form10-q.htm
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010.
OR
 ¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to ___________
 
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
 
   
Delaware
91-1292054
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
19300 International Boulevard, Seattle, Washington 98188
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: (206) 392-5040
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes  ¨    No  x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
The registrant has 35,766,831 common shares, par value $1.00, outstanding at April 30, 2010.
 
 

 
 
 
ALASKA AIR GROUP, INC.
Quarterly Report on Form 10-Q for the three months ended March 31, 2010

 
TABLE OF CONTENTS

 
 
 
 
 
 
37
 
 
 
 
 
 
 




 


 
2
 

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

Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.   Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words.  Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are:
 
 
·
general economic conditions, including the impact of the current economic environment on customer travel behavior;
·      changes in our operating costs, including fuel, which can be volatile;
 
·
our significant indebtedness;
·      the competitive environment in our industry;
 
·
our ability to meet our cost reduction goals;
 
·
an aircraft accident or incident;
 
·
labor disputes and our ability to attract and retain qualified personnel;
 
·
operational disruptions;
 
·
the concentration of our revenue from a few key markets;
 
·
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
 
·
our reliance on automated systems and the risks associated with changes made to those systems;
 
·
our reliance on third-party vendors and partners; and
 
·
changes in laws and regulations.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.  Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC.  We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements.  Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders.  For a discussion of these and other risk factors, see "Item 1A: Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2009.  Please consider our forward-looking statements in light of those risks as you read this report.


 
3

           
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            
             
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
            
Alaska Air Group, Inc.
            
             
ASSETS
            
   
March 31,
    
December 31,
  
(in millions)
  
2010
    
2009
  
Current Assets
            
Cash and cash equivalents
   $ 117.7     $ 164.2  
Marketable securities
     1,053.5       1,027.9  
  Total cash and marketable securities
     1,171.2       1,192.1  
Receivables - net
     137.3       111.8  
Inventories and supplies - net
     49.1       45.8  
Deferred income taxes
     133.0       120.3  
Fuel hedge contracts
     58.9       66.2  
Prepaid expenses and other current assets
     102.1       98.1  
Total Current Assets
     1,651.6       1,634.3  
                 
Property and Equipment
                
Aircraft and other flight equipment
     3,667.6       3,660.1  
Other property and equipment
     635.9       631.3  
Deposits for future flight equipment
     219.5       215.5  
      4,523.0       4,506.9  
Less accumulated depreciation and amortization
     1,387.0       1,339.0  
                 
Total Property and Equipment - Net
     3,136.0       3,167.9  
                 
Fuel Hedge Contracts
     48.1       50.8  
                 
Other Assets
     180.0       143.2  
                 
Total Assets
   $ 5,015.7     $ 4,996.2  
                 
See accompanying notes to condensed consolidated financial statements.
                
                 

 
 
4
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
            
Alaska Air Group, Inc.
            
             
LIABILITIES AND SHAREHOLDERS' EQUITY
            
   
March 31,
    
December 31,
  
(in millions except share amounts)
  
2010
    
2009
  
Current Liabilities
            
Accounts payable
   $ 53.3     $ 63.3  
Accrued aircraft rent
     35.8       54.0  
Accrued wages, vacation and payroll taxes
     113.3       155.4  
Other accrued liabilities
     510.0       474.5  
Air traffic liability
     468.9       366.3  
Current portion of long-term debt
    158.2       156.0  
                 
Total Current Liabilities
     1,339.5       1,269.5  
                 
Long-Term Debt, Net of Current Portion
     1,657.2       1,699.2  
                 
Other Liabilities and Credits
                
Deferred income taxes
     170.1       151.1  
Deferred revenue
     419.1       435.1  
Obligation for pension and postretirement medical benefits
     412.8       421.0  
Other liabilities
     131.6       148.2  
      1,133.6       1,155.4  
Commitments and Contingencies
                
Shareholders' Equity
                
Preferred stock, $1 par value
                
  Authorized:       5,000,000 shares, none issued or outstanding
     -       -  
Common stock, $1 par value
                
  Authorized:      100,000,000 shares
                
  Issued:  2010 - 36,174,693 shares
                
               2009 - 35,843,092 shares
     36.2       35.8  
  Capital in excess of par value
     779.7       767.0  
  Treasury stock (common), at cost: 2010 - 438,734 shares
                
                                              2009 - 252,084 shares
     (13.8 )     (5.7 )
Accumulated other comprehensive loss
     (237.0 )     (240.0 )
Retained earnings
     320.3       315.0  
      885.4       872.1  
Total Liabilities and Shareholders' Equity
   $ 5,015.7     $ 4,996.2  
                 
See accompanying notes to condensed consolidated financial statements.
                

 
 


 
5
 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
        
Alaska Air Group, Inc.
            
             
   
Three Months Ended March 31
  
(in millions except per share amounts)
  
2010
    
2009
  
             
Operating Revenues
            
Passenger
   $ 748.4     $ 684.1  
Freight and mail
     23.0       19.4  
Other - net
     58.5       38.9  
Total Operating Revenues
     829.9       742.4  
Operating Expenses
                
Wages and benefits
     239.3       246.0  
Variable incentive pay
     17.9       9.3  
Aircraft fuel, including hedging gains and losses
     207.3       157.7  
Aircraft maintenance
     57.0       59.7  
Aircraft rent
     37.0       38.0  
Landing fees and other rentals
     55.9       54.2  
Contracted services
     39.6       38.4  
Selling expenses
     33.6       25.0  
Depreciation and amortization
     56.2       52.8  
Food and beverage service
     12.3       11.6  
Other
     47.8       56.8  
Fleet transition costs - Q200
     -       4.8  
Total Operating Expenses
     803.9       754.3  
                 
Operating Income (Loss)
     26.0       (11.9 )
                 
Nonoperating Income (Expense)
                
Interest income
     7.5       8.3  
Interest expense
     (25.6 )     (27.8 )
Interest capitalized
     1.7       2.8  
Other - net
     0.6       (1.0 )
      (15.8 )     (17.7 )
Income (loss) before income tax
    10.2       (29.6 )
Income tax expense (benefit)
     4.9       (10.4 )
                 
Net Income (Loss)
   $ 5.3     $ (19.2 )
                 
Basic Earnings (Loss) per Share:
  $ 0.15     $ (0.53 )
Diluted Earnings (Loss) Per Share:
   $ 0.15     $ (0.53 )
Shares used for computation:
                
Basic
     35.667       36.326  
Diluted
     36.393       36.326  
                 
See accompanying notes to condensed consolidated financial statements.
                
                 


 
6
 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
              
Alaska Air Group, Inc.
                                          
                                           
                           
Accumulated
              
   
Common
          
Capital in
    
Treasury
    
Other
              
   
Shares
    
Common
    
Excess of
    
Stock,
    
Comprehensive
    
Retained
  
(in millions)
  
Outstanding
    
Stock
    
Par Value
    
at Cost
    
Loss
    
Earnings
    
Total
  
Balances at December 31, 2009
     35.591     $ 35.8     $ 767.0     $ (5.7 )   $ (240.0 )   $ 315.0     $ 872.1  
Net income for the three months ended March 31, 2010
                                       5.3       5.3  
Other comprehensive income (loss):
                                                        
                                                         
Related to marketable securities:
                                                        
  Change in fair value
                                     3.5                  
  Reclassification to earnings
                                     (1.8 )                
  Income tax effect
                                     (0.7 )                
                                      1.0               1.0  
                                                         
Adjustments related to employee benefit plans:
                                                  
  Reclassification to earnings
                                     5.4                  
   Income tax effect
                                     (1.7 )                
                                      3.7               3.7  
Related to interest rate derivative instruments:
                                                        
  Change in fair value
                                     (2.8 )                
  Income tax effect
                                     1.1                  
                                      (1.7 )             (1.7 )
                                                         
Total comprehensive loss
                                                     8.3  
                                                         
Purchase of treasury stock
     (0.279 )                     (10.5 )                     (10.5 )
Stock-based compensation
                     5.0                               5.0  
Treasury stock issued under stock plans
     0.092                       2.4                       2.4  
Stock issued for employee stock purchase plan
     0.016       0.1       0.2                               0.3  
Stock issued under stock plans
     0.316       0.3       7.5                               7.8  
Balances at March 31, 2010
     35.736     $ 36.2     $ 779.7     $ (13.8 )   $ (237.0 )   $ 320.3     $ 885.4  
                                                         
See accompanying notes to condensed consolidated financial statements.
                                  

 
7
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
            
Alaska Air Group, Inc.
            
             
     Three Months Ended March 31  
(in millions)
  
2010
    
2009
  
Cash flows from operating activities:
            
Net income (loss)
   $ 5.3     $ (19.2 )
Adjustments to reconcile net income (loss) to net cash
               
 provided by operating activities:
                
   Fleet transition costs - Q200
     -       4.8  
   Depreciation and amortization
     56.2       52.8  
   Stock-based compensation
     5.0       5.4  
   Increase in air traffic liability
     102.6       26.9  
   Changes in other assets and liabilities-net
     (114.6 )     (60.6 )
Net cash provided by operating activities
     54.5       10.1  
                 
Cash flows from investing activities:
                
Property and equipment additions:
                
  Aircraft and aircraft purchase deposits
     (5.0 )     (199.5 )
  Other flight equipment
     (14.2 )     (17.0 )
  Other property and equipment
     (6.7 )     (9.7 )
Total property and equipment additions
     (25.9 )     (226.2 )
Proceeds from disposition of assets
     1.4       2.3  
Purchases of marketable securities
     (284.0 )     (160.5 )
Sales and maturities of marketable securities
     261.0       151.9  
Restricted deposits and other
     (0.4 )     (3.3 )
Net cash used in investing activities
     (47.9 )     (235.8 )
                 
Cash flows from financing activities:
                
Proceeds from issuance of long-term debt
     -       64.0  
Proceeds from sale-leaseback transaction, net
     -       230.0  
Long-term debt payments, including line of credit
     (39.8 )     (121.5 )
Purchase of treasury stock
     (10.5 )     -  
Proceeds from issuance of common stock
     11.1       2.0  
Other financing activities
     (13.9 )     5.2  
Net cash provided by (used in) financing activities
     (53.1 )     179.7  
                 
Net change in cash and cash equivalents
     (46.5 )     (46.0 )
Cash and cash equivalents at beginning of year
     164.2       283.1  
Cash and cash equivalents at end of period
   $ 117.7     $ 237.1  
                 
Supplemental disclosure of cash paid during the period for:
                
  Interest (net of amount capitalized)
   $ 29.5     $ 28.7  
  Income taxes
     -       -  
                 
See accompanying notes to condensed consolidated financial statements.
                


 
8
 

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

NOTE 1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Alaska Air Group, Inc. (Air Group or the Company) include the accounts of the parent company, Alaska Air Group, Inc., and its principal subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. These interim condensed consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of March 31, 2010, as well as the results of operations for the three months ended March 31, 2010 and 2009. The adjustments made were of a normal recurring nature.
 
The Company’s interim condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Significant estimates made include assumptions used to record expenses and revenues associated with the Company’s Mileage Plan; assumptions used in the calculations of pension expense in the Company’s defined-benefit plans; and the amounts of certain accrued liabilities. Actual results may differ from the Company’s estimates.

Reclassifications
Certain reclassifications have been made to conform the prior year’s data to the current format.

Prospective Accounting Pronouncements
New accounting standards on “Revenue Arrangements with Multiple Deliverables” were issued in September 2009 and update the current guidance pertaining to multiple-element revenue arrangements.  This new guidance will be effective for the Company’s annual reporting period beginning January 1, 2011.  Management is currently evaluating the impact of this new standard on the Company’s financial position, results of operations, cash flows, and disclosures.

9
NOTE 2.            FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair Value Measurements
Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

Amounts measured at fair value as of March 31, 2010 are as follows (in millions):

   
Level 1
    
Level 2
    
Level 3
    
Total
  
Cash and cash equivalents
   $ 85.3     $ 32.4     $ —     $ 117.7  
Marketable securities
     139.6       913.9       —       1,053.5  
                                 
Total
   $ 224.9     $ 946.3     $ —     $ 1,171.2  
 
All of the Company’s marketable securities are classified as available-for-sale.  The securities are carried at fair value, with the unrealized gains and losses, excluding credit losses, reported in shareholders’ equity under the caption “accumulated other comprehensive loss” (AOCL).  Realized gains and losses are included in other nonoperating income (expense) in the condensed consolidated statements of operations.

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

Marketable securities consisted of the following (in millions):

   
March 31, 2010
    
December 31, 2009
  
Amortized cost:
            
Government securities/agencies
   $ 359.5     $ 376.7  
Asset-backed obligations
     196.1       215.4  
Other corporate obligations
     482.2       421.8  
    $ 1,037.8     $ 1,013.9  
Fair value:
                
Government securities/agencies
   $ 363.1     $ 381.2  
Asset-backed obligations
     195.5       214.7  
Other corporate obligations
     494.9       432.0  
    $ 1,053.5     $ 1,027.9  

Of the marketable securities on hand at March 31, 2010, 22% mature in 2010, 24% in 2011 and 54% thereafter.  Gross realized gains and losses for the three months ended March 31, 2010 and 2009 were not material to the condensed consolidated financial statements.

Some of the Company’s asset-backed securities held at March 31, 2010 had credit losses, as defined in the accounting standards.  These credit losses total $2.2 million and were recorded through earnings in 2009 and represent the difference between the present value of future cash flows and the amortized cost basis of the affected securities. No additional credit losses were recorded in the first quarter of 2010.

 
10
 

Management does not believe the securities associated with the remaining $3.3 million unrealized loss recorded in AOCL are “other-than-temporarily” impaired, as defined in the accounting standards, based on the current facts and circumstances.  Management currently does not intend to sell these securities prior to their recovery nor does it believe that it will be more-likely-than-not that the Company would need to sell these securities for liquidity or other reasons.

Gross unrealized gains and losses, including credit losses, at March 31, 2010 are presented in the table below (in millions):

         
Unrealized Losses
              
   
Unrealized Gains in AOCL
    
Less than 12 months
    
Greater than 12 months
    
Total Unrealized Losses
    
Less: Credit Loss Previously Recorded in Earnings
    
Net Unrealized Losses in AOCL
    
Net Unrealized Gains/(Losses) in AOCL
    
Fair Value of Securities with Unrealized Losses
  
Government Securities/Agencies
   $ 3.9     $ (0.3 )   $ --     $ (0.3 )   $ --     $ (0.3 )   $ 3.6     $ 127.2  
Asset-backed obligations
     2.2       (0.3 )     (4.7 )     (5.0 )     (2.2 )     (2.8 )     (0.6 )     61.1  
Other corporate obligations
     12.9       (0.2 )     --       (0.2 )     --       (0.2 )     12.7       69.6  
Total
   $ 19.0     $ (0.8 )   $ (4.7 )   $ (5.5 )   $ (2.2 )   $ (3.3 )   $ 15.7     $ 257.9  

Fair Value of Financial Instruments
The majority of the Company’s financial instruments are carried at fair value.  These include, cash, cash equivalents and marketable securities (Note 2); restricted deposits (Note 6); fuel hedge contracts (Note 3); and interest rate swap agreements (Note 3).  The Company’s long-term fixed-rate debt is not carried at fair value.  The estimated fair value of the Company’s long-term debt is as follows (in millions):

   
Carrying Amount
    
Fair Value
  
Long-term debt at March 31, 2010
   $ 1,815.4     $ 1,791.5  
Long-term debt at December 31, 2009
   $ 1,855.2     $ 1,821.3  
 
The fair value of cash and cash equivalents approximates carrying values due to the short maturity of these instruments.  The fair value of marketable securities is based on market prices.  The fair value of fuel hedge contracts is based on commodity exchange prices.  The fair value of restricted deposits approximates the carrying amount.  The fair value of interest rate swap agreements is based on quoted market swap rates.  The fair value of long-term debt is based on a discounted cash flow analysis using the Company’s current borrowing rate.


 
11
 

NOTE 3.            DERIVATIVE INSTRUMENTS
 
Fuel Hedge Contracts
The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risk associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and swap agreements for jet fuel refining margins. The Company records these instruments on the balance sheet at their fair value.  Changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.

The following table summarizes the components of aircraft fuel expense for the three months ended March 31, 2010 and 2009 (in millions):
   
2010
    
2009
  
Raw or “into-plane” fuel cost
   $ 195.2     $ 141.9  
Losses in value and settlement of fuel hedge contracts
     12.1       15.8  
Aircraft fuel expense
   $ 207.3     $ 157.7  

Cash received, net of premiums expensed, for hedges that settled in the first quarter of 2010 totaled $0.4 million.  In the first quarter of 2009, the Company recorded a net expense of $25.8 million for hedges settled in that period.

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

Outstanding future fuel hedge positions are as follows:

   
Approximate % of Expected Fuel Requirements
    
Gallons Hedged
(in millions)
    
Approximate Crude Oil Price per Barrel
  
Second Quarter 2010
     50 %     45.9     $ 69  
Third Quarter 2010
     50 %     48.3     $ 74  
Fourth Quarter 2010
     50 %     44.5     $ 83  
   Remainder of 2010
     50 %     138.7     $ 75  
First Quarter 2011
     50 %     44.9     $ 87  
Second Quarter 2011
     41 %     39.2     $ 83  
Third Quarter 2011
     36 %     35.6     $ 86  
Fourth Quarter 2011
     29 %     26.4     $ 87  
   Full Year 2011
     39 %     146.1     $ 85  
First Quarter 2012
     23 %     21.6     $ 87  
Second Quarter 2012
     14 %     14.0     $ 90  
Third Quarter 2012
     13 %     12.8     $ 95  
Fourth Quarter 2012
     11 %     10.5     $ 93  
   Full Year 2012
     15 %     58.9     $ 91  
First Quarter 2013
     6 %     5.2     $ 95  
   Full Year 2013
     1 %     5.2     $ 95  

 
12
 

The Company also has financial swap agreements in place to fix the refining margin component for approximately 50%, 21%, and 2% of second, third, and fourth quarter 2010 jet fuel purchases, respectively, at an average price per gallon of 23 cents per gallon, 27 cents per gallon, and 30 cents per gallon, respectively.

As of March 31, 2010 and December 31, 2009, the net fair values of the Company’s fuel hedge positions were as follows (in millions):
   
March 31, 2010
    
December 31, 2009
  
Crude oil call options or “caps”
   $ 106.1     $ 115.9  
Refining margin swap contracts
     0.9       1.1  
   Total
   $ 107.0     $ 117.0  

The balance sheet amounts include capitalized premiums paid to enter into the contracts of $91.5 million and $88.9 million at March 31, 2010 and December 31, 2009, respectively.

Interest Rate Swap Agreements
In the third quarter of 2009, the Company entered into interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company’s aircraft lease agreements for six B737-800 aircraft.  The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate.  All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and underlying notional values.  The agreements expire beginning in June 2020 through March 2021 to coincide with the lease termination dates.

The Company has formally designated these swap agreements as hedging instruments and records the effective portion of the hedge as an adjustment to aircraft rent in the condensed consolidated statement of operations in the period of contract settlement.  The effective portion of the changes in fair value for instruments that settle in the future is recorded in AOCL in the condensed consolidated balance sheets.

At March 31, 2010, the Company had a net liability of $0.4 million associated with these contracts recorded in other accrued liabilities in the condensed consolidated balance sheets, all of which is expected to be reclassified into earnings within the next twelve months.  The fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by the total notional value.  As such, the Company places these contracts in Level 2 of the fair value hierarchy.
 
8BNOTE 4.            LONG-TERM DEBT
Long-term debt obligations were as follows (in millions):
   
March 31, 2010
    
December 31, 2009
  
Fixed-rate notes payable due through 2024
   $ 1,406.3     $ 1,440.2  
Variable-rate notes payable due through 2024
     409.1       415.0  
Long-term debt
     1,815.4       1,855.2  
22BLess current portion
     (158.2 )     (156.0 )
    $ 1,657.2     $ 1,699.2  

During the first three months of 2010, the Company had no new debt borrowings and made scheduled debt payments of $39.8 million.

 
13
 

Bank Lines of Credit
The Company terminated is previous $185 million credit facility effective March 30, 2010.  That facility was replaced with two new $100 million credit facilities.  Both facilities have variable interest rates based on LIBOR plus a specified margin.  Borrowings on one of the $100 million facilities, which expires in March 2013, are secured by aircraft.  Borrowings on the other $100 million facility, which expires in March 2014, are secured by certain accounts receivable, spare engines, spare parts and ground service equipment.  The Company has no immediate plans to borrow using either of these facilities.  These facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million.  The Company is in compliance with this covenant at March 31, 2010.

Pre-delivery Payment Facility
Subsequent to March 31, 2010, the Company terminated its variable-rate pre-delivery payment facility that had been used to provide a portion of the pre-delivery funding requirements for the purchase of new Boeing 737-800 aircraft.  There were no borrowings on this facility as of December 31, 2009 or March 31, 2010.

NOTE 5.            COMMON STOCK REPURCHASE
 
In June 2009, the Board of Directors authorized the Company to repurchase up to $50 million of its common stock. Through March 31, 2010, the Company had repurchased 1,603,478 shares of its common stock for $34.3 million under this program.  In the first quarter of 2010, 278,900 shares were purchased for $10.5 million.

NOTE 6.            EMPLOYEE BENEFIT PLANS
 
Pension Plans - Qualified Defined Benefit
Net pension expense for the three months ended March 31 included the following components (in millions):
   
2010
    
2009
  
Service cost
   $ 8.1     $ 11.1  
Interest cost
     16.9       16.7  
Expected return on assets
     (17.7 )     (12.8 )
Amortization of prior service cost
     (0.2 )     1.1  
Actuarial loss
     5.5       7.2  
Net pension expense
   $ 12.6     $ 23.3  

25BThe Company contributed $15.2 million to its qualified defined-benefit plans during the three months ended March 31, 2010, and expects to contribute an additional $30.4 million to these plans during the remainder of 2010.  The Company made $10.6 million in contributions to its defined-benefit pension plans during the three months ended March 31, 2009.

Pension Plans - Nonqualified Defined Benefit
Net pension expense for the unfunded, noncontributory defined-benefit plans was $0.8 million for the three months ended March 31, 2010 and 2009.

Postretirement Medical Benefits
Net periodic benefit cost for the post-retirement medical plans for the three months ended March 31, 2010 and 2009 was $3.1 million and $3.3 million, respectively.
 
 

 
 
14
 

NOTE 7.            OTHER ASSETS
Other assets consisted of the following (in millions):
   
March 31, 2010
    
December 31, 2009
  
Restricted deposits (primarily restricted investments)
   $ 87.1     $ 86.7  
Deferred costs and other*
     92.9       56.5  
    $ 180.0     $ 143.2  
*Deferred costs and other includes deferred financing costs, long-term prepaid rent, lease deposits and other items.

NOTE 8.            MILEAGE PLAN
Alaska’s Mileage Plan deferrals and liabilities are included under the following balance sheet captions (in millions):
   
March 31, 2010
    
December 31, 2009
  
Current Liabilities:
            
Other accrued liabilities
   $ 287.7     $ 267.9  
Other Liabilities and Credits (non-current):
                
Deferred revenue
     395.1       410.6  
Other liabilities
     12.6       13.2  
    $ 695.4     $ 691.7  

Alaska’s Mileage Plan revenue is included under the following condensed consolidated statements of operations captions for the three months ended March 31 (in millions):
   
2010
    
2009
  
Passenger revenues
   $ 41.1     $ 38.8  
Other - net revenues
     42.0       24.5  
    $ 83.1     $ 63.3  

NOTE 9.            STOCK-BASED COMPENSATION PLANS
The Company has stock awards outstanding under a number of long-term incentive equity plans, one of which continues to provide for the grant of stock awards to directors, officers and employees of the Company and its subsidiaries.  Compensation expense is recorded over the shorter of the vesting period or the period between the grant date and the date the employee becomes retirement-eligible as defined in the applicable plan. All stock-based compensation expense is recorded in wages and benefits in the condensed consolidated statements of operations.

Stock Options
During the three months ended March 31, 2010 the Company granted 129,970 options with a weighted-average fair value of $18.05 per share.  During the same period in the prior year, the Company granted 384,268 options with a weighted-average fair value of $14.00 per share.

12BThe Company recorded stock-based compensation expense related to stock options of $1.8 million and $2.3 million for the three months ended March 31, 2010 and 2009, respectively.  As of March 31, 2010, $4.9 million of compensation cost associated with unvested stock option awards attributable to future service had not yet been recognized.  This amount will be recognized as expense over a weighted-average period of 2.2 years.

 
15
 

As of March 31, 2010, options to purchase 2,046,098 shares of common stock were outstanding with a weighted-average exercise price of $29.90.  Of that total, 1,305,791 were exercisable at a weighted-average exercise price of $30.32.

Restricted Stock Awards
During the three months ended March 31, 2010, the Company awarded 123,650 restricted stock units (RSUs) to certain employees, with a weighted-average grant date fair value of $33.26.  This amount reflects the value of the total RSU awards at the grant date based on the closing price of the Company’s common stock.

The Company recorded stock-based compensation expense related to RSUs of $2.5 million and $2.8 million for the three-month period ended March 31, 2010 and 2009, respectively.  As of March 31, 2010 $6.9 million of compensation cost associated with unvested restricted stock awards attributable to future service had not yet been recognized.  This amount will be recognized as expense over a weighted-average period of 1.9 years.

Performance Stock Awards
From time to time, the Company issues performance stock unit awards (PSUs) to certain executives.  PSUs are similar to RSUs, but vesting is based on performance or market conditions.

PSUs issued in early 2008 vest based on a performance condition tied to the Company achieving a specified pretax margin over a three-year period ending December 31, 2010.  PSUs issued in 2010 vest based on a market condition tied to the Company’s total shareholder return as defined in the plan relative to an airline peer group measured over the three-year period commencing January 1, 2010.  The total grant-date fair value of the PSUs issued in 2010 was $2.5 million.

The Company recorded $0.6 million of compensation expense related to PSUs in the first quarter of 2010.   No expense was recorded in the first quarter of 2009.

Employee Stock Purchase Plan
35BCompensation expense recognized under the Employee Stock Purchase Plan was $0.1 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively.

Summary of Stock-Based Compensation
The table below summarizes the components of total stock-based compensation for the three months ended March 31, 2010 and 2009 (in millions):
 
   
2010
    
2009
  
Stock options
   $ 1.8     $ 2.3  
Restricted stock units
     2.5       2.8  
Performance stock awards
     0.6       --  
Employee stock purchase plan
     0.1       0.3  
Total stock-based compensation
   $ 5.0     $ 5.4  

NOTE 10.          FLEET TRANSITION
26BHorizon Transition to All-Q400 Fleet
Horizon’s long-term goal is to transition to an all-Q400 fleet. During 2009, Horizon had either terminated its remaining Q200 leases or subleased Q200 aircraft to a third party. The total charge associated with removing

 
16
 

these aircraft from operation in the first quarter of 2009 was $4.8 million.  This charge represented the estimated loss under potential disposal transactions.

Horizon has 16 Q200 aircraft that are subleased to a third-party carrier, for which an accrual for the estimated sublease loss has been recorded.  The Company is evaluating alternatives to the existing sublease arrangements for these aircraft.  The Company may be required to record a charge if the original lease or sublease arrangements are modified in the future.  However, the nature, timing or amount of any such charge cannot be reasonably estimated at this time.

Horizon operates 18 CRJ-700 aircraft, which the Company plans to remove from its fleet in the future.  Market conditions have hindered the remarketing efforts for these CRJ-700 aircraft resulting in a delay of the fleet transition plan.  Depending on the ultimate disposition of the CRJ-700 aircraft, there may be further associated exit charges.  The Company expects to remove between one and three of these CRJ-700 aircraft from operations in the second quarter of 2010 and sublease them to a third party.  At this time, management expects the loss on the sublease to be approximately $5 million per aircraft.  The nature, timing or amount of any potential gain or loss on any future potential transactions on the remaining aircraft cannot be reasonably estimated at this time.  Horizon also subleases two CRJ-700 aircraft to a third-party carrier.

NOTE 11.          OPERATING SEGMENT INFORMATION
Operating segment information for Alaska and Horizon for the three months ended March 31 was as follows (in millions):
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Operating revenues:
            
Alaska – mainline (1)
   $ 661.1     $ 591.3  
Alaska – purchased capacity (1)
     U76.5       U61.8  
Total Alaska
     737.6       653.1  
Horizon – brand flying
     92.0       89.0  
Horizon – capacity purchase arrangement with Alaska
     66.4       57.8  
Total Horizon
     158.4       146.8  
Other (2)
     0.3       0.3  
Elimination of intercompany revenues
     (66.4 )     (57.8 )
29BConsolidated
   $ 30B829.9     $ 30B742.4  
Income (loss) before income tax:
                
Alaska – mainline
   $ 13.2     $ (17.4 )
Alaska – purchased capacity
     U4.0       (0.9 )
Total Alaska
     17.2       (18.3 )
Horizon
     (6.2 )     (10.5 )
Other (2)
     (0.8 )     (0.8 )
32BConsolidated
   $ 33B10.2     $ (29.6 )

 
17
 
 
   
March 31, 2010
    
December 31, 2009
  
Total assets at end of period:
            
Alaska
   $ 4,599.5     $ 4,541.3  
Horizon
     758.7       724.1  
Other (2)
     1,075.6       1,052.4  
Elimination of intercompany accounts
     (1,418.1 )     (1,332.8 )
Consolidated
   $ 5,015.7     $ 4,985.0  
 
(1) Alaska mainline revenue represents revenue from passengers aboard Alaska jets, freight and mail revenue, and all other revenue.  Purchased capacity revenue represents that revenue earned by Alaska on capacity purchased from and provided by Horizon and a small third party under a capacity purchase arrangement.
(2) Includes the parent company, Alaska Air Group, Inc., including its investments in Alaska and Horizon, which are eliminated in consolidation.

NOTE 12.          CONTINGENCIES
Grievance with International Association of Machinists
In June 2005, the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) with Alaska 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 July 2008, the arbitrator issued a final decision regarding liability.  In that decision, the arbitrator found that Alaska had violated the CBA and instructed Alaska and the IAM to negotiate a remedy.  In February 2010, the arbitrator issued a final decision on the remedy. That 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 imposed monetary remedies which were paid in the first quarter of 2010.  The amount was not material to the Company’s financial position, statements of operations or cash flows.

Other items
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected.

Management believes the ultimate disposition of the matters discussed above is not likely to materially affect the Company’s 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 arbitrators, judges and juries.
 
18
ITEM 2.       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 condensed 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 the Company’s filings with the Securities and Exchange Commission including those listed in Part I, “Item 1A.  Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.  This overview summarizes MD&A, which includes the following sections:

 
·
First Quarter in Review – highlights from the first quarter of 2010 outlining some of the major events that happened during the period 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 months ended March 31, 2010.  We believe this analysis will help the reader better understand our condensed consolidated statements of operations.  This section also includes forward-looking statements regarding our view of the remainder of 2010.

 
·
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.

Air Group’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are accessible free of charge at www.alaskaair.com.  The information contained on our website is not a part of this quarterly report on Form 10-Q.

FIRST QUARTER IN REVIEW
Our consolidated pretax income was $10.2 million for the first quarter of 2010 compared to a $29.6 million pretax loss in the first quarter of 2009.  The year-over-year improvement was due to an $87.5 million increase in operating revenues and flat non-fuel operating expenses, partially offset by a $49.6 million increase in our aircraft fuel costs.
 
 
·
Consolidated unit revenues increased 11% over the first quarter of 2009, stemming from significant increases in passenger unit revenues that were driven by higher load factors at both Alaska and Horizon.  Baggage fees contributed $22.7 million to the revenue improvement, reflecting the benefit of our first bag fee that was introduced during the third quarter of 2009.
 
 
·
Economic fuel averaged $2.25 per gallon in the first quarter of 2010, compared to $1.91 in 2009.  This increase, partially offset by a slight decline in consumption, resulted in a $27.1 million increase in our economic fuel expense for the quarter.

 
19
 

Other significant developments during the first quarter of 2010 and through the filing of this Form 10-Q are described below.

Operational Performance
Our operational results continue to be among the best in the industry.  For the 12 months ended February 2010, Alaska held the No. 1 spot in on-time performance among the 10 largest U.S. airlines.  And recently, Horizon was ranked among the world’s top five airlines in 2009 on-time performance.

New Lines of Credit
In the first quarter, we established two new $100 million variable-interest rate credit facilities.  These facilities replaced the previous $185 million credit facility that was terminated in March 2010.  Borrowings on one of the $100 million facilities, which expires in March 2013, are secured by aircraft.  Borrowings on the other $100 million facility, which expires in March 2014, are secured by certain accounts receivable, spare engines, spare parts and ground service equipment.  We have no immediate plans to borrow using either of these facilities.

New Markets
In the first quarter, Alaska began daily non-stop service between Sacramento and Maui, non-stop service between San Jose and Maui three times per week, and between San Jose and Kona four times per week.

Alaska also recently announced daily non-stop service between Portland and Honolulu beginning in September 2010, between San Diego and Maui beginning in October 2010, and between San Diego and Puerto Vallarta, Mexico beginning in November 2010; and seasonal service four times weekly between Portland and Kona beginning in November 2010.  By the end of the year, Alaska will operate 101 round-trip flights per week to Hawaii – from Seattle, Anchorage, Portland, Oakland, San Jose, Sacramento, and San Diego.

Horizon announced four daily non-stop flights between Los Angeles and San Jose, Calif. beginning in August 2010.

Changes to Certain Fees
We announced that we will begin charging $20 for each of the first three checked bags.  This increases the current service charge for the first bag from $15, but decreases the charges for the second and third bags.  We also announced that we would reduce and simplify fees for unaccompanied minors and eliminate free same-day standby travel and courtesy holds on tickets purchased through Alaska/Horizon reservations or our websites. We expect these changes to provide incremental revenue of approximately $30 million annually.   These changes will be effective beginning June 16, 2010.

On-Board Wi-Fi
In the first quarter of 2010, Alaska announced its selection of Aircell to provide inflight Wi-Fi service, discontinuing its testing with Row 44 satellite-based equipment.  Installation of Aircell’s equipment began in March and we expect that most of the fleet will be equipped by the end of 2010.

Horizon Maintenance
In the course of business, Horizon periodically evaluates outsourcing certain functions.  Management is currently evaluating the potential cost savings related to outsourcing a portion of heavy maintenance work currently performed by Horizon.  No final decisions have been made at this time.

Outlook
Given our normal seasonal pattern, we are encouraged that we are starting out the year with a first-quarter profit.  We have typically reported a loss in the first quarter.

Looking ahead, advance bookings for May and June are up on average across the Air Group system compared to the same periods in 2009 and early yield trends are encouraging. With the new service described above, we now expect  Alaska’s mainline capacity to grow by 4% - 5% as compared to 2009.  We expect Horizon system-wide capacity to be relatively flat in 2010 as compared to 2009.
 
20
 
RESULTS OF OPERATIONS
COMPARISON OF QUARTER ENDED MARCH 31, 2010 TO QUARTER ENDED MARCH 31, 2009
Our consolidated net income for the first quarter of 2010 was $5.3 million, or $0.15 per diluted share, compared to a net loss of $19.2 million, or $0.53 per share, in 2009.  Both periods include adjustments to reflect the timing of gain or loss recognition resulting from mark-to-market accounting related to our fuel hedge portfolio.  In the first quarter of 2010, we recognized net mark-to-market losses of $12.5 million ($7.8 million after tax, or $0.21 per share), compared to gains of $10.0 million ($6.2 million after tax, or $0.17 per share) in the first quarter of 2009.
 
We believe disclosure of earnings excluding the impact of these individual charges is useful information to investors and other readers 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 condensed 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 mark-to-market adjustments noted above, and as shown in the following table, our consolidated net income for the first quarter of 2010 was $13.1 million, or $0.36 per diluted share, compared to an adjusted consolidated net loss of $25.4 million, or $0.70 per share, in the first quarter of 2009.

   
Three Months Ended March 31,
  
   
2010
    
2009
  
(in millions except per-share amounts)  
Dollars
    
Diluted EPS
    
Dollars
    
Diluted EPS
  
Net income (loss) and diluted EPS, excluding noted items
   $ 13.1     $ 0.36     $ (25.4 )   $ (0.70 )
Mark-to-market fuel hedge adjustments,  net of tax
     (7.8 )     (0.21 )     6.2       0.17  
Net income (loss) and diluted EPS as reported
   $ 5.3     $ 0.15     $ (19.2 )   $ (0.53 )

INDIVIDUAL SUBSIDIARY RESULTS
Our consolidated results are primarily driven by the results of our two operating carriers. Alaska reported pretax income of $17.2 million and Horizon reported a pretax loss of $6.2 million in the first quarter of 2010. Financial and statistical data for Alaska and Horizon are shown on pages 22 and 29, respectively. An in-depth discussion of the results of Alaska and Horizon begins on pages 23 and 30, respectively.

 
21
 

Alaska Airlines Financial and Statistical Data (unaudited)
              
                   
      Three Months Ended March 31  
                   
Financial Data (in millions):
  
2010
    
2009
    
% Change
  
Operating Revenues:
                  
Passenger
   $ 587.0     $ 539.8       8.7  
Freight and mail
     22.0       18.3       20.2  
Other - net
     52.1       33.2       56.9  
Total mainline operating revenues
     661.1       591.3       11.8  
Passenger - purchased capacity
     76.5       61.8       23.8  
Total Operating Revenues
     737.6       653.1       12.9  
                         
Operating Expenses:
                        
Wages and benefits
     191.2       197.4       (3.1 )
Variable incentive pay
     14.8       7.1       108.5  
Aircraft fuel, including hedging gains and losses
     171.7       131.9       30.2  
Aircraft maintenance
     42.1       46.3       (9.1 )
Aircraft rent
     25.9       26.5       (2.3 )
Landing fees and other rentals
     41.7       40.8       2.2  
Contracted services
     30.6       30.5       0.3  
Selling expenses
     26.7       19.1       39.8  
Depreciation and amortization
     45.7       43.3       5.5  
Food and beverage service
     11.8       11.0       7.3  
Other
     34.8       42.8       (18.7 )
Total mainline operating expenses
     637.0       596.7       6.8  
Purchased capacity costs
     72.5       62.7       15.6  
Total Operating Expenses
     709.5       659.4       7.6  
                         
Operating Income (Loss)
     28.1       (6.3 )  
NM
  
                         
Interest income
     8.6       10.1          
Interest expense
     (22.1 )     (23.9 )        
Interest capitalized
     1.7       2.5          
Other - net
     0.9       (0.7 )        
      (10.9 )     (12.0 )        
                         
Income (Loss) Before Income Tax
  $ 17.2     $ (18.3 )  
NM
  
                         
Mainline Operating Statistics:
                        
Revenue passengers (000)
     3,641       3,573       1.9  
RPMs (000,000) "traffic"
     4,472       4,179       7.0  
ASMs (000,000) "capacity"
     5,541       5,520       0.4  
Passenger load factor
     80.7 %     75.7 %  
5.0
 pts 
Yield per passenger mile
     13.13 ¢     12.92 ¢     1.6  
Operating revenue per ASM
    11.93 ¢     10.71 ¢     11.4  
Passenger revenue per ASM
     10.59 ¢     9.78 ¢     8.3  
Operating expenses per ASM
     11.50 ¢     10.81 ¢     6.4  
Operating expenses per ASM, excluding fuel
     8.40 ¢     8.42 ¢     (0.2 )
Aircraft fuel cost per gallon
   $ 2.38     $ 1.80       32.3  
Economic fuel cost per gallon
   $ 2.25     $ 1.91       17.8  
Fuel gallons (000,000)
     72.3       73.3       (1.4 )
Average number of full-time equivalent employees
     8,537       9,021       (5.4 )
Aircraft utilization (blk hrs/day)
     9.3       9.9       (6.1 )
Average aircraft stage length (miles)
     1,068       1,016       5.1  
Operating fleet at period-end
     112       112       -  
                         
Purchased Capacity Operating Statistics:
                       
RPMs (000,000)
     271       215       26.0  
ASMs (000,000)
     369       316       16.8  
Passenger load factor
     73.4 %     68.0 %  
5.4
 pts 
Yield per passenger mile
     28.23 ¢     28.74 ¢     (1.8 )
Operating revenue per ASM
     20.73 ¢     19.56 ¢     6.0  
Operating expenses per ASM
     19.65 ¢     19.84 ¢     (1.0 )
                         
NM = Not Meaningful
                        

 
22
 
ALASKA AIRLINES
Alaska reported income before income taxes of $17.2 million during the first quarter of 2010 compared to an $18.3 million pretax loss in the first quarter of 2009.

Excluding the mark-to-market adjustments in each period as noted in the table below, Alaska would have reported pretax income of $26.5 million in the first quarter of 2010, compared to a pretax loss of $26.6 million in the same period of 2009.
 
   
Three Months E