10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

T    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015
 
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.
 
Delaware
 
91-1292054
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

 
19300 International Boulevard, Seattle, Washington 98188
Telephone: (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 126,128,614 common shares, par value $0.01, outstanding at October 31, 2015.



ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 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:

•
the competitive environment in our industry;
•
changes in our operating costs, primarily fuel, which can be volatile;
•
general economic conditions, including the impact of those conditions on customer travel behavior;
•
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;
•
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, 2014, and Item 1A. "Risk Factors" included herein. 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
 
ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
88

 
$
107

Marketable securities
1,170

 
1,110

Total cash and marketable securities
1,258

 
1,217

Receivables - net
205

 
259

Inventories and supplies - net
52

 
58

Deferred income taxes
126

 
117

Prepaid expenses and other current assets
74

 
105

Total Current Assets
1,715

 
1,756

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
5,557

 
5,165

Other property and equipment
936

 
896

Deposits for future flight equipment
775

 
555

 
7,268

 
6,616

Less accumulated depreciation and amortization
2,534

 
2,317

Total Property and Equipment - Net
4,734

 
4,299

 
 
 
 
Other Assets
115

 
126

 
 
 
 
Total Assets
$
6,564

 
$
6,181


See accompanying notes to condensed consolidated financial statements.


4

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts)
September 30,
2015
 
December 31,
2014
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
61

 
$
62

Accrued wages, vacation and payroll taxes
218

 
232

Other accrued liabilities
698

 
629

Air traffic liability
760

 
631

Current portion of long-term debt
117

 
117

Total Current Liabilities
1,854

 
1,671

 
 
 
 
Long-Term Debt, Net of Current Portion
593

 
686

Other Liabilities and Credits
 

 
 

Deferred income taxes
746

 
750

Deferred revenue
416

 
374

Obligation for pension and postretirement medical benefits
249

 
246

Other liabilities
341

 
327

 
1,752

 
1,697

Commitments and Contingencies


 


Shareholders' Equity
 

 
 

Preferred stock, $0.01 par value Authorized: 5,000,000 shares, none issued or outstanding
—

 
—

Common stock, $0.01 par value, Authorized: 200,000,000 shares, Issued: 2015 - 128,409,720 shares; 2014 - 131,556,573 shares, Outstanding: 2015 - 126,701,469 shares; 2014 - 131,481,473
1

 
1

Capital in excess of par value
70

 
296

Treasury stock (common), at cost: 2015 - 1,708,251 shares; 2014 - 75,100 shares
(127
)
 
(4
)
Accumulated other comprehensive loss
(303
)
 
(310
)
Retained earnings
2,724

 
2,144

 
2,365

 
2,127

Total Liabilities and Shareholders' Equity
$
6,564

 
$
6,181

See accompanying notes to condensed consolidated financial statements.


5

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share amounts)
2015
 
2014
 
2015
 
2014
Operating Revenues
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
Mainline
$
1,057

 
$
1,030

 
$
2,977

 
$
2,858

Regional
240

 
219

 
638

 
605

Total passenger revenue
1,297

 
1,249

 
3,615

 
3,463

Freight and mail
30

 
32

 
83

 
88

Other - net
188

 
184

 
523

 
511

Total Operating Revenues
1,515

 
1,465

 
4,221

 
4,062

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 

 
 

Wages and benefits
312

 
279

 
923

 
832

Variable incentive pay
32

 
30

 
90

 
84

Aircraft fuel, including hedging gains and losses
245

 
394

 
741

 
1,112

Aircraft maintenance
67

 
58

 
182

 
166

Aircraft rent
26

 
27

 
78

 
84

Landing fees and other rentals
80

 
74

 
217

 
207

Contracted services
74

 
66

 
209

 
188

Selling expenses
53

 
55

 
160

 
154

Depreciation and amortization
81

 
75

 
236

 
218

Food and beverage service
30

 
24

 
83

 
68

Other
82

 
67

 
259

 
229

Total Operating Expenses
1,082

 
1,149

 
3,178

 
3,342

Operating Income
433

 
316

 
1,043

 
720

 
 
 
 
 
 
 
 
Nonoperating Income (Expense)
 
 
 
 
 

 
 

Interest income
5

 
5

 
16

 
15

Interest expense
(10
)
 
(12
)
 
(32
)
 
(36
)
Interest capitalized
9

 
5

 
25

 
14

Other - net
—

 
2

 
1

 
20

 
4

 
—

 
10

 
13

Income before income tax
437

 
316

 
1,053

 
733

Income tax expense
163

 
118

 
396

 
276

Net Income
$
274

 
$
198

 
$
657

 
$
457

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
2.15

 
$
1.47

 
$
5.08

 
$
3.35

Diluted Earnings Per Share:
$
2.14

 
$
1.45

 
$
5.05

 
$
3.31

 
 
 
 
 
 
 
 
Shares used for computation:
 
 
 
 
 
 
 

Basic
127.308

 
134.865

 
129.231

 
136.482

Diluted
128.205

 
136.158

 
130.200

 
137.825

 
 
 
 
 
 
 
 
Cash dividend declared per share:
$
0.20

 
$
0.125

 
$
0.60

 
$
0.375

See accompanying notes to condensed consolidated financial statements.

6

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net Income
$
274

 
$
198

 
$
657

 
$
457

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Related to marketable securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
—

 
(4
)
 
2

 
3

Reclassification of (gains) losses into Other-net nonoperating income (expense)
—

 
(1
)
 
—

 
(2
)
Income tax effect
—

 
2

 
(1
)
 
—

Total
—

 
(3
)
 
1

 
1

 
 
 
 
 
 
 
 
Related to employee benefit plans:
 
 
 
 
 
 
 
Reclassification of net pension expense into Wages and benefits
3

 
2

 
11

 
7

Income tax effect
(1
)
 
(1
)
 
(4
)
 
(3
)
Total
2

 
1

 
7

 
4

 
 
 
 
 
 
 
 
Related to interest rate derivative instruments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(5
)
 
—

 
(8
)
 
(5
)
Reclassification of (gains) losses into Aircraft rent
2

 
2

 
5

 
5

Income tax effect
2

 
—

 
2

 
—

Total
(1
)
 
2

 
(1
)
 
—

 
 
 
 
 
 
 
 
Other Comprehensive Income
1

 
—

 
7

 
5

 
 
 
 
 
 
 
 
Comprehensive Income
$
275

 
$
198

 
$
664

 
$
462

See accompanying notes to condensed consolidated financial statements.


7

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Nine Months Ended September 30,
(in millions)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
657

 
$
457

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

 
 

Depreciation and amortization
236

 
218

Stock-based compensation and other
22

 
27

Changes in certain assets and liabilities:
 
 
 
Changes in deferred income taxes
(17
)
 
27

Increase in air traffic liability
129

 
139

Increase (decrease) in deferred revenue
42

 
21

Other - net
160

 
3

Net cash provided by operating activities
1,229

 
892

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(563
)
 
(414
)
Other flight equipment
(61
)
 
(92
)
Other property and equipment
(44
)
 
(53
)
Total property and equipment additions
(668
)
 
(559
)
Purchases of marketable securities
(876
)
 
(794
)
Sales and maturities of marketable securities
818

 
739

Proceeds from disposition of assets and changes in restricted deposits
(1
)
 
(4
)
Net cash used in investing activities
(727
)
 
(618
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of debt
—

 
51

Long-term debt payments
(93
)
 
(97
)
Common stock repurchases
(381
)
 
(242
)
Dividends paid
(78
)
 
(51
)
Other financing activities
31

 
19

Net cash used in financing activities
(521
)
 
(320
)
Net increase (decrease) in cash and cash equivalents
(19
)
 
(46
)
Cash and cash equivalents at beginning of year
107

 
80

Cash and cash equivalents at end of the period
$
88

 
$
34

 
 
 
 
Supplemental disclosure:
 

 
 

Cash paid during the period for:
 
 
 
Interest (net of amount capitalized)
$
9

 
$
26

Income taxes paid (received)
262

 
185

See accompanying notes to condensed consolidated financial statements.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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, 2014. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of September 30, 2015, as well as the results of operations for the three and nine months ended September 30, 2015 and 2014. 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, changes in the competitive environment, and other factors, operating results for the three and nine months ended September 30, 2015, are not necessarily indicative of operating results for the entire year.

Certain reclassifications, such as changes in our equity structure, have been made to prior year financial statements to conform with classifications used in the current year.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB agreed to defer the effective date one year, and now allows early adoption one year prior to the effective date. The standard would be effective for the Company on January 1, 2018, and early adoption is allowed on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined whether or not it will early adopt the standard.

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):
September 30, 2015
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
3

 
$
—

 
$
—

 
$
3

Cash equivalents
85

 
—

 
—

 
85

Cash and cash equivalents
88

 
—

 
—

 
88

U.S. government and agency securities
188

 
1

 
—

 
189

Foreign government bonds
31

 
—

 
—

 
31

Asset-backed securities
137

 
—

 
—

 
137

Mortgage-backed securities
107

 
—

 
—

 
107

Corporate notes and bonds
682

 
5

 
(3
)
 
684

Municipal securities
22

 
—

 
—

 
22

Marketable securities
1,167

 
6

 
(3
)
 
1,170

Total
$
1,255

 
$
6

 
$
(3
)
 
$
1,258



9


December 31, 2014
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
4

 
$
—

 
$
—

 
$
4

Cash equivalents
103

 
—

 
—

 
103

Cash and cash equivalents
107

 
—

 
—

 
107

U.S. government and agency securities
166

 
—

 
—

 
166

Foreign government bonds
25

 
—

 
—

 
25

Asset-backed securities
130

 
—

 
—

 
130

Mortgage-backed securities
127

 
—

 
(1
)
 
126

Corporate notes and bonds
644

 
3

 
(2
)
 
645

Municipal securities
18

 
—

 
—

 
18

Marketable securities
1,110

 
3

 
(3
)
 
1,110

Total
$
1,217

 
$
3

 
$
(3
)
 
$
1,217


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 September 30, 2015.

Activity for marketable securities (in millions):  
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales and maturities
$
142

 
$
341

 
$
818

 
$
739

Gross realized gains
—

 
1

 
2

 
3

Gross realized losses
—

 
—

 
(2
)
 
(1
)
 
Maturities for marketable securities (in millions):
September 30, 2015
Cost Basis
 
Fair Value
Due in one year or less
$
171

 
$
171

Due after one year through five years
993

 
995

Due after five years through 10 years
3

 
4

Due after 10 years
—

 
—

Total
$
1,167

 
$
1,170


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.

As of September 30, 2015, the Company had outstanding fuel hedge contracts covering 259 million gallons of crude oil that will be settled from October 2015 to March 2017. 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.

10



Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):
 
September 30,
2015
 
December 31,
2014
Derivative Instruments Not Designated as Hedges
 
 
 
Fuel hedge contracts
 
 
 
Fuel hedge contracts, current assets
$
3

 
$
3

Fuel hedge contracts, noncurrent assets
2

 
4

 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
Interest rate swaps
 
 
 
Other accrued liabilities
(6
)
 
(6
)
Other liabilities
(16
)
 
(13
)
Losses in accumulated other comprehensive loss (AOCL)
(22
)
 
(19
)

The net cash received (paid) for new positions and settlements was ($4) million and $1 million during the three months ended September 30, 2015 and 2014, respectively. The net cash received (paid) for new positions and settlements was ($12) million and ($4) million during the nine months ended September 30, 2015 and 2014, respectively.

Pretax effect of derivative instruments on earnings (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Derivative Instruments Not Designated as Hedges
 
 
 
 
 
 
 
Fuel hedge contracts:
 
 
 
 
 
 
 
Gains (losses) recognized in aircraft fuel expense
$
(10
)
 
$
(11
)
 
$
(14
)
 
$
(17
)
 
 
 
 
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
Losses recognized in aircraft rent
(2
)
 
(2
)
 
(5
)
 
(5
)
Gains (losses) recognized in other comprehensive income (OCI)
(5
)
 
—

 
(8
)
 
(5
)

The Company expects $6 million to be reclassified from AOCL to aircraft rent within the next twelve months.

Credit Risk and Collateral

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 $5 million and $3 million as of September 30, 2015 and December 31, 2014, respectively.


11


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):
September 30, 2015
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
189

 
$
—

 
$
189

All other securities
—

 
981

 
981

Derivative instruments
 
 
 
 
 
Fuel hedge call options
—

 
5

 
5

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(22
)
 
(22
)

December 31, 2014
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
166

 
$
—

 
$
166

All other securities
—

 
944

 
944

Derivative instruments
 
 
 
 
 
Fuel hedge call options
—

 
7

 
7

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(19
)
 
(19
)

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. All other securities (Foreign government bonds, asset-backed securities, mortgage-backed 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.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts are Level 2 as the fair value is primarily based on inputs which are readily available in active markets or can be derived from information available in active markets. The fair value considers the exposure to credit losses in the event of nonperformance by counterparties. 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 forward interest rates at period end, multiplied by the total notional value.

The Company has no financial assets that are measured at fair value on a nonrecurring basis at September 30, 2015.

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 cost, 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, through a discounted cash flow analysis using interest rates for

12


comparable debt over the weighted remaining 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):
 
September 30,
2015
 
December 31,
2014
Carrying amount
$
540

 
$
614

Fair value
575

 
666


NOTE 5. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals on the consolidated balance sheets (in millions):
 
September 30,
2015
 
December 31,
2014
Current Liabilities:
 
 
 
Other accrued liabilities
$
368

 
$
343

Other Liabilities and Credits:
 
 
 
Deferred revenue
410

 
367

Other liabilities
20

 
20

Total
$
798

 
$
730

 
Alaska's Mileage Plan revenue included in the consolidated statements of operations (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Passenger revenues
$
66

 
$
62

 
$
199

 
$
180

Other - net revenues
85

 
77

 
244

 
223

Total
$
151

 
$
139

 
$
443

 
$
403


NOTE 6. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
September 30,
2015
 
December 31,
2014
Fixed-rate notes payable due through 2024
$
540

 
$
614

Variable-rate notes payable due through 2025
170

 
189

Total debt
710

 
803

Less current portion
117

 
117

Long-term debt, less current portion
$
593

 
$
686

 
 
 
 
Weighted-average fixed-interest rate
5.7
%
 
5.7
%
Weighted-average variable-interest rate
1.8
%
 
1.6
%

During the nine months ended September 30, 2015, the Company made debt payments of $93 million.


13


At September 30, 2015, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2015
$
24

2016
115

2017
121

2018
151

2019
114

Thereafter
185

Total
$
710

 
Bank Lines of Credit
 
The Company has two $100 million variable rate credit facilities, with interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in September 2017, is secured by aircraft. The other $100 million facility, which expires in March 2017, is 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 September 30, 2015.

On October 2, 2015, the Company entered into a $52 million credit facility. The facility is secured with two aircraft in place of restricted cash.

NOTE 7. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized in the consolidated statements of operations (in millions): 
 
Three Months Ended September 30,
 
Qualified
 
Postretirement Medical
 
2015
 
2014
 
2015
 
2014
Service cost
$
11

 
$
8

 
$
1

 
$
1

Interest cost
21

 
21

 
—

 
1

Expected return on assets
(31
)
 
(30
)
 
—

 
—

Amortization of prior service cost
(1
)
 
—

 
—

 
—

Recognized actuarial loss (gain)
7

 
3

 
(3
)
 
(1
)
Total
$
7

 
$
2

 
$
(2
)
 
$
1


Net periodic benefit costs recognized in the consolidated statements of operations (in millions): 
 
Nine Months Ended September 30,
 
Qualified
 
Postretirement Medical
 
2015
 
2014
 
2015
 
2014
Service cost
$
31

 
$
24

 
$
2

 
$
2

Interest cost
63

 
61

 
2

 
3

Expected return on assets
(92
)
 
(88
)
 
—

 
—

Amortization of prior service cost
(1
)
 
(1
)
 
—

 
—

Recognized actuarial loss (gain)
20

 
10

 
(8
)
 
(2
)
Total
$
21

 
$
6

 
$
(4
)
 
$
3



14


NOTE 8. COMMITMENTS

Future minimum fixed payments for commitments (in millions):
September 30, 2015
Aircraft Commitments
 
Capacity Purchase Agreements (CPA)
 
Aircraft Leases(a)
 
Facility Leases
Remainder of 2015
$
51

 
$
16

 
$
13

 
$
25

2016
601

 
67

 
112

 
98

2017
544

 
58

 
103

 
93

2018
428

 
60

 
98

 
43

2019
372

 
64

 
90

 
41

Thereafter
650

 
623

 
548

 
209

Total
$
2,646

 
$
888

 
$
964

 
$
509

(a)  
Includes embedded leases under the CPA with SkyWest.

Aircraft Commitments
 
As of September 30, 2015, the Company has purchase commitments for 71 B737 aircraft (34 737-900ER aircraft and 37 737 MAX aircraft) and two Q400 aircraft, with deliveries in 2015 through 2022. In addition, the Company has options to purchase 46 B737 aircraft and five Q400 aircraft.

Capacity Purchase Agreements (CPAs)
 
At September 30, 2015, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, for which all intercompany transactions are eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest Airlines, Inc. (SkyWest) to fly certain routes and Peninsula Airways, Inc. (PenAir) to fly one route 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 those due to Horizon) are based on contractually required 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.

During the second quarter Alaska signed an amendment to the CPA with SkyWest to remove the eight CRJ-700 aircraft out of regional operations and replace them with eight E175 aircraft. Six of these CRJ-700 aircraft are leased by the Company and two of the aircraft are owned by the Company. The E175 aircraft will be introduced into service throughout 2016, at which time the CRJ-700 aircraft will be removed from service. The CPA with SkyWest is a service contract that, in accordance with GAAP, includes embedded leases related to the aircraft operated under the agreement.

Lease Commitments

At September 30, 2015, the Company had lease contracts for 27 B737 aircraft, 15 Q400 aircraft, 6 CRJ-700 aircraft (operated by SkyWest), and 8 CRJ-700 aircraft that are subleased and operated by another carrier (i.e. not in the Company's fleet). In addition, the Company has 15 E175 aircraft under the CPA with SkyWest, 3 of which are included in the fleet as of September 30, 2015. All lease contracts have remaining noncancelable lease terms ranging from 2015 to 2028. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with 2018 delivery dates.

In addition, the Company has also contracted for eight E175 regional aircraft that will enter service in 2017.

The majority of airport and terminal facilities are also leased. Rent expense for aircraft and facility leases was $77 million and $74 million for the three months ended September 30, 2015 and 2014, respectively. Rent expense for aircraft and facility leases was $217 million and $215 million for the nine months ended September 30, 2015 and 2014, respectively.


15


NOTE 9. SHAREHOLDERS' EQUITY

Dividends

During the three months ended September 30, 2015, the Company declared and paid cash dividends of $0.20 per share, or $26 million. During the nine months ended September 30, 2015, the Company declared and paid cash dividends of $0.60 per share, or $78 million.

Common Stock Repurchase

In September 2012, the Board of Directors authorized a $250 million share repurchase program, which was completed in July 2014. In May 2014, the Board of Directors authorized a $650 million share repurchase program, which was completed in October 2015. In August 2015, the Board of Directors authorized a $1 billion share repurchase program, which began in October 2015.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
2014 Repurchase Program - $650 million 
1,588,251

 
$
119

 
3,438,723

 
$
159

 
5,649,805

 
$
381

 
3,438,723

 
$
159

2012 Repurchase Program - $250 million
—

 
$
—

 
5,268

 
$
—

 
—

 
$
—

 
1,819,304

 
$
83

Total
1,588,251

 
$
119

 
3,443,991

 
$
159

 
5,649,805

 
$
381

 
5,258,027

 
$
242



Accumulated Other Comprehensive Loss
 
Components of accumulated other comprehensive income (loss), net of tax (in millions):
 
September 30,
2015
 
December 31,
2014
Marketable securities
$
1

 
$
—

Employee benefit plans
(291
)
 
(298
)
Interest rate derivatives
(13
)
 
(12
)
Total
$
(303
)
 
$
(310
)

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of 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 and nine months ended September 30, 2015 and 2014, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 10. OPERATING SEGMENT INFORMATION
 
Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. Horizon sells 100% of its capacity to Alaska under a CPA, for which all intercompany transactions are eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest to fly certain routes and PenAir to fly one route in the state of Alaska. The Company attributes revenue between Mainline and Regional based on the coupon fare in effect on the date of issuance relative to the origin and destination of each flight segment. To manage the two operating airlines and the revenues and expenses associated with the CPAs, management views the business in three operating segments.
Alaska Mainline - Flying Boeing 737 jets and all associated revenues and costs.

16


Alaska Regional - Alaska's CPAs with Horizon, SkyWest and PenAir. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective CPAs. Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska on behalf of the regional operations.
Horizon - Horizon operates turboprop Q400 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 reconciliation to consolidated GAAP results. Operating segment information is as follows (in millions):
 
Three Months Ended September 30, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,057

 
$
—

 
$
—

 
$
—

 
$
1,057

 
$
—

 
$
1,057

Regional
—

 
240

 
—

 
—

 
240

 
—

 
240

Total passenger revenues
1,057

 
240

 
—

 
—

 
1,297

 
—

 
1,297

CPA revenues
—

 
—

 
105

 
(105
)
 
—

 
—

 
—

Freight and mail
29

 
1

 
—

 
—

 
30

 
—

 
30

Other - net
167

 
20

 
1

 
—

 
188

 


 
188

Total operating revenues
1,253

 
261

 
106

 
(105
)
 
1,515

 
—

 
1,515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
667

 
181

 
93

 
(104
)
 
837

 
—

 
837

Economic fuel
205

 
35

 
—

 
—

 
240

 
5

 
245

Total operating expenses
872

 
216

 
93

 
(104
)
 
1,077

 
5

 
1,082

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
5

 
—

 
—

 
—

 
5

 
—

 
5

Interest expense
(7
)
 
—

 
(3
)
 
—

 
(10
)
 
—

 
(10
)
Other
7

 
—

 
—

 
2

 
9

 
—

 
9

 
5

 
—

 
(3
)
 
2

 
4

 
—

 
4

Income before income tax
$
386

 
$
45

 
$
10

 
$
1

 
$
442

 
$
(5
)
 
$
437


17


 
Three Months Ended September 30, 2014
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,030

 
$
—

 
$
—

 
$
—

 
$
1,030

 
$
—

 
$
1,030

Regional
—

 
219

 
—

 
—

 
219

 
—

 
219

Total passenger revenues
1,030

 
219

 
—

 
—

 
1,249

 
—

 
1,249

CPA revenues
—

 
—

 
99

 
(99
)
 
—

 
—

 
—

Freight and mail
30

 
2

 
—

 
—

 
32

 
—

 
32

Other - net
161

 
22

 
1

 
—

 
184

 
—

 
184

Total operating revenues
1,221

 
243

 
100

 
(99
)
 
1,465

 
—

 
1,465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
605

 
162

 
85

 
(97
)
 
755

 
—

 
755

Economic fuel
338

 
52

 
—

 
—

 
390

 
4

 
394

Total operating expenses
943

 
214

 
85

 
(97
)
 
1,145

 
4

 
1,149

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
5

 
—

 
—

 
—

 
5

 
—

 
5

Interest expense
(8
)
 
—

 
(4
)
 
—

 
(12
)
 
—

 
(12
)
Other
7

 
—

 
—

 
—

 
7

 
—

 
7

 
4

 
—

 
(4
)
 
—

 
—

 
—

 
—

Income before income tax
$
282

 
$
29

 
$
11

 
$
(2
)
 
$
320

 
$
(4
)
 
$
316


 
Nine Months Ended September 30, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
2,977

 
—

 
—

 
—

 
2,977

 
—

 
2,977

Regional
—

 
638

 
—

 
—

 
638

 
—

 
638

Total passenger revenues
2,977

 
638

 
—

 
—

 
3,615

 
—

 
3,615

CPA revenues
—

 
—

 
303

 
(303
)
 
—

 
—

 
—

Freight and mail
79

 
4

 
—

 
—

 
83

 
—

 
83

Other-net
465

 
55

 
3

 


 
523

 
—

 
523

Total operating revenues
3,521

 
697

 
306

 
(303
)
 
4,221

 
—

 
4,221

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,951

 
514

 
274

 
(302
)
 
2,437

 
—

 
2,437

Economic fuel
641

 
101

 
—

 
—

 
742

 
(1
)
 
741

Total operating expenses
2,592

 
615

 
274

 
(302
)
 
3,179

 
(1
)
 
3,178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
15

 
—

 
—

 
1

 
16

 
—

 
16

Interest expense
(21
)
 
—

 
(8
)
 
(3
)
 
(32
)
 
—

 
(32
)
Other
21

 
—

 
—

 
5

 
26

 
—

 
26

 
15

 
—

 
(8
)
 
3

 
10

 
—

 
10

Income before income tax
944

 
82

 
24

 
2

 
1,052

 
1

 
1,053


18


 
Nine Months Ended September 30, 2014
 
Alaska