82% of Alaska’s and 46% of Horizon’s employees. Each of our
represented employee groups has a separate collective bargaining agreement, and
could make demands that would increase our operating expenses and adversely
affect our financial performance if we agree to them. Although we have been
successful in negotiating new contracts or extending existing
contracts with a number of workgroups recently, future uncertainty around open
contracts could be a distraction to many employees, reduce employee engagement
in our business and divert management’s attention from other projects and
issues.
Horizon
is currently in negotiations with the IBT on a new pilot agreement and has been
since the contract first became amendable in September 2006. In January 2010,
Horizon and the IBT filed separate requests for assistance from the NMB in our
ongoing negotiations. Factoring in pay rates and productivity
measures, we believe our pilot unit costs at Horizon are among the highest in
the industry for the size of aircraft we operate.
We
rely on partner airlines for codeshare and frequent flyer marketing
arrangements.
Alaska
and Horizon are parties to marketing agreements with a number of domestic and
international air carriers, or “partners,” including, but not limited to,
American Airlines and Delta Air Lines. These agreements provide that certain
flight segments operated by us are held out as partner “codeshare” flights and
that certain partner flights are held out for sale as Alaska codeshare flights.
In addition, the agreements generally provide that members of Alaska’s Mileage
Plan program can earn miles on or redeem miles for partner flights and vice
versa. We receive a significant amount of revenue from flights sold under
codeshare arrangements. In addition, we believe that the frequent flyer
arrangements are an important part of our Mileage Plan program. The loss of a
significant partner or certain partner flights could have a negative effect on
our revenues or the attractiveness of our Mileage Plan, which we believe is a
source of competitive advantage.
|
ITEM 1B. UNRESOLVED
STAFF COMMENTS
|
None
|
ITEM 2.
PROPERTIES
|
AIRCRAFT
The
following tables describe the aircraft we operate and their average age at
December 31, 2009:
|
Aircraft
Type
|
Passenger
Capacity
|
Owned
|
Leased
|
Total
|
Average
Age
in
Years
|
||||||||||||||||
|
Alaska Airlines
|
|||||||||||||||||||||
| Boeing: | |||||||||||||||||||||
|
737-400
|
144 | 3 | 24 | 27 | 14.1 | ||||||||||||||||
| 737-400C* | 72 | 5 | — | 5 | 17.3 | ||||||||||||||||
| 737-400F* | — | 1 | — | 1 | 10.8 | ||||||||||||||||
| 737-700 | 124 | 17 | 2 | 19 | 9.1 | ||||||||||||||||
| 737-800 | 157 | 41 | 10 | 51 | 2.3 | ||||||||||||||||
| 737-900 | 172 | 12 | — | 12 | 7.4 | ||||||||||||||||
|
Total
|
79 | 36 | 115 | 7.5 | |||||||||||||||||
|
Horizon
Air
|
|||||||||||||||||||||
| Bombardier: | |||||||||||||||||||||
|
Q400
|
76 | 25 | 15 | 40 | 5.1 | ||||||||||||||||
| CRJ-700 | 70 | 2 | 16 | 18 | 7.3 | ||||||||||||||||
|
Total
|
27 | 31 | 58 | 5.8 | |||||||||||||||||
|
*
|
C=Combination
freighter/passenger; F=Freighter
|
Part II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” discusses future orders and options for additional
aircraft.
Most of
our owned aircraft secure long-term debt arrangements or collateralize our
revolving credit facility. See further discussion in “Liquidity and
Capital Resouces” on page 44.
Alaska’s
leased 737-400, 737-700, and 737-800 aircraft have lease expiration dates
between 2010 and 2016, in 2010, and between 2015 and 2021, respectively. Alaska
has four MD-80 aircraft, one owned and three under long-term lease arrangements
through 2012, currently in temporary storage. Horizon’s leased Q400 and CRJ-700
aircraft have expiration dates in 2018 and between 2018 and 2020, respectively.
Horizon also has 16 leased Q200 aircraft and two leased CRJ-700 aircraft that
are subleased to third-party carriers. Alaska and Horizon have the
option to extend most of the leases for additional periods, or the right to
purchase the aircraft at the end of the lease term, usually at the
then-fair-market value of the aircraft.
Alaska
completed its transition to an all-Boeing operating fleet during 2008. Horizon’s
long-term goal is to transition to an all-Q400 operating 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.
The
following table displays the currently anticipated fleet counts for Alaska and
Horizon as of the end of each quarter in 2010. This plan assumes that
we are able to remarket three CRJ-700 aircraft in the first half of
2010. Given current market conditions, there is no assurance that we
will be successful in doing so.
|
31-Mar-10
|
30-Jun-10
|
30-Sep-10
|
31-Dec-10
|
||||||||||||||
|
Alaska Airlines
|
|||||||||||||||||
| 737-400 | 24 | 24 | 24 | 23 | |||||||||||||
| 737-400C* | 5 | 5 | 5 | 5 | |||||||||||||
| 737-400F* | 1 | 1 | 1 | 1 | |||||||||||||
| 737-700 | 19 | 19 | 18 | 17 | |||||||||||||
| 737-800 | 51 | 55 | 55 | 55 | |||||||||||||
| 737-900 | 12 | 12 | 12 | 12 | |||||||||||||
|
Totals
|
112 | 116 | 115 | 113 | |||||||||||||
|
Horizon
Air
|
|||||||||||||||||
| Q400 | 40 | 40 | 40 | 40 | |||||||||||||
|
CRJ-700
|
18 | 15 | 15 | 15 | |||||||||||||
|
Totals
|
58 | 55 | 55 | 55 | |||||||||||||
|
*
|
C=Combination
freighter/passenger; F=Freighter
|
GROUND FACILITIES AND SERVICES
Alaska
and Horizon lease ticket counters, gates, cargo and baggage space, office space,
and other support areas at the majority of the airports they serve. Alaska also
owns terminal buildings in various cities in the state of Alaska.
Alaska
has centralized operations in several buildings located at or near
Seattle-Tacoma International Airport (Sea-Tac) near Seattle, Wash. These include
a five-bay hangar and shops complex (used primarily for line maintenance), a
flight operations and training center, an air cargo facility, an information
technology office and datacenter, an office building, and corporate headquarters
complex. Alaska also leases a stores warehouse, and office space for a customer
service and reservation facility in Kent, Wash. Alaska’s major facilities
outside of Seattle include a regional headquarters building, an air cargo
facility and a hangar/office facility in Anchorage, as well as leased
reservations facilities in Phoenix, Ariz. and Boise, Idaho. Alaska uses its own
employees for ground handling services at most of our airports in the state of
Alaska. At other airports throughout our system, those services are contracted
to various third-party vendors.
Horizon
owns its Seattle corporate headquarters building. It leases an operations,
training, and aircraft maintenance facility in Portland as well as line
maintenance stations in Boise, Spokane, Pasco, Eugene, Los Angeles and
Seattle.
|
ITEM 3. LEGAL
PROCEEDINGS
|
Grievance
with International Association of Machinists
In June
2005, the International Association of Machinists (IAM) filed a grievance under
its Collective Bargaining Agreement (CBA) alleging that Alaska violated the CBA
by, among other things, subcontracting the ramp service operation in Seattle.
The dispute was referred to an arbitrator and hearings on the grievance
commenced in January 2007, with a final hearing date in August 2007. In February
2010, the arbitrator issued a final decision. The decision does not
require Alaska to alter the existing subcontracting arrangements for ramp
service in Seattle. The award sustains the right to subcontract other
operations in the future so long as the requirements of the CBA are
met. The award imposes monetary remedies which have not been fully
calculated, but are not expected to be material.
Other
items
We are a
party to routine litigation matters incidental to our business and with respect
to which no material liability is expected.
Management
believes the ultimate disposition of these matters is not likely to materially
affect our financial position or results of operations. This
forward-looking statement is based on management’s current understanding of the
relevant law and facts, and it is subject to various contingencies, including
the potential costs and risks associated with litigation and the actions of
judges and juries.
|
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
|
ITEM 5. MARKET FOR THE
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
As of
December 31, 2009, there were 35,591,008 shares of common stock of Alaska
Air Group, Inc. issued and outstanding and 3,406 shareholders of record. We also
held 252,084 treasury shares at a cost of $5.7 million. We have not paid
dividends on the common stock since 1992 and have no plans to do so in the
foreseeable future. Our common stock is listed on the New York Stock Exchange
(symbol: ALK).
The
following table shows the trading range of Alaska Air Group, Inc. common stock
on the New York Stock Exchange.
|
2009
|
2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 30.95 | $ | 13.61 | $ | 28.56 | $ | 17.44 | ||||||||
|
Second
Quarter
|
22.08 | 14.53 | 23.00 | 15.34 | ||||||||||||
|
Third
Quarter
|
27.99 | 17.93 | 24.68 | 10.10 | ||||||||||||
|
Fourth
Quarter
|
36.48 | 24.91 | 29.74 | 12.89 | ||||||||||||
SALES OF NON-REGISTERED SECURITIES
None
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Maximum remaining
dollar
value of shares
that
can be purchased
under the
plan
|
||||||||||
|
June
11, 2009 – June
30, 2009 (1)
|
700,000 | $ | 16.89 | |||||||||
|
July
1, 2009 – July
31, 2009 (1)
|
624,578 | $ | 19.12 | |||||||||
|
Total
|
1,324,578 | $ | 17.94 | $ | 26,234,104 | |||||||
|
(1)
|
Purchased
pursuant to a $50 million repurchase plan authorized by the Board of
Directors in June 2009. The plan expires after twelve
months. There were no purchases under this plan subsequent to
July 2009 through the end of 2009. However, we have resumed
purchases subsequent to December 31,
2009.
|
In
October 2009, Air Group delisted 7,900,000 common shares that had been held in
treasury stock on the consolidated balance sheet in prior
periods. The action did not impact the total number of common shares
outstanding.
PERFORMANCE GRAPH
The
following graph compares our cumulative total stockholder return since
December 31, 2004 with the S&P 500 Index and the Dow Jones U.S.
Airlines Index. The graph assumes that the value of the investment in our common
stock and each index (including reinvestment of dividends) was $100 on
December 31, 2004.
|
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND
OPERATING DATA
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
CONSOLIDATED OPERATING RESULTS
(audited)
|
||||||||||||||||||||
|
Year
Ended December 31 (in millions, except per share amounts):
|
||||||||||||||||||||
|
Operating
Revenues
|
$ | 3,399.8 | $ | 3,662.6 | $ | 3,506.0 | $ | 3,334.4 | $ | 2,975.3 | ||||||||||
|
Operating
Expenses
|
3,132.4 | 3,834.8 | 3,295.1 | 3,424.6 | 2,808.8 | |||||||||||||||
|
Operating
Income (Loss)
|
267.4 | (172.2 | ) | 210.9 | (90.2 | ) | 166.5 | |||||||||||||
|
Nonoperating
income (expense), net of interest capitalized (a)
|
(64.5 | ) | (41.0 | ) | (10.4 | ) | (0.5 | ) | (29.3 | ) | ||||||||||
|
Income
(loss) before income tax and accounting change
|
202.9 | (213.2 | ) | 200.5 | (90.7 | ) | 137.2 | |||||||||||||
|
Income
(loss) before accounting change
|
202.9 | (135.9 | ) | 124.3 | (54.5 | ) | 84.5 | |||||||||||||
|
Net
Income (Loss)
|
$ | 121.6 | $ | (135.9 | ) | $ | 124.3 | $ | (54.5 | ) | $ | (5.9 | ) | |||||||
|
Average
basic shares outstanding
|
35.815 | 36.343 | 40.125 | 37.939 | 27.609 | |||||||||||||||
|
Average
diluted shares outstanding
|
36.154 | 36.343 | 40.424 | 37.939 | 33.917 | |||||||||||||||
|
Basic
earnings (loss) per share before accounting change
|
$ | 3.39 | $ | (3.74 | ) | $ | 3.10 | $ | (1.44 | ) | $ | 3.06 | ||||||||
|
Basic
earnings (loss) per share
|
3.39 | (3.74 | ) | 3.10 | (1.44 | ) | (0.21 | ) | ||||||||||||
|
Diluted
earnings (loss) per share before accounting change
|
3.36 | (3.74 | ) | 3.07 | (1.44 | ) | 2.65 | |||||||||||||
|
Diluted
earnings (loss) per share
|
3.36 | (3.74 | ) | 3.07 | (1.44 | ) | (0.01 | ) | ||||||||||||
|
CONSOLIDATED FINANCIAL POSITION
(audited)
|
||||||||||||||||||||
|
At
End of Period (in millions, except ratio):
|
||||||||||||||||||||
|
Total
assets
|
$ | 4,985.0 | $ | 4,835.6 | $ | 4,490.9 | $ | 4,077.1 | $ | 3,792.0 | ||||||||||
|
Long-term
debt and capital lease obligations, net of current portion
|
1,699.2 | 1,596.3 | 1,124.6 | 1,031.7 | 969.1 | |||||||||||||||
|
Shareholders'
equity
|
872.1 | 661.9 | 1,025.4 | 886.5 | 827.6 | |||||||||||||||
|
Ratio
of earnings to fixed charges (b) (unaudited)
|
1.92 | (0.10 | ) | 1.83 | 0.40 | 1.72 | ||||||||||||||
|
STATISTICS
(unaudited)
|
||||||||||||||||||||
|
Alaska
Airlines Mainline Operating Data:
|
||||||||||||||||||||
|
Revenue
passengers (000)
|
15,561 | 16,809 | 17,558 | 17,165 | 16,759 | |||||||||||||||
|
Revenue
passenger miles (RPM) (000,000)
|
18,362 | 18,712 | 18,451 | 17,822 | 16,915 | |||||||||||||||
|
Available
seat miles (ASM) (000,000)
|
23,144 | 24,218 | 24,208 | 23,278 | 22,292 | |||||||||||||||
|
Revenue
passenger load factor
|
79.3 | % | 77.3 | % | 76.2 | % | 76.6 | % | 75.9 | % | ||||||||||
|
Yield
per passenger mile
|
13.28 | ¢ | 14.13 | ¢ | 13.81 | ¢ | 13.76 | ¢ | 12.91 | ¢ | ||||||||||
|
Operating
revenues per ASM
|
11.74 | ¢ | 12.06 | ¢ | 11.52 | ¢ | 11.50 | ¢ | 10.76 | ¢ | ||||||||||
|
Operating
expenses per ASM
|
10.78 | ¢ | 12.54 | ¢ | 10.55 | ¢ | 11.93 | ¢ | 10.14 | ¢ | ||||||||||
|
Operating
expenses per ASM, excluding fuel and noted items (d)
|
8.26 | ¢ | 7.49 | ¢ | 7.50 | ¢ | 7.76 | ¢ | 7.90 | ¢ | ||||||||||
|
Average
number of full-time equivalent employees
|
8,915 | 9,628 | 9,679 | 9,322 | 9,065 | |||||||||||||||
|
Operating
fleet at period-end
|
115 | 110 | 115 | 114 | 110 | |||||||||||||||
|
Horizon
Air Combined Operating Data (c):
|
||||||||||||||||||||
|
Revenue
passengers (000)
|
6,759 | 7,390 | 7,552 | 6,860 | 6,481 | |||||||||||||||
|
Revenue
passenger miles (RPM) (000,000)
|
2,408 | 2,635 | 2,918 | 2,691 | 2,475 | |||||||||||||||
|
Available
seat miles (ASM) (000,000)
|
3,292 | 3,617 | 3,978 | 3,632 | 3,400 | |||||||||||||||
|
Revenue
passenger load factor
|
73.1 | % | 72.9 | % | 73.4 | % | 74.1 | % | 72.8 | % | ||||||||||
|
Yield
per passenger mile
|
26.73 | ¢ | 27.43 | ¢ | 24.30 | ¢ | 23.53 | ¢ | 21.98 | ¢ | ||||||||||
|
Operating
revenues per ASM
|
19.88 | ¢ | 20.29 | ¢ | 18.06 | ¢ | 17.73 | ¢ | 16.36 | ¢ | ||||||||||
|
Operating
expenses per ASM
|
18.64 | ¢ | 21.42 | ¢ | 18.07 | ¢ | 17.41 | ¢ | 15.50 | ¢ | ||||||||||
|
Operating
expenses per ASM, excluding fuel and noted items (d)
|
15.33 | ¢ | 14.52 | ¢ | 14.58 | ¢ | 14.20 | ¢ | 13.36 | ¢ | ||||||||||
|
Average
number of full-time equivalent employees
|
3,308 | 3,699 | 3,897 | 3,611 | 3,456 | |||||||||||||||
|
Operating
fleet at period-end
|
58 | 59 | 70 | 69 | 65 | |||||||||||||||
(a) Includes
capitalized interest of $7.6 million, $23.2 million, $27.8 million, $24.7
million, $8.9 million, $1.7 million, $2.3 million, $2.7 million, $10.6 million,
$17.7 million, and $12.6 million for 2009, 2008, 2007, 2006, 2005, 2004, 2003,
2002, 2001, 2000, and 1999, respectively.
(b) For
2008, 2006, 2004, 2002, 2001, and 2000 earnings are inadequate to cover fixed
charges by $236.4 million, $115.4 million, $17.4 million, $99.5 million, $69.1
million, and $44.6 million, respectively. See Exhibit 12.1 to
this Form 10-K.
|
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA - (continued)
|
||||||||||||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
1999
|
|||||||||||||||||||
|
CONSOLIDATED OPERATING RESULTS
(audited)
|
||||||||||||||||||||||||
|
Year
Ended December 31 (in millions, except per share amounts):
|
||||||||||||||||||||||||
|
Operating
Revenues
|
$ | 2,723.8 | $ | 2,444.8 | $ | 2,224.1 | $ | 2,152.8 | $ | 2,194.0 | $ | 2,091.5 | ||||||||||||
|
Operating
Expenses
|
2,718.1 | 2,455.9 | 2,317.3 | 2,279.1 | 2,227.1 | 1,901.7 | ||||||||||||||||||
|
Operating
Income (Loss)
|
5.7 | (17.511.1 | ) | (93.2 | ) | (126.3 | ) | (33.1 | ) | 189.8 | ||||||||||||||
|
Nonoperating
income (expense), net of interest capitalized (a)
|
(26.3 | ) | 46.540.1 | (8.6 | ) | 62.8 | 6.2 | 23.2 | ||||||||||||||||
|
Income
(loss) before income tax and accounting change
|
(20.6 | ) | 29.0 | (101.8 | ) | (63.5 | ) | (26.9 | ) | 213.0 | ||||||||||||||
|
Income
(loss) before accounting change
|
(15.3 | ) | 13.5 | (67.2 | ) | (43.4 | ) | (20.4 | ) | 129.4 | ||||||||||||||
|
Net
Income (Loss)
|
$ | (15.3 | ) | $ | 13.5 | $ | (118.6 | ) | $ | (43.4 | ) | $ | (67.2 | ) | $ | 129.4 | ||||||||
|
Average
basic shares outstanding
|
||||||||||||||||||||||||
|
Average
diluted shares outstanding
|
26.859 | 26.648 | 26.546 | 26.499 | 26.440 | 26.372 | ||||||||||||||||||
|
Basic
earnings (loss) per share before accounting change
|
26.859 | 26.730 | 26.546 | 26.499 | 26.440 | 26.507 | ||||||||||||||||||
|
Basic
earnings (loss) per share
|
$ | (0.57 | ) | $ | 0.51 | $ | (2.53 | ) | $ | (1.64 | ) | $ | (0.77 | ) | $ | 4.91 | ||||||||
|
Diluted
earnings (loss) per share before accounting change
|
(0.57 | ) | 0.51 | (4.47 | ) | (1.64 | ) | (2.54 | ) | 4.91 | ||||||||||||||
|
Diluted
earnings (loss) per share
|
(0.57 | ) | 0.51 | (2.53 | ) | (1.64 | ) | (0.77 | ) | 4.88 | ||||||||||||||
|
CONSOLIDATED FINANCIAL POSITION
(audited)
|
(0.57 | ) | 0.51 | (4.47 | ) | (1.64 | ) | (2.54 | ) | 4.88 | ||||||||||||||
|
At
End of Period (in millions, except ratio):
|
||||||||||||||||||||||||
|
Total
assets
|
$ | 3,335.0 | $ | 3,259.2 | $ | 2,880.7 | $ | 2,950.5 | $ | 2,528.1 | $ | 2,196.0 | ||||||||||||
|
Long-term
debt and capital lease obligations, net of current portion
|
989.6 | 906.9 | 856.7 | 852.2 | 509.2 | 337.0 | ||||||||||||||||||
|
Shareholders'
equity
|
664.8 | 674.2 | 655.7 | 851.3 | 895.1 | 959.2 | ||||||||||||||||||
|
Ratio
of earnings to fixed charges (b) (unaudited)
|
0.89 | 1.22 | 0.28 | 0.48 | 0.66 | 3.07 | ||||||||||||||||||
|
STATISTICS
(unaudited)
|
||||||||||||||||||||||||
|
Alaska
Airlines Mainline Operating Data:
|
||||||||||||||||||||||||
|
Revenue
passengers (000)
|
16,295 | 15,047 | 14,154 | 13,668 | 13,525 | 13,620 | ||||||||||||||||||
|
Revenue
passenger miles (RPM) (000,000)
|
16,231 | 14,554 | 13,186 | 12,249 | 11,986 | 11,777 | ||||||||||||||||||
|
Available
seat miles (ASM) (000,000)
|
22,276 | 20,804 | 19,360 | 17,919 | 17,315 | 17,341 | ||||||||||||||||||
|
Revenue
passenger load factor
|
72.9 | % | 70.0 | % | 68.1 | % | 68.4 | % | 69.2 | % | 67.9 | % | ||||||||||||
|
Yield
per passenger mile
|
12.47 | ¢ | 12.65 | ¢ | 12.65 | ¢ | 13.12 | ¢ | 13.56 | ¢ | 12.86 | ¢ | ||||||||||||
|
Operating
revenues per ASM
|
10.02 | ¢ | 9.74 | ¢ | 9.47 | ¢ | 9.84 | ¢ | 10.20 | ¢ | 9.75 | ¢ | ||||||||||||
|
Operating
expenses per ASM
|
10.07 | ¢ | 9.81 | ¢ | 9.87 | ¢ | 10.24 | ¢ | 10.35 | ¢ | 9.81 | ¢ | ||||||||||||
|
Operating
expenses per ASM, excluding fuel and noted items (d)
|
7.92 | ¢ | 8.34 | ¢ | 8.52 | ¢ | 8.73 | ¢ | 8.54 | ¢ | 8.63 | ¢ | ||||||||||||
|
Average
number of full-time equivalent employees
|
9,968 | 10,040 | 10,142 | 10,115 | 9,611 | 9,183 | ||||||||||||||||||
|
Operating
fleet at period-end
|
108 | 109 | 102 | 101 | 95 | 89 | ||||||||||||||||||
|
Horizon
Air Combined Operating Data (c):
|
||||||||||||||||||||||||
|
Revenue
passengers (000)
|
5,930 | 4,934 | 4,815 | 4,668 | 5,044 | 4,984 | ||||||||||||||||||
|
Revenue
passenger miles (RPM) (000,000)
|
2,155 | 1,640 | 1,514 | 1,350 | 1,428 | 1,379 | ||||||||||||||||||
|
Available
seat miles (ASM) (000,000)
|
3,107 | 2,569 | 2,428 | 2,148 | 2,299 | 2,194 | ||||||||||||||||||
|
Revenue
passenger load factor
|
69.3 | % | 63.9 | % | 62.4 | % | 62.8 | % | 62.1 | % | 62.9 | % | ||||||||||||
|
Yield
per passenger mile
|
22.61 | ¢ | 26.96 | ¢ | 26.02 | ¢ | 28.15 | ¢ | 29.82 | ¢ | 28.77 | ¢ | ||||||||||||
|
Operating
revenues per ASM
|
16.20 | ¢ | 18.06 | ¢ | 17.29 | ¢ | 19.02 | ¢ | 19.27 | ¢ | 18.96 | ¢ | ||||||||||||
|
Operating
expenses per ASM
|
15.57 | ¢ | 17.79 | ¢ | 17.87 | ¢ | 21.02 | ¢ | 19.53 | ¢ | 17.74 | ¢ | ||||||||||||
|
Operating
expenses per ASM, excluding fuel and noted items (d)
|
13.58 | ¢ | 15.80 | ¢ | 15.99 | ¢ | 18.48 | ¢ | 16.48 | ¢ | 15.79 | ¢ | ||||||||||||
|
Average
number of full-time equivalent employees
|
3,423 | 3,361 | 3,476 | 3,764 | 3,795 | 3,603 | ||||||||||||||||||
|
Operating
fleet at period-end
|
65 | 62 | 63 | 60 | 62 | 62 | ||||||||||||||||||
(c)
Includes Horizon services operated as Frontier JetExpress in 2004 through 2007
and flights operated under the Capacity Purchase Agreement with Alaska in 2007
through 2009.
(d) See
reconciliation of this measure to the most directly related GAAP measure in the
"Results of Operations" section for both Alaska and Horizon.
|
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
OVERVIEW
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help the reader understand the
Company, our operations and our present business environment. MD&A is
provided as a supplement to – and should be read in conjunction with – our
consolidated financial statements and the accompanying notes. All statements in
the following discussion that are not statements of historical information or
descriptions of current accounting policy are forward-looking statements. Please
consider our forward-looking statements in light of the risks referred to in
this report’s introductory cautionary note and the risks mentioned in Part I,
“Item 1A. Risk Factors.” This overview summarizes the MD&A, which includes
the following sections:
|
|
•
|
Year in
Review—highlights from 2009 outlining some of the major events that
happened during the year and how they affected our financial
performance.
|
|
|
•
|
Results of
Operations—an in-depth analysis of the results of operations of
Alaska and Horizon for the three years presented in our consolidated
financial statements. We believe this analysis will help the reader better
understand our consolidated statements of operations. Financial and
statistical data for Alaska and Horizon are also included here. This
section includes forward-looking statements regarding our view of
2010.
|
|
|
•
|
Critical Accounting
Estimates—a discussion of our accounting estimates that involve
significant judgment and
uncertainties.
|
|
|
•
|
Liquidity and Capital
Resources—an analysis of cash flows, sources and uses of cash,
contractual obligations, commitments and off-balance sheet arrangements,
an overview of financial position and the impact of inflation and changing
prices.
|
YEAR IN REVIEW
Our 2009
consolidated pretax income was $202.9 million compared to a pretax loss of
$213.2 million in 2008. The $416.1 million improvement in our pretax earnings
was primarily due to the $702.4 million decline in aircraft fuel costs and other
non-fuel operating costs, partially offset by a $262.8 million decline in
operating revenues. The decline in fuel cost was substantially driven
by the 43% reduction in the raw cost of fuel per gallon. The 7.2%
decline in operating revenues can be attributed to the following:
|
|
•
|
a
7.9% decline in passenger revenue because of demand weakness stemming from
the economic recession; and
|
|
|
•
|
a
one-time benefit of $42.3 million recorded in 2008 associated with a
change in our Mileage Plan terms.
|
These
declines were offset by:
|
|
•
|
our
new $15 first bag service charge, which went into effect on July 7,
2009. In 2009, the fee generated $47.4 million of incremental
revenue.
|
|
|
•
|
a
$39.7 million improvement in Mileage Plan commission revenues included in
“Other-net.”
|
See
“Results of Operations” below for further discussion of changes in revenues and
operating expenses for both Alaska and Horizon.
Accomplishments
and Highlights
Accomplishments
and highlights from 2009 include:
|
|
•
|
Alaska
and Horizon both improved their operational performance again in 2009 as
measured by on-time arrivals and completion rate as reported to the
Department of Transportation (DOT). At Alaska, we led the ten largest
carriers in on-time performance for eight months of the
year. If Horizon were a DOT reporting entity, they would have
led reporting mainland US carriers for the year with their 86.1% on-time
performance in 2009.
|
|
|
•
|
For
the second year in a row, Alaska Airlines ranked “Highest in Customer
Satisfaction among Traditional Network Carriers” in 2009 by J.D. Power and
Associates.
|
|
|
•
|
Alaska
won the 2008 “Program of the Year” Freddie award for our Mileage Plan
program in 2009. This is the fifth time that we have won this
highest award and the second year in a row. We also won top
honors for “Best Web Site,” “Best Elite-Level Program,” and “Best Member
Communications.”
|
|
|
•
|
During
the year, we reached agreements with several of our labor groups that
provide for improved productivity and a common gain-sharing
formula. See “Update on Labor Negotiations” below for further
discussion.
|
|
|
•
|
For
the year, our employees earned $76 million in incentive pay for meeting
certain operational and financial goals. We also contributed nearly $150
million to Alaska’s defined benefit pension
plans.
|
Update
on Labor Negotiations
Both
Alaska and Horizon have had success recently with new bargaining agreements or
contract extensions with a number of represented employees. All of
the new agreements or extensions ratified in 2009 include participation by the
represented employees in Air Group’s Performance-Based Pay (PBP) incentive plan
as approved by the Compensation Committee of the Board of
Directors. PBP is described in Note 8 to the consolidated financial
statements. Our ultimate goal is to include all Air Group employees in PBP in
order to have common goals and targets that everyone is working together to
achieve.
New Alaska Pilot
Contract
On May
19, 2009, Alaska’s pilots, represented by the Air Line Pilots Association,
ratified a new four-year contract. This negotiated agreement replaces
the contract that had been in place since May 1, 2005. The terms of
the 2005 contract were the result of an arbitrator’s decision and included
immediate wage reductions that averaged approximately 26% across the pilot
group, work rule changes, and higher employee health care
contributions.
The
significant terms of the new contract are as follows:
|
•
|
Average
pilot wages increased approximately 14% effective April 1,
2009. The contract also provides for step increases of 1.5% on
the first two anniversary dates of the contract and 1.8% on the third
anniversary.
|
|
•
|
Participation
in PBP.
|
|
•
|
The
defined-benefit pension plan for pilots is now closed to new
entrants. Newly hired pilots will participate in a
defined-contribution plan that includes a contribution by Alaska equal to
13.5% of eligible wages. Incumbents had the option of (1)
remaining in the defined-benefit pension plan, (2) moving to a new blended
option with lower service credit under the defined benefit plan and higher
401(k) contribution or (3) voluntarily freezing service credit in the
existing defined benefit plan in exchange for a higher 401(k)
contribution.
|
|
•
|
Upon
retirement, pilots are now allowed to receive a cash payment of an amount
equivalent to 25% of their accrued sick leave balance multiplied by their
hourly rate.
|
|
•
|
The
new contract provides for better productivity and flexibility. We
expect to realize savings from these productivity enhancements when we
resume capacity growth.
|
Pilots
received a one-time bonus of $20.3 million in the aggregate following
ratification of the contract. The transition expense associated with
establishing the sick-leave payout program described above was $15.5
million. These items have been combined and reported in 2009 as “New
pilot contract transition costs” in the consolidated statements of
operations.
Contract Extensions at
Alaska
In March
2009, Alaska’s flight attendants, represented by the AFA, ratified a two-year
contract extension. The contract will become amendable in April
2012. As part of the contract, flight attendants will receive a 1.5%
pay increase on May 1, 2010 and May 1, 2011 and will participate in
PBP. The flight attendants received a bonus upon ratification of the
contract totaling $2.0 million in the aggregate.
In August
2009, Alaska and its aircraft technicians reached an agreement on a two-year
contract extension. The extended contract, which becomes amendable on
October 17, 2011, provides technicians with 1.5% pay scale increases in October
2009 and 2010. Technicians now also participate in PBP. The technicians received
a bonus upon ratification of the contract totaling $1.3 million in the
aggregate.
In
December 2009, Alaska’s ramp service and stores agents, represented by the IAM,
ratified a two-year extension of their collective bargaining agreement, which
will now become amendable on July 19, 2012. This agreement includes
participation in PBP, a 1.5% pay increase in June 2010 and 2011, and a signing
bonus of approximately $0.5 million in the aggregate.
Alaska’s
clerical, office and passenger service employees (COPS), also represented by the
IAM, rejected a two-year extension proposal nearly identical to the terms of the
proposal ratified by the ramp service employees and stores agents. As
a result, COPS employees are the only remaining work group at Alaska, besides
station personnel in Mexico, that participate in a profit-sharing plan other
than PBP.
Horizon Labor
Contracts
Horizon’s
dispatchers, represented by the TWU, ratified a new contract in July 2009,
expiring in October 2010. This contract includes a transition from
the former profit-sharing plan to PBP.
In
December 2009, Horizon’s flight attendants, represented by the AFA, ratified a
new two-year contract. The agreement includes participation in PBP in
2009 and beyond, at least a 3% pay increase over the life of the contract, and a
signing bonus of $0.3 million in the aggregate.
Historically,
only a small percentage of non-represented employees at Horizon participated in
the PBP plan. To better align the incentive plans for this group with
other Horizon and Alaska employees, Horizon has also added all remaining
non-represented employees (approximately 1,400 people) to the PBP plan in
2009.
Horizon
is currently in negotiations with its pilots and aircraft
technicians. Horizon and the IBT recently filed separate requests for
assistance for the NMB in the ongoing pilot contract
negotiations. Horizon’s aircraft technicians voted in 2009 to be
represented by the IBT. They were previously represented by the
Aircraft Mechanics Fraternal Association. Horizon’s pilots and
mechanics remain in a profit-sharing plan program other than PBP.
Horizon
Fleet Transition
Horizon’s
long-term goal is to transition to an all-Q400 fleet. In the first
quarter of 2009, Horizon removed the final six Q200 aircraft from
operations. These aircraft were disposed of in the last six months of
2009 and the related lease agreements were terminated. We recorded
charges of $8.8 million in 2009 associated with removing these aircraft from
operation.
Although
we have been actively pursuing various alternatives to dispose of our 18 CRJ-700
aircraft in the most economically feasible way, the current economic conditions
have hindered the remarketing efforts. As a result, the transition to
an all-Q400 fleet will be delayed and we will continue to operate the CRJ-700
aircraft in our operating fleet. We have successfully deferred 2010
and 2011 Q400 deliveries into future years to better manage our fleet size and
capacity plans.
New
Mileage Plan Affinity Card Agreement
In June
2009, we revised our Mileage Plan affinity credit card agreement with Bank of
America. This revised agreement enhances the economics of our Mileage
Plan program and provides for, among other things, an increase in the rate at
which we sell miles to the bank. This revised agreement was effective
January 1, 2009 and expires on December 31, 2014.
First
Bag Service Charge
In 2009,
we joined nearly all major domestic carriers in charging for a first checked
bag. The $15 service charge began July 7, 2009. This fee
does not apply to our MVP or MVP Gold Mileage Plan members, for those traveling
solely with the state of Alaska, or for certain other
passengers. This service charge generated $47.4 million of
incremental revenue in the last six months of 2009.
New
Baggage Service Guarantee
Concurrent
with the first bag service charge, we introduced a guarantee to compensate
passengers if their bags are not at the baggage claim within 25 minutes after
their flight parks at the gate. Passengers have the choice of 2,500
Mileage Plan miles or a $25 voucher that can be used on a future
flight. This guarantee is for all passengers with luggage, including
those not subject to the bag service charge. We believe that we are
the only airline that offers this guarantee to customers. To date, the cost of
providing this guarantee has been minimal as our baggage performance has been
excellent.
New
Markets
In 2009,
Alaska added several new cities and non-stop routes to our overall
network. Those new routes are:
|
New
Non-Stop Routes
|
Frequency
|
Start
Date
|
|
Between
Bellingham, Wash. and Las Vegas
|
4 x
weekly
|
6/25/2009
|
|
Between
Portland, Ore. and Maui
|
Daily
|
7/3/2009
|
|
Between
Seattle and Austin, Tex.
|
Daily
|
8/3/2009
|
|
Between
San Jose and Austin
|
Daily
|
9/2/2009
|
|
Between
Seattle and Houston
|
Daily
|
9/23/2009
|
|
Between
Seattle and Atlanta
|
Daily
|
10/23/2009
|
|
Between
Oakland, Calif. and Maui
|
4 x
weekly
|
11/9/2009
|
|
Between
Oakland and Kona
|
3 x
weekly
|
11/10/2009
|
|
Service
between Portland and Chicago
|
Daily
|
11/16/2009
|
Horizon
also announced expanded seasonal service to Mammoth Lakes, Calif. from San Jose,
Reno, Seattle and Portland. The flights will operate from December
17, 2009 to April 11, 2010.
Stock
Repurchase
In June
2009, our Board of Directors authorized the Company to repurchase up to $50
million of our common stock, at which time the stock price was
$15.60. Through December 31, 2009, we had repurchased 1,324,578
shares of common stock for approximately $23.8 million under this program. This
program expires in June 2010.
Outlook
Our
primary focus every year is to run safe, compliant and reliable operations at
our airlines. In addition to our primary objective, in 2010 our key
initiative is to maintain our focus on optimizing revenue. Our
specific focus will be on the way we merchandise fares and ancillary products
and services, as well as broader employee involvement in our marketing
efforts. In addition to the focus on revenue, both of our airlines
have initiatives under way designed to reduce costs. Alaska is focused on
improving productivity and controlling overhead. Horizon aims to reduce
maintenance costs and pilot labor costs.
Our
fourth quarter 2009 revenue performance marked the first quarter-over-quarter
improvement in the top line in 2009, providing a solid outlook as we move into
2010.
For the
first quarter, our advance booked load factors are up significantly at both
Alaska and Horizon, although we expect the higher load factors, which were
driven by deep price discounting, will be offset by a decline in yields, resulting
in only modest unit revenue increases in the first quarter.
RESULTS OF
OPERATIONS
2009 COMPARED WITH
2008
Our
consolidated net income for 2009 was $121.6 million, or $3.36 per diluted share,
compared to a net loss of $135.9 million, or $3.74 per share, in
2008. Items that impact the comparability between the periods are as
follows:
|
|
•
|
Both periods include adjustments to reflect timing
of gain and loss recognition resulting from mark-to-market fuel hedge
accounting. For 2009, we recognized net mark-to-market gains of
$88.8 million ($55.2 million after tax, or $1.53 per share), compared to
net losses of $142.3 million ($89.2 million after tax, or $2.46 per share)
in 2008.
|
|
|
•
|
2009 included the new pilot contract transition
costs of $35.8 million ($22.3 million after tax, or $0.62 per
share).
|
|
|
•
|
2008 included fleet transition costs of $61.0
million ($38.2 million after tax, or $1.05 per share) related to the
ongoing transitions out of the MD-80 and CRJ-700
fleets.
|
|
|
•
|
2008 included realized losses on the early
termination of fuel-hedge contracts originally scheduled to settle in 2009
and 2010 of $50 million ($31.3 million after tax, or $0.86 per
share).
|
|
|
•
|
2008 included a $42.3 million benefit ($26.5
million after tax, or $0.73 per share) related to a change in the terms of
our Mileage Plan program.
|
|
|
•
|
2008 included restructuring charges of $12.9
million ($8.1 million after tax, or $0.22 per share) related to the
reduction in work force at
Alaska.
|
ADJUSTED
(NON-GAAP) RESULTS AND PER-SHARE
AMOUNTS
We
believe disclosure of earnings excluding the impact of these individual charges
is useful information to investors because:
|
|
|
|
|
•
|
It
is consistent with how we present information in our quarterly earnings
press releases;
|
|
|
•
|
We
believe it is the basis by which we are evaluated by industry
analysts;
|
|
|
•
|
Our
results excluding these items are most often used in internal management
and board reporting and
decision-making;
|
|
|
•
|
Our
results excluding these adjustments serve as the basis for our various
employee incentive plans, thus the information allows investors to better
understand the changes in variable incentive pay expense in our
consolidated statements of operations;
and
|
|
|
•
|
It
is useful to monitor performance without these items as it improves a
reader’s ability to compare our results to those of other
airlines.
|
Although
we are presenting these non-GAAP amounts for the reasons above, investors and
other readers should not necessarily conclude that these amounts are
non-recurring, infrequent, or unusual in nature.
Excluding
the items noted above, and as shown in the following table, our consolidated net
income for 2009 was $88.7 million, or $2.45 per diluted share, compared to $4.4
million, or $0.12 per diluted share, in 2008.
|
Years Ended December 31
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
(in
millions except per share amounts)
|
Dollars
|
Diluted
EPS
|
Dollars
|
Diluted
EPS
|
|||||||||||||
|
Net
income and diluted EPS, excluding noted items
|
$ | 88.7 | $ | 2.45 | $ | 4.4 | $ | 0.12 | |||||||||
|
Change
in Mileage Plan terms, net of tax
|
-- | -- | 26.5 | 0.73 | |||||||||||||
|
New
pilot contract transition costs, net of tax
|
(22.3 | ) | (0.62 | ) | -- | -- | |||||||||||
|
Restructuring
charges, net of tax
|
-- | -- | (8.1 | ) | (0.22 | ) | |||||||||||
|
Fleet
transition costs – MD-80, net of tax
|
-- | -- | (29.8 | ) | (0.82 | ) | |||||||||||
|
Fleet
transition costs – CRJ-700, net of tax
|
-- | -- | (8.4 | ) | (0.23 | ) | |||||||||||
|
Mark-to-market
fuel hedge adjustments, net of tax
|
55.2 | 1.53 | (89.2 | ) | (2.46 | ) | |||||||||||
|
Realized
losses on hedge portfolio restructuring, net of tax
|
-- | -- | (31.3 | ) | (0.86 | ) | |||||||||||
|
Net
income and diluted EPS as reported
|
$ | 121.6 | $ | 3.36 | $ | (135.9 | ) | $ | (3.74 | ) | |||||||
INDIVIDUAL
SUBSIDIARY RESULTS
Our
consolidated results are primarily driven by the results of our two operating
carriers. Alaska and Horizon reported pretax income of $183.8 million and $22.8
million, respectively, in 2009. Financial and statistical data and an in -depth
discussion of the results of Alaska and Horizon are on the following
pages. For a reconciliation of these subsidiary results to the
consolidated results of Air Group, see Note 13 in the consolidated financial
statements.
|
Three Months Ended December
31
|
Year Ended December 31
|
|||||||||||||||||||||||||||||||
|
Financial
Data (in
millions):
|
2009
|
2008
|
% Change
|
2009
|
2008
|
% Change
|
2007
|
% Change
|
||||||||||||||||||||||||
|
Operating
Revenues:
|
||||||||||||||||||||||||||||||||
|
Passenger
|
$ | 594.5 | $ | 602.5 | (1.3 | ) | $ | 2,438.8 | $ | 2,643.7 | ||||||||||||||||||||||