ALK 10-Q 6/30/12


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
T
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

 
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 T  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 T 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 definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer   T
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 T
 
The registrant has 70,494,808 common shares, par value $1.00, outstanding at July 31, 2012.



ALASKA AIR GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2012

 TABLE OF CONTENTS

 
 
 
 
 
 

 
As used in this Form 10-Q, the terms “Air Group,” the "Company," “our,” “we” and "us," 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.”
 

2



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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:

•
changes in our operating costs, primarily fuel, which can be volatile;
•
general economic conditions, including the impact of those conditions on customer travel behavior;
•
the competitive environment in our industry;
•
our ability to meet our cost reduction goals;
•
operational disruptions;
•
an aircraft accident or incident;
•
labor disputes and our ability to attract and retain qualified personnel;
•
our significant indebtedness;
•
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;
•
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, 2011. Please consider our forward-looking statements in light of those risks as you read this report.


3


PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
35.4

 
$
102.2

Marketable securities
1,150.0

 
1,038.7

Total cash and marketable securities
1,185.4

 
1,140.9

Receivables - net
169.4

 
136.4

Inventories and supplies - net
47.8

 
44.3

Deferred income taxes
152.1

 
134.2

Fuel hedge contracts
22.0

 
46.7

Prepaid expenses and other current assets
121.7

 
93.0

Total Current Assets
1,698.4

 
1,595.5

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
4,099.5

 
4,041.8

Other property and equipment
857.1

 
762.3

Deposits for future flight equipment
331.4

 
262.5

 
5,288.0

 
5,066.6

Less accumulated depreciation and amortization
1,740.6

 
1,665.1

Total Property and Equipment - Net
3,547.4

 
3,401.5

 
 
 
 
Fuel Hedge Contracts
39.3

 
70.2

 
 
 
 
Other Assets
138.5

 
127.8

 
 
 
 
Total Assets
$
5,423.6

 
$
5,195.0


See accompanying notes to consolidated financial statements.


4

ALASKA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions except share amounts)
June 30,
2012
 
December 31,
2011
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
110.8

 
$
103.6

Accrued aircraft rent
9.7

 
31.6

Accrued wages, vacation and payroll taxes
134.7

 
163.8

Other accrued liabilities
558.5

 
513.3

Air traffic liability
667.2

 
489.4

Current portion of long-term debt
183.4

 
207.9

Total Current Liabilities
1,664.3

 
1,509.6

 
 
 
 
Long-Term Debt, Net of Current Portion
957.1

 
1,099.0

Other Liabilities and Credits
 

 
 

Deferred income taxes
447.5

 
362.9

Deferred revenue
414.0

 
410.2

Obligation for pension and postretirement medical benefits
452.9

 
463.4

Other liabilities
204.8

 
176.7

 
1,519.2

 
1,413.2

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: 2012 - 70,723,900 shares; 2011 - 75,733,044 shares
70.7

 
37.9

Capital in excess of par value
674.2

 
840.0

Treasury stock (common), at cost: 2012 - 0 shares; 2011 - 4,783,494 shares
—

 
(125.3
)
Accumulated other comprehensive loss
(380.8
)
 
(390.0
)
Retained earnings
918.9

 
810.6

 
1,283.0

 
1,173.2

Total Liabilities and Shareholders' Equity
$
5,423.6

 
$
5,195.0


See accompanying notes to consolidated financial statements.


5

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions except per share amounts)
2012
 
2011
 
2012
 
2011
Operating Revenues
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
Mainline
$
862.7

 
$
774.2

 
$
1,586.1

 
$
1,433.5

Regional
187.6

 
179.0

 
360.4

 
340.6

Total passenger revenue
1,050.3

 
953.2

 
1,946.5

 
1,774.1

Freight and mail
30.6

 
29.1

 
55.0

 
54.0

Other - net
132.3

 
127.9

 
251.0

 
247.3

Total Operating Revenues
1,213.2

 
1,110.2

 
2,252.5

 
2,075.4

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 

 
 

Wages and benefits
258.9

 
242.8

 
515.5

 
492.1

Variable incentive pay
21.5

 
17.9

 
37.5

 
34.3

Aircraft fuel, including hedging gains and losses
431.8

 
397.5

 
750.6

 
592.0

Aircraft maintenance
54.5

 
49.1

 
104.6

 
102.4

Aircraft rent
29.0

 
29.0

 
57.0

 
59.5

Landing fees and other rentals
60.5

 
59.9

 
123.0

 
117.8

Contracted services
50.5

 
46.6

 
98.2

 
90.1

Selling expenses
44.2

 
45.8

 
85.3

 
85.6

Depreciation and amortization
65.8

 
61.7

 
129.5

 
122.0

Food and beverage service
19.6

 
17.1

 
37.4

 
32.2

Other
61.1

 
58.2

 
125.7

 
118.9

Fleet transition expenses
—

 
26.8

 
—

 
36.9

Total Operating Expenses
1,097.4

 
1,052.4

 
2,064.3

 
1,883.8

Operating Income
115.8

 
57.8

 
188.2

 
191.6

 
 
 
 
 
 
 
 
Nonoperating Income (Expense)
 
 
 
 
 

 
 

Interest income
5.1

 
6.3

 
10.0

 
13.9

Interest expense
(17.2
)
 
(20.0
)
 
(33.8
)
 
(43.4
)
Interest capitalized
3.5

 
1.6

 
8.0

 
3.4

Other - net
1.9

 
1.3

 
3.3

 
2.2

 
(6.7
)
 
(10.8
)
 
(12.5
)
 
(23.9
)
Income before income tax
109.1

 
47.0

 
175.7

 
167.7

Income tax expense
41.6

 
18.2

 
67.4

 
64.7

Net Income
$
67.5

 
$
28.8

 
$
108.3

 
$
103.0

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
0.95

 
$
0.40

 
$
1.52

 
$
1.43

Diluted Earnings Per Share:
$
0.93

 
$
0.39

 
$
1.50

 
$
1.40

Shares used for computation:
 
 
 
 
 
 
 

Basic
70.996

 
71.965

 
71.069

 
71.977

Diluted
72.200

 
73.473

 
72.325

 
73.551


See accompanying notes to consolidated financial statements.

6

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net Income
$
67.5

 
$
28.8

 
$
108.3

 
$
103.0

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Related to marketable securities:
 
 
 
 
 
 
 
Unrealized holding gains arising during the period
0.6

 
3.9

 
4.3

 
1.7

Reclassification adjustment for gains included in net income
(1.5
)
 
(0.9
)
 
(2.5
)
 
(1.5
)
Income tax expense (benefit)
0.3

 
(1.2
)
 
(0.7
)
 
(0.2
)
Total
(0.6
)
 
1.8

 
1.1

 
—

 
 
 
 
 
 
 
 
Related to employee benefit plans:
 
 
 
 
 
 
 
Prior service cost arising during period
9.8

 
6.4

 
19.7

 
12.7

Income tax benefit
(3.7
)
 
(2.4
)
 
(7.4
)
 
(4.8
)
Total
6.1

 
4.0

 
12.3

 
7.9

 
 
 
 
 
 
 
 
Related to interest rate derivative instruments:
 
 
 
 
 
 
 
Unrealized holding losses arising during the period
(6.4
)
 
(3.3
)
 
(3.2
)
 
(1.1
)
Income tax expense (benefit)
2.5

 
1.2

 
(1.0
)
 
0.4

Total
(3.9
)
 
(2.1
)
 
(4.2
)
 
(0.7
)
 
 
 
 
 
 
 
 
Other comprehensive income
1.6

 
3.7

 
9.2

 
7.2

 
 
 
 
 
 
 
 
Comprehensive income
$
69.1

 
$
32.5

 
$
117.5

 
$
110.2


See accompanying notes to consolidated financial statements.


7

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 
Six Months Ended June 30,
(in millions)
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
108.3

 
$
103.0

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Fleet transition expenses
—

 
36.9

Depreciation and amortization
129.5

 
122.0

Stock-based compensation and other
5.5

 
7.3

Changes in certain assets and liabilities:
 
 
 
Changes in fair values of open fuel hedge contracts
45.3

 
(25.0
)
Changes in deferred income taxes
57.5

 
57.8

Increase in air traffic liability
177.8

 
172.1

Increase (decrease) in deferred revenue
3.8

 
(16.8
)
Increase in other long-term liabilities
4.9

 
53.8

Pension contribution
(23.6
)
 
(22.2
)
Other - net
(53.3
)
 
(120.2
)
Net cash provided by operating activities
455.7

 
368.7

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(228.4
)
 
(214.8
)
Other flight equipment
(6.7
)
 
(11.1
)
Other property and equipment
(19.7
)
 
(15.2
)
Total property and equipment additions
(254.8
)
 
(241.1
)
Assets constructed for others (Terminal 6 at LAX)
(50.0
)
 
(44.6
)
Purchases of marketable securities
(537.2
)
 
(427.7
)
Sales and maturities of marketable securities
430.4

 
459.0

Proceeds from disposition of assets and changes in restricted deposits
0.9

 
12.5

Net cash used in investing activities
(410.7
)
 
(241.9
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Long-term debt payments
(165.4
)
 
(125.4
)
Proceeds from sale-leaseback transactions
49.3

 
—

Common stock repurchases
(26.3
)
 
(33.3
)
Proceeds and tax benefit from issuance of common stock
14.0

 
14.9

Other financing activities
16.6

 
(5.5
)
Net cash used in financing activities
(111.8
)
 
(149.3
)
Net decrease in cash and cash equivalents
(66.8
)
 
(22.5
)
Cash and cash equivalents at beginning of year
102.2

 
89.5

Cash and cash equivalents at end of the period
$
35.4

 
$
67.0

 
 
 
 
Supplemental disclosure:
 

 
 

Cash paid (refunded) during the period for:
 
 
 
Interest (net of amount capitalized)
$
24.6

 
$
39.7

Income taxes
(2.5
)
 
0.1

Non-cash transactions:
 
 
 
Assets constructed related to Terminal 6 at LAX
25.8

 
—

See accompanying notes to consolidated financial statements.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
Alaska Air Group, Inc.
June 30, 2012
 
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The interim condensed consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in the Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of June 30, 2012, as well as the results of operations for the three and six months ended June 30, 2012 and 2011. The adjustments made were of a normal recurring nature.

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. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions and other factors, operating results for the three and six months ended June 30, 2012 are not necessarily indicative of operating results for the entire year.

Reclassifications

Certain reclassifications have been made to conform the prior-year data to the current format. During the second quarter of 2012, the Company changed the classification of ancillary revenues, such as checked-bag fees, ticket change fees, and others, from "Passenger revenue" to "Other-net" revenue to enhance comparability of passenger revenue among peers in the industry. The Company has reclassified ancillary revenues in the current period and all prior periods, with the reclassification having no impact on total revenue for any of the respective periods. The table below shows operating revenues originally reported in the Form 10-Q for the three and six months ended June 30, 2011 and the effect of the reclassification on the condensed consolidated statement of operations (in millions):
 
Three Months Ended June 30, 2011
 
Six Months Ended June 30, 2011
 
As Reclassified
 
Reported
 
As Reclassified
 
Reported
Operating Revenues
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
Mainline
$
774.2

 
$
819.9

 
$
1,433.5

 
$
1,522.3

Regional
179.0

 
194.3

 
340.6

 
370.8

Total passenger revenue
953.2

 
1,014.2

 
1,774.1

 
1,893.1

Freight and mail
29.1

 
29.1

 
54.0

 
54.0

Other - net
127.9

 
66.9

 
247.3

 
128.3

Total Operating Revenues
$
1,110.2

 
$
1,110.2

 
$
2,075.4

 
$
2,075.4

 


9


NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):
June 30, 2012
Cost Basis
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash
$
23.2

 
$
—

 
$
—

 
$
23.2

Commercial paper, money market funds and other securities
12.2

 
—

 
—

 
12.2

Cash and cash equivalents
35.4

 
—

 
—

 
35.4

U.S. government and agency securities
366.0

 
2.8

 
—

 
368.8

Foreign government bonds
41.4

 
0.9

 
—

 
42.3

Asset-back securities
90.3

 
0.4

 
—

 
90.7

Mortgage-back securities
109.6

 
0.9

 
(0.1
)
 
110.4

Corporate notes and bonds
516.8

 
6.5

 
(0.5
)
 
522.8

Municipal securities
14.9

 
0.1

 
—

 
15.0

Marketable securities
1,139.0

 
11.6

 
(0.6
)
 
1,150.0

Total
$
1,174.4

 
$
11.6

 
$
(0.6
)
 
$
1,185.4


December 31, 2011
Cost Basis
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash
$
62.1

 
$
—

 
$
—

 
$
62.1

Money market funds
40.1

 
—

 
—

 
40.1

Cash and cash equivalents
102.2

 
—

 
—

 
102.2

U.S. government and agency securities
292.5

 
3.4

 
—

 
295.9

Foreign government bonds
24.9

 
0.5

 
—

 
25.4

Asset-back securities
58.2

 
0.1

 
(0.3
)
 
58.0

Mortgage-back securities
124.1

 
1.1

 
(0.3
)
 
124.9

Corporate notes and bonds
518.0

 
7.0

 
(2.4
)
 
522.6

Municipal securities
11.8

 
0.1

 
—

 
11.9

Marketable securities
1,029.5

 
12.2

 
(3.0
)
 
1,038.7

Total
$
1,131.7

 
$
12.2

 
$
(3.0
)
 
$
1,140.9


Activity for marketable securities (in millions):  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Proceeds from sales and maturities
$
242.3

 
$
145.0

 
$
430.4

 
$
459.0

Gross realized gains
2.0

 
1.4

 
3.6

 
3.3

Gross realized losses
0.5

 
0.4

 
0.8

 
1.7

Other-than-temporary impairments on investments
—

 
—

 
0.3

 
—

 
Of the marketable securities on hand at June 30, 2012, 9.8% mature in 2012, 29.5% in 2013, and 60.7% thereafter.

Investments with continuous unrealized losses (in millions):
 
Less than 12 months
 
Greater than 12 months
 
 
 
 
June 30, 2012
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
Mortgage-backed obligations
$
26.3

 
$
(0.1
)
 
$
—

 
$
—

 
$
26.3

 
$
(0.1
)
Corporate notes and bonds
106.3

 
(0.5
)
 
—

 
—

 
106.3

 
(0.5
)
Total
$
132.6

 
$
(0.6
)
 
$
—

 
$
—

 
$
132.6

 
$
(0.6
)

10


 
Less than 12 months
 
Greater than 12 months
 
 
 
 
December 31, 2011
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
Asset-backed obligations
$
31.7

 
$
(0.1
)
 
$
1.1

 
$
(0.2
)
 
$
32.8

 
$
(0.3
)
Mortgage-backed obligations
35.1

 
(0.2
)
 
1.9

 
(0.1
)
 
37.0

 
(0.3
)
Corporate notes and bonds
137.4

 
(2.4
)
 
1.0

 
—

 
138.4

 
(2.4
)
Total
$
204.2

 
$
(2.7
)
 
$
4.0

 
$
(0.3
)
 
$
208.2

 
$
(3.0
)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of June 30, 2012.

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 risks 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.

As of June 30, 2012, the Company had fuel hedge contracts outstanding covering 10.3 million barrels of crude oil that will be settled from July 2012 to June 2015. Refer to the contractual obligations and commitments section of Item 2 for further information.

Interest Rate Swap Agreements

The Company has 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 Boeing 737-800 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 from February 2020 through March 2021 to coincide with the lease termination dates.

Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):
 
June 30,
2012
 
December 31,
2011
Derivative Instruments Not Designated as Hedges
 
 
 
Fuel hedge contracts
 
 
 
Fuel hedge contracts, current assets
$
22.0

 
$
46.7

Fuel hedge contracts, noncurrent assets
39.3

 
70.2

Fuel hedge contracts, current liabilities
—

 
(10.3
)
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
Interest rate swaps
 
 
 
Other accrued liabilities
(5.7
)
 
(5.2
)
Other liabilities
(26.3
)
 
(23.6
)
Losses in Accumulated Other Comprehensive Loss (AOCL)
(32.0
)
 
(28.8
)

The net cash received (paid) for new positions and settlements was $(11.1) million and $9.6 million during the three months ended June 30, 2012 and 2011, respectively. The net cash received (paid) for new positions and settlements was $(17.5) million and $15.0 million during the six months ended June 30, 2012 and 2011, respectively.


11


Pretax effect of derivative instruments on earnings (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Derivative Instruments Not Designated as Hedges
 
 
 
 
 
 
 
Fuel hedge contracts
 
 
 
 
 
 
 
Gains (losses) recognized in aircraft fuel expense
$
(81.4
)
 
$
(54.4
)
 
$
(62.9
)
 
$
40.1

 
 
 
 
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
Losses recognized in aircraft rent
(1.4
)
 
(1.6
)
 
(2.9
)
 
(3.1
)
Losses recognized in Other Comprehensive Income (OCI)
(7.8
)
 
(4.9
)
 
(6.1
)
 
(4.2
)

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period. The Company expects $5.7 million to be reclassified from OCI to aircraft rent within the next twelve months.

Credit Risk and Collateral

The Company is exposed to credit losses in the event of non-performance by counterparties to these derivative instruments. To mitigate exposure, the Company periodically reviews the counterparties' nonperformance by monitoring the absolute exposure levels and credit ratings. The Company maintains security agreements with a number of its counterparties which may require the Company to post collateral if the fair value of the selected derivative instruments fall below specified mark-to-market thresholds. The posted collateral does not offset the fair value of the derivative instruments and is included in "Prepaid expenses and other current assets" on the consolidated balance sheet.

The Company posted collateral of $17.5 million and $0.9 million as of June 30, 2012 and December 31, 2011, respectively. The collateral was provided to one counterparty associated with the net liability position of the interest rate swap agreements offset by the net asset position of the fuel hedge contracts under a master netting arrangement.

NOTE 4. FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments on a Recurring Basis

Fair values of financial instruments on the consolidated balance sheet (in millions):
June 30, 2012
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
368.8

 
$
—

 
$
368.8

Foreign government bonds
—

 
42.3

 
42.3

Asset-back securities
—

 
90.7

 
90.7

Mortgage-back securities
—

 
110.4

 
110.4

Corporate notes and bonds
—

 
522.8

 
522.8

Municipal securities
—

 
15.0

 
15.0

Derivative instruments
 
 
 
 
 
Fuel hedge contracts
—

 
61.3

 
61.3

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(32.0
)
 
(32.0
)


12


December 31, 2011
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
295.9

 
$
—

 
$
295.9

Foreign government bonds
—

 
25.4

 
25.4

Asset-back securities
—

 
58.0

 
58.0

Mortgage-back securities
—

 
124.9

 
124.9

Corporate notes and bonds
—

 
522.6

 
522.6

Municipal securities
—

 
11.9

 
11.9

Derivative instruments
 
 
 
 
 
Fuel hedge contracts
—

 
116.9

 
116.9

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Fuel hedge contracts
—

 
(10.3
)
 
(10.3
)
Interest rate swap agreements
—

 
(28.8
)
 
(28.8
)

The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign governments bonds, asset-back securities, mortgage-back securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on industry standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts are over-the-counter, are not exchange traded and determined based on observable inputs that are readily available in active markets or can be derived from information available in active, quoted markets. Interest rate swap agreements are Level 2 as 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.
The Company has no other financial assets that are measured at fair value on a nonrecurring basis at June 30, 2012.

Fair Value of Other Financial Instruments

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carried at amortized costs, which approximates fair value.

Debt: The carrying amount of the Company's variable-rate debt approximates fair values. For fixed-rate debt, the Company uses the income approach to determine the estimated fair value, by using discounted cash flow using borrowing rates for comparable debt over the weighted life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):
 
June 30,
2012
 
December 31,
2011
Carrying amount
$
933.3

 
$
1,002.5

Fair value
1,016.3

 
1,075.8




13


NOTE 5. ASSETS CONSTRUCTED FOR OTHERS - TERMINAL 6 AT LOS ANGELES INTERNATIONAL AIRPORTS (LAX)

In March 2012, the Company placed into service assets constructed for others (Terminal 6 at LAX), including a new baggage system, additional gates, new common use systems, expansion of security screening checkpoints, and a new ticket lobby, all of which were constructed for the City of Los Angeles and Los Angeles World Airports (LAWA). Additionally, the Company placed into service proprietary renovations in the ticketing lobby and at the new gates included in Terminal 6. The majority of the assets constructed for LAX will be acquired by the City of Los Angeles and LAWA.

For accounting and financial reporting purposes, the Company is considered to be the owners of the project during construction and will not be able to qualify for sale and leaseback accounting when the non-proprietary assets are sold to the City of Los Angeles due to the Company's continuing involvement with the project. As a result, all of the costs incurred to fund the project are included in "Other property and equipment" and all amounts that have been and will be reimbursed will be in "Other liabilities" on the balance sheet. These assets and liabilities are summarized in the table below (in millions):
 
June 30,
2012
 
December 31,
2011
Proprietary assets of T6 at LAX
$
16.3

 
$
8.7

Assets constructed for others (T6 at LAX)
219.2

 
143.4

Other property and equipment
$
235.5

 
$
152.1

 
 
 
 
Other liabilities
$
46.3

 
$
17.7


Included in the asset balances above is capitalized interest of $6.0 million and $4.5 million at June 30, 2012 and December 31, 2011, respectively.

The assets will be depreciated over the life of the lease based on the straight-line method, while the liability will amortize using the effective interest method based on the lease rental payments. Because the Company will only operate a small portion of the gates in the new terminal, the asset and liability will depreciate and amortize to an estimated fair value at the end of the lease term, at which time we may derecognize our obligation or we may extend our lease term.

Future minimum payments related to the Terminal 6 lease are included in facility leases described in Note 10.

NOTE 6. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals are included in the consolidated balance sheets (in millions) as follows:
 
June 30,
2012
 
December 31,
2011
Current Liabilities:
 
 
 
Other accrued liabilities
$
289.1

 
$
271.4

Other Liabilities and Credits:
 
 
 
Deferred revenue
397.8

 
392.2

Other liabilities
17.2

 
16.9

Total
$
704.1

 
$
680.5

 
Alaska's Mileage Plan revenue is included in the consolidated statements of operations (in millions) as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Passenger revenues
$
48.2

 
$
54.2

 
$
90.8

 
$
104.5

Other-net revenues
55.2

 
51.6

 
102.7

 
97.2

Total Mileage Plan revenues
$
103.4

 
$
105.8

 
$
193.5

 
$
201.7




14


NOTE 7. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
June 30,
2012
 
December 31,
2011
Fixed-rate notes payable due through 2024
$
933.3

 
$
1,002.5

Variable-rate notes payable due through 2023
207.2

 
304.4

Long-term debt
1,140.5

 
1,306.9

Less current portion
183.4

 
207.9

 
$
957.1

 
$
1,099.0

 
 
 
 
Weighted-average fixed-interest rate
5.9
%
 
5.8
%
Weighted-average variable-interest rate
2.0
%
 
1.9
%
 
All of the Company’s borrowings were secured by aircraft, but only one aircraft debt agreement secured by an aircraft has a loan-to-value covenant. As of June 30, 2012, the Company was in compliance with this covenant and expects to retire this debt by December 31, 2012.

During the six months ended June 30, 2012, the Company made scheduled debt payments of $62.9 million and prepaid the full debt balance on seven outstanding aircraft debt agreements of $102.5 million.

At June 30, 2012, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2012
$
108.6

2013
160.9

2014
117.1

2015
113.4

2016
110.6

Thereafter
529.9

Total principal payments
$
1,140.5

 
Bank Line of Credit
 
The Company has two $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 2016, 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 June 30, 2012.

NOTE 8. INCOME TAXES

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. Primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes, the Company has generated a net deferred tax liability. As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, deferred assets and liabilities do not include certain deferred tax assets that arose directly from the tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Those deferred tax assets include $4.9 million and $10.3 million of loss carryforwards at June 30, 2012 and December 31, 2011, respectively, in which additional-paid-in-capital will be increased if and when such deferred tax assets are ultimately realized. The Company uses ASC 740 ordering for purposes of determining when excess tax benefits have been realized. During the second quarter of 2012, the Company recognized $9.7 million of previously unrecognized deferred tax assets related to the excess tax benefits of stock compensation, which decreased "Deferred income taxes" and increased "Capital in excess of par."



15


NOTE 9. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized included the following components for the three months ended June 30 (in millions): 
 
Qualified
 
Nonqualified
 
Postretirement Medical
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
9.5

 
$
9.0

 
$
0.2

 
$
0.2

 
$
1.3

 
$
1.5

Interest cost
18.3

 
18.3

 
0.5

 
0.5

 
1.3

 
1.8

Expected return on assets
(23.2
)
 
(22.1
)
 
—

 
—

 
—

 
—

Amortization of prior service cost
(0.3
)
 
(0.2
)
 
—

 
—

 
0.2

 
0.1

Recognized actuarial loss
9.9

 
6.1

 
0.2

 
0.2

 
(0.2
)
 
0.3

Net periodic benefit costs
$
14.2

 
$
11.1

 
$
0.9

 
$
0.9

 
$
2.6

 
$
3.7


Net periodic benefit costs recognized included the following components for the six months ended June 30 (in millions): 
 
Qualified
 
Nonqualified
 
Postretirement Medical
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
19.1

 
$
18.0

 
$
0.4

 
$
0.4

 
$
2.5

 
$
3.0

Interest cost
36.5

 
36.6

 
1.0

 
1.1

 
2.7

 
3.6

Expected return on assets
(46.5
)
 
(44.2
)
 
—

 
—

 
—

 
—

Amortization of prior service cost
(0.5
)
 
(0.4
)
 
—

 
—

 
0.3

 
0.2

Recognized actuarial loss
19.8

 
12.2

 
0.4

 
0.3

 
(0.3
)
 
0.6

Net periodic benefit costs
$
28.4

 
$
22.2

 
$
1.8

 
$
1.8

 
$
5.2

 
$
7.4


NOTE 10. COMMITMENTS

Future minimum fixed payments for commitments (in millions):
June 30, 2012
Aircraft Leases
 
Facility Leases
 
Aircraft Commitments
 
Capacity Purchase Agreements
 
Engine Maintenance
Remainder of 2012
$
41.8

 
$
31.8

 
$
181.8

 
$
9.7

 
$
20.9

2013
141.6

 
42.5

 
333.2

 
17.4

 
31.9

2014
126.1

 
38.5

 
194.6

 
17.7

 
26.4

2015
104.4

 
27.0

 
48.0

 
18.0

 
10.1

2016
81.9

 
17.2

 
18.4

 
18.3

 
—

Thereafter
130.7

 
137.9

 
36.8

 
26.5

 
—

Total
$
626.5

 
$
294.9

 
$
812.8

 
$
107.6

 
$
89.3


Lease Commitments

The Company had lease contracts for 63 aircraft, which have remaining noncancelable lease terms ranging up to nine years at June 30, 2012. Of these aircraft, 14 are non-operating (i.e. not in our fleet) and subleased to third-party carriers. In May 2012, the Company entered into an agreement to sell and leaseback three Boeing 737-700 aircraft. The lease terms are less than two years and qualify as operating leases. The sale of the aircraft resulted in a gain of $3.2 million, which was deferred and will be amortized over the life of the leases to aircraft rent expense on the consolidated statement of operations. The majority of airport and terminal facilities are also leased. Rent expense was $67.9 million and $69.4 million for the three months ended June 30, 2012 and 2011, respectively, and $137.9 million and $138.5 million for the six months ended June 30, 2012 and 2011, respectively.


16


Aircraft Commitments
 
As of June 30, 2012, the Company is committed to purchasing three Boeing 737-800 aircraft and 22 Boeing 737-900ER aircraft, with deliveries in 2012 through 2015, and has options to purchase an additional 39 Boeing 737 aircraft. The Company also purchased one Boeing 737-800 and two Q400 aircraft in the second quarter of 2012. The Company is committed to selling two Q400 aircraft in 2012, and has options to purchase an additional 10 Q400 aircraft.

Capacity Purchase Agreements (CPAs)
 
At June 30, 2012, Alaska had CPAs with three carriers, including our wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. On May 14, 2011, SkyWest Airlines, Inc. (SkyWest) began flying certain routes under a CPA with Alaska. In addition, Alaska has a CPA with Peninsula Airways, Inc. (PenAir) to fly in the state of Alaska. Under these agreements, Alaska pays the third-party carriers an amount which is based on a determination of their cost of operating those flights and other factors. The costs paid by Alaska to Horizon are based on similar data and are intended to approximate market rates for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.

Engine Maintenance
 
The Company had power-by-the-hour maintenance agreements for all Boeing 737 engines other than the Boeing 737-800 at June 30, 2012. These agreements transfer risk to third-party service providers and fix the amount the Company pays per flight hour in exchange for maintenance and repairs under a predefined maintenance program. Future payments are based on minimum flight hours. Accordingly, payments could differ materially based on actual flight hours.

NOTE 11. SHAREHOLDERS' EQUITY
 
Common Stock Split

On February 15, 2012, the Board of Directors declared a two-for-one split of the Company's common stock to be accomplished by means of a stock distribution. The additional shares were distributed on March 16, 2012, to the shareholders of record on March 2, 2012. The stock split increased the Company's outstanding shares from approximately 35.5 million shares as of December 31, 2011 to 70.7 million shares as of June 30, 2012. Historical outstanding shares were recast upon the distribution.
Common Stock Repurchase

In February 2012, the Board of Directors authorized a $50 million share repurchase program, which expires in February 2013. In June 2011, the Board of Directors authorized a $50 million share repurchase program, which was completed in January 2012. In June 2010, the Board of Directors authorized a $50 million share repurchase program, which was completed in April 2011.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
2012 Repurchase Program
506,000

 
$
17.5

 
—

 
$
—

 
709,000

 
$
24.6

 
—

 
$
—

2011 Repurchase Program
—

 
—

 
63,000

 
2.1

 
46,340

 
1.7

 
63,000

 
2.1

2010 Repurchase Program
—

 
—

 
155,600

 
4.9

 
—

 
—

 
1,023,600

 
31.2

 
506,000

 
$
17.5

 
218,600

 
$
7.0

 
755,340

 
$
26.3

 
1,086,600

 
$
33.3


Retirement of Treasury Shares

In February 2012, the Company retired 4,829,834 common shares that had been held in treasury.  This action did not impact the total number of common shares outstanding.


17


Earnings Per Share

Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three months ended June 30, 2012 and 2011, 0.2 million and 0.1 million stock options, respectively, were excluded from the calculation of diluted EPS because they were antidilutive. Antidilutive shares for the six month ended June 30, 2012 and 2011 were 0.2 million and 0.2 million, respectively.
 
NOTE 12. FLEET TRANSITION EXPENSES

Fleet transition expenses included in the consolidated statements of operations (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Horizon Fleet Transition - CRJ-700
$
—

 
$
20.8

 
$
—

 
$
30.9

Horizon Fleet Transition - Q200
—

 
6.0

 
—

 
6.0

Total
$
—

 
$
26.8

 
$
—

 
$
36.9


In 2011, Horizon completed its transition to an all-Q400 fleet. During the first six months of 2011, Horizon subleased the final 13 CRJ-700 aircraft to a third-party carrier.

Horizon also had 16 Q200 aircraft subleased to a third-party carrier, which included a liability related to the estimated sublease loss which had been recorded in previous periods. The Company evaluated the loss in the second quarter of 2011 and determined the ultimate loss would likely be higher than the original estimate and recorded an additional charge.


18


NOTE 13. OPERATING SEGMENT INFORMATION
 
Management views the business in three operating segments.
Alaska Mainline - The Boeing 737 part of Alaska's business with average stage lengths greater than 1,000 miles.
Alaska Regional - Alaska's shorter distance network. In this segment, we record actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under CPAs.
Horizon - Horizon operates regional aircraft. All of Horizon's capacity is sold to Alaska under a CPA.   Expenses include those typically borne by regional airlines such as crew costs, ownership costs, and maintenance costs.
The following table reports “Air Group adjusted,” which is not a measure determined in accordance with GAAP. The Company's chief operating decision-makers and others in management use this measure to evaluate operational performance and determine resource allocations. Adjustments are further explained below in reconciling to consolidated GAAP results. All inter-company revenues and expenses between Alaska and Horizon are eliminated in consolidation.

Operating segment information is as follows (in millions):
 
Three Months Ended June 30, 2012
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
862.7

 
$
—

 
$
—

 
$
—

 
$
862.7

 
$
—

 
$
862.7

Regional
—

 
187.6

 
—

 
—

 
187.6

 
—

 
187.6

Total passenger revenues
862.7

 
187.6

 
—

 
—

 
1,050.3

 
—

 
1,050.3

CPA revenues
—

 
—

 
89.2

 
(89.2
)
 
—

 
—

 
—

Freight and mail
29.5

 
1.1

 
—

 
—

 
30.6

 
—

 
30.6

Other-net
115.4

 
15.1

 
1.8

 
—

 
132.3

 
—

 
132.3

Total operating revenues
1,007.6

 
203.8

 
91.0

 
(89.2
)
 
1,213.2

 
—

 
1,213.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
532.2

 
139.0

 
83.1

 
(88.7
)
 
665.6

 
—

 
665.6

Economic fuel(c)
316.7

 
45.5

 
—

 
—

 
362.2

 
69.6

 
431.8

Total operating expenses
848.9

 
184.5

 
83.1

 
(88.7
)
 
1,027.8

 
69.6

 
1,097.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
4.4

 
—

 
—

 
0.7

 
5.1

 
—

 
5.1

Interest expense
(12.7
)
 
—

 
(4.1
)
 
(0.4
)
 
(17.2
)
 
—

 
(17.2
)
Other
5.1

 
—

 
0.4

 
(0.1
)
 
5.4

 
—

 
5.4

 
(3.2
)
 
—

 
(3.7
)
 
0.2

 
(6.7
)
 
—

 
(6.7
)
Income (loss) before income tax
$
155.5

 
$
19.3

 
$
4.2

 
$
(0.3
)
 
$
178.7

 
$
(69.6
)
 
$
109.1



19


 
Three Months Ended June 30, 2011
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
774.2

 
$
—

 
$
—

 
$
—

 
$
774.2

 
$
—

 
$
774.2

Regional
—

 
179.0

 
—

 
—

 
179.0

 
—

 
179.0

Total passenger revenues
774.2

 
179.0

 
—

 
—

 
953.2

 
—

 
953.2

CPA revenues
—

 
—

 
93.5

 
(93.5
)
 
—

 
—

 
—

Freight and mail
28.0

 
1.0

 
0.1

 
—

 
29.1

 
—

 
29.1

Other-net
110.7

 
15.4

 
1.8

 
—

 
127.9

 
—

 
127.9

Total operating revenues
912.9

 
195.4

 
95.4

 
(93.5
)
 
1,110.2

 
—

 
1,110.2