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 September 30, 1997.
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 (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7040
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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes. No.
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 14,746,611 common shares, par value $1.00,
outstanding at September 30, 1997.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Air Group, Inc. (the Company or Air
Group) unaudited financial statements: (i) consolidated balance sheets as
of September 30, 1997 and December 31, 1996; (ii) consolidated statements
of income for the quarters and nine months ended September 30, 1997 and
1996; (iii) consolidated statement of shareholders' equity for the nine
months ended September 30, 1997; and, (iv) consolidated statements of cash
flows for the nine months ended September 30, 1997 and 1996. Also attached
are the accompanying notes to the Company's consolidated financial
statements that have changed significantly during the nine months ended
September 30, 1997. These statements, which should be read in conjunction
with the financial statements in the Company's annual report on Form 10-K
for the year ended December 31, 1996, include all adjustments that are, in
the opinion of management, necessary for a fair presentation of the results
for the interim periods. The adjustments made were of a normal recurring
nature.
Air Group is a holding company incorporated in Delaware in 1985. Its
principal subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air
Industries, Inc. (Horizon).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Third Quarter 1997 Compared with Third Quarter 1996
The consolidated net income for the third quarter of 1997 was $42.2
million, or $2.85 per share (primary) and $1.95 per share (fully diluted),
compared with net income of $32.8 million, or $2.25 per share (primary) and
$1.53 per share (fully diluted) in 1996. Consolidated operating income for
the third quarter of 1997 was $76.3 million compared to $63.0 million for
1996. Alaska's operating income increased to $69.3 million from $57.0
million for 1996, while Horizon's operating income increased to $7.0
million from $5.9 million for 1996. Airline financial and statistical data
is shown following the Air Group financial statements. A discussion of
this data follows.
Alaska Airlines Operating income increased 21.6% to $69.3 million,
resulting in a 16.5% operating margin as compared to a 14.9% margin in
1996. Operating revenue per available seat mile (ASM) increased 7.7% to
10.06 cents while operating expenses per ASM increased 5.7% to 8.40 cents.
The increase in revenue per ASM was due to a 9.0% increase in system
passenger yield, offset by a modest decrease in passenger load factor.
Most markets experienced increases in yields, including the three largest
(Southern California, Seattle-Anchorage and Northern California). The
higher load factor in 1996 was due to extremely low fares available in
certain markets during 1996.
Other-net revenues increased 6.3% primarily due to increased revenues from
Alaska's frequent flyer program.
The table below shows the major operating expense elements on a cost per
ASM basis for Alaska for the third quarters of 1996 and 1997.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 2.44 2.67 .23 9
Employee profit sharing .19 .16 (.03) NM
Contracted services .22 .26 .04 18
Aircraft fuel 1.38 1.18 (.20) (14)
Aircraft maintenance .32 .43 .11 34
Aircraft rent .88 .90 .02 2
Food and beverage service .30 .31 .01 3
Commissions .63 .72 .09 14
Other selling expenses .46 .49 .03 7
Depreciation and amortization .35 .35 -- --
Gain on sale of assets (.09) (.01) .08 NM
Landing fees and other rentals .32 .34 .02 6
Other .55 .60 .05 9
Alaska Airlines Total 7.95 8.40 .45 6
NM = Not Meaningful
Alaska's higher unit costs were primarily due to increased labor and
aircraft maintenance costs. Significant unit cost changes are discussed
below.
Employees increased 8.3% (primarily in reservations and customer service
positions) to improve on-time performance, which improved from 73% on-time
in 1996 to 78% on-time in 1997. Excluding profit sharing, average wages
and benefits per employee were up 2.8% primarily due to higher pilot wage
rates and higher health insurance costs. The net effect was that wages and
benefits expense increased more than the ASM growth, resulting in a 9%
increase in cost per ASM.
Effective for 1997, Alaska changed its profit sharing program so that
eligible employees will receive their pro rata share of 10% of Alaska's
adjusted pre-tax profits. Actual profit sharing is based on full year
results and will be calculated and paid in early 1998.
Fuel expense per ASM decreased 14%, due to a 14% decrease in the price of
fuel.
Maintenance expense per ASM increased 34% because Alaska performed more
repair work that is expensed currently and less major airframe and engine
overhaul work which is capitalized.
Commission expense per ASM increased 14%, in line with the 11% increase in
passenger revenues.
Other expense per ASM increased 9%. The increase is primarily due to
higher costs related to property taxes, flight crew hotels, employee hiring
and communications.
Horizon Air Operating income increased 18.6% to $7.0 million, resulting in
an 8.2% operating margin as compared to a 7.0% margin in 1996. Operating
revenue per ASM increased 3.0% to 22.32 cents while operating expenses per
ASM increased 1.6% to 20.47 cents.
The increase in revenue per ASM was due to a 3.0 point improvement in
system passenger load factor which was partially offset by 2.2% decrease in
passenger yield (believed to be partially due to the presence of the 10%
passenger ticket tax in 1997 compared with no tax in July and August 1996).
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon for the third quarters of 1996 and 1997.
Horizon Air Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 6.12 6.33 .21 3
Employee profit sharing .18 .16 (.02) NM
Contracted services .40 .44 .04 10
Aircraft fuel 2.29 2.08 (.21) (9)
Aircraft maintenance 2.75 3.23 .48 17
Aircraft rent 2.36 2.35 (.01) --
Food and beverage service .14 .12 (.02) (14)
Commissions 1.34 1.29 (.05) (4)
Other selling expenses 1.18 1.18 -- --
Depreciation and amortization .68 .75 .07 10
Loss on sale of assets .04 .02 (.02) NM
Landing fees and other rentals .88 .93 .05 6
Other 1.79 1.59 (.20) (11)
Horizon Air Total 20.15 20.47 .32 2
Wages and benefits per ASM increased primarily due to higher pilot wages
and higher health insurance costs. Maintenance expense per ASM increased
due to higher than normal engine repairs and costs associated with
transitioning to a simplified fleet. Other expense per ASM decreased due
to less flight crew training and personnel costs, lower insurance rates and
decreased supplies expense.
Consolidated Other Income (Expense) Non-operating expense decreased $2.6
million to $3.8 million primarily due to smaller average debt balances and
lower interest rates on variable interest rate debt.
Nine Months 1997 Compared with Nine Months 1996
The consolidated net income for the nine months ended September 30, 1997
was $57.3 million, or $3.90 per share (primary) and $2.78 per share (fully
diluted), compared with net income of $43.6 million, or $3.06 per share
(primary) and $2.22 per share (fully diluted) in 1996. Consolidated
operating income for the first nine months of 1997 was $111.8 million
compared to $97.4 million for 1996. Alaska's operating income increased to
$109.9 million from $91.0 million for 1996, while Horizon operating income
decreased to $2.6 million from $7.2 million for 1996. A discussion of
operating results for the two airlines follows.
Alaska Airlines Operating income increased 20.8% to $109.9 million,
resulting in a 10.0% operating margin as compared to a 9.1% margin in 1996.
Operating revenue per ASM increased 7.6% to 9.47 cents while operating
expenses per ASM increased 6.4% to 8.53 cents.
The increase in revenue per ASM was due to a 2.2 point improvement in
system passenger load factor combined with a 5.1% increase in system
passenger yield.
Unit costs increased 6.4% due to a 9.0% increase in employees, increased
pilot wage rates, $2.1 million more profit sharing expense, higher ground
handling and security costs, increased aircraft maintenance expense and
costs associated with higher load factors.
Horizon Air Operating revenues decreased 2.4% primarily due to a 2.9%
decrease in passenger yield. The yield decline is believed to be largely
due to the presence of the 10% passenger ticket tax during March to August
1997 compared with only one month of tax in the 1996 period.
Operating expenses decreased 0.5% on a capacity decrease of 2.4%. Unit
costs increased primarily due to higher wage rates and increased aircraft
maintenance expense (including costs associated with transitioning to a
simplified fleet).
Consolidated Other Income (Expense) Non-operating expense decreased $8.5
million to $12.9 million for the same reasons as noted above in the third
quarter comparison.
Income Tax Expense Accounting standards require the Company to provide for
income taxes each quarter based on its estimate of the effective tax rate
for the full year. The volatility of air fares and the seasonality of the
Company's business make it very difficult to estimate full-year pretax
results. In addition, a relatively small change in pretax results can
cause a significant change in the effective tax rate due to the magnitude
of nondeductible expenses, such as goodwill amortization and employee per
diem costs. In estimating the 42.1% tax rate for the first nine months of
1997, the Company considered a variety of factors, including the U.S.
federal rate of 35%, estimates of nondeductible expenses and state income
taxes, and the 40.9% tax rate used for full year 1996. This rate is
evaluated each quarter and adjustments are made if necessary.
New Accounting Standards During March 1997, the Financial Accounting
Standards Board issued FAS 128, Earnings Per Share (EPS). The new standard
replaces "primary" and "fully diluted" EPS amounts with "basic" and
"diluted" EPS amounts, respectively. The purpose of the change is to
simplify the EPS calculations and provide consistency with international
accounting standards. Had FAS 128 been in effect during 1996, the
Company's basic EPS would have been $2.67 (versus $2.65 primary EPS) and
diluted EPS would have been $2.05 (the same as fully diluted EPS). FAS 128
is effective for fiscal years ending after December 15, 1997 and requires
restatement of prior years' earnings per share. Early adoption is not
permitted.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
Dec 31, 1996 Sept 30, 1997 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $101.8 $192.0 $90.2
Working capital (deficit) (185.6) (118.9) 66.7
Long-term debt and
capital lease obligations 404.1 411.6 7.5
Shareholders' equity 272.5 336.1 63.6
Book value per common share $18.83 $22.79 $3.96
Debt-to-equity 60%:40% 55%:45% NA
The Company's cash and marketable securities portfolio increased by $90
million during the first nine months of 1997. Operating activities
provided $227 million of cash during this period. Additional cash was
provided by the sale and leaseback of four B737-400 aircraft and eight Dash
8-200 aircraft ($199 million) and issuance of long-term debt ($28 million).
Cash was used for $317 million of capital expenditures including the
purchase of two new MD-83 aircraft, three new B737-400 aircraft, a
previously leased B737-200C aircraft, eight new Dash 8-200 aircraft, flight
equipment deposits and airframe and engine overhauls, net repayment of
short-term borrowings ($47 million) and the repayment of debt ($16
million).
In June 1997, Standard & Poors revised its outlook on Air Group and Alaska
to positive from stable, citing a stabilized competitive position and
improving financial profile.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 1991, Alaska gave notice of termination of its code sharing and
frequent flyer relationship with MarkAir, an airline based in the state of
Alaska. Both companies have filed suit against one another in connection
with that termination alleging breach of contract and other causes of
action under state law. In June 1992, MarkAir filed for protection under
Chapter 11 of the U.S. Bankruptcy Code and ceased operations in 1995. In
June 1997 MarkAir claimed damages of $57 million (later revised to $70
million) in connection with Alaska's actions. If MarkAir were to prevail,
the after-tax effect would be to reduce shareholders' equity by
approximately $41 million or 12%. However, the Company believes that it
has adequate defenses and is vigorously defending itself against the
lawsuit.
ITEM 5. Other Information
The U.S. 10% passenger ticket tax, the 6.25% cargo waybill tax and the $6
per passenger international departure tax expired on December 31, 1996, and
were all reinstated for the period March 7, 1997 through September 30,
1997. As part of the Taxpayer Relief Act, the cargo waybill tax was
extended in its current form and the other taxes in revised forms through
September 30, 2007. The passenger ticket tax was replaced with a new
system that combines a percentage tax with a per passenger segment fee.
For sales and travel beginning October 1, 1997, the ticket tax is 9% plus
$1 per segment. The percentage tax is scheduled to decrease over time and
the segment fee is scheduled to increase. The $6 international departure
tax has increased to $12 and a new $12 international arrival tax has been
added. However, the Act retains the $6 rate for travel between Alaska and
the U.S. mainland. This tax and the international taxes will be indexed to
the CPI beginning January 1, 1999.
The Taxpayer Relief Act also included these items that will affect the
Company and the airline industry: (a) a new tax of 7.5% on payments to air
carriers for the sale of miles in frequent flyer programs; (b) a phased-in
increase from 50% to 80% for the deductible percentage of per diems paid to
flight crews; and (c) faster cost recovery for alternative minimum tax
purposes of aircraft purchased in 1999 and later years.
In September 1997, the union contract governing approximately 1,800
Mechanic, Rampservice and related classifications at Alaska Airlines became
amendable. The union and Alaska have begun negotiating a new contract.
During October 1997, the Airline Pilots Association and Alaska agreed on a
new 5 and 1/2 year contract (amendable in May 2002) covering Alaska's 1,075
pilots.
During the third quarter of 1997, Horizon's pilots voted to be represented
by the Teamsters union. The Association of Flight Attendants and Horizon
are continuing mediated negotiations for a new contract to cover
approximately 320 flight attendants. Horizon's 29 dispatchers have
ratified a new contract that is amendable in May 2002.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation of per-share earnings.
Exhibit 27 - Financial data schedule.
(b) No reports on Form 8-K were filed during the third quarter of 1997.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ALASKA AIR GROUP, INC.
Registrant
Date: October 27, 1997
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Finance
(Principal Financial Officer)
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
Dec. 31, Sept. 30,
(In Millions) 1996 1997
Current Assets
Cash and cash equivalents $49.4 $98.7
Marketable securities 52.4 93.3
Receivables - net 69.7 88.1
Inventories and supplies 47.8 46.0
Prepaid expenses and other assets 80.9 62.8
Total Current Assets 300.2 388.9
Property and Equipment
Flight equipment 815.9 871.3
Other property and equipment 270.4 295.5
Deposits for future flight equipment 84.5 90.9
1,170.8 1,257.7
Less accumulated depreciation and amortization 326.3 360.4
844.5 897.3
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 25.5 27.0
18.9 17.4
Total Property and Equipment - Net 863.4 914.7
Intangible Assets - Subsidiaries 61.6 60.1
Other Assets 86.2 87.0
Total Assets $1,311.4 $1,450.7
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
Dec. 31, Sept. 30,
(In Millions) 1996 1997
Current Liabilities
Accounts payable $65.4 $83.0
Accrued aircraft rent 52.8 57.0
Accrued wages, vacation and payroll taxes 51.5 61.3
Other accrued liabilities 82.0 93.8
Short-term borrowings
(Interest rate: 1996 - 5.6%) 47.0 -
Air traffic liability 163.0 183.9
Current portion of long-term debt and
capital lease obligations 24.1 28.8
Total Current Liabilities 485.8 507.8
Long-Term Debt and Capital Lease Obligations 404.1 411.6
Other Liabilities and Credits
Deferred income taxes 49.5 84.1
Deferred income 18.1 20.2
Other liabilities 81.4 90.9
149.0 195.2
Shareholders' Equity
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1996 - 17,223,281 shares
1997 - 17,494,631 shares 17.2 17.5
Capital in excess of par value 166.8 172.2
Treasury stock, at cost: 1996 - 2,748,550 shares
1997 - 2,748,020 shares (62.6) (62.6)
Deferred compensation (2.7) (2.1)
Retained earnings 153.8 211.1
272.5 336.1
Total Liabilities and Shareholders' Equity $1,311.4 $1,450.7
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Three Months Ended September 30
(In Millions except Per share Amounts) 1996 1997
Operating Revenues
Passenger $423.0 $457.2
Freight and mail 25.4 26.0
Other - net 16.5 18.0
Total Operating Revenues 464.9 501.2
Operating Expenses
Wages and benefits 132.4 143.1
Contracted services 10.6 12.7
Aircraft fuel 65.5 57.3
Aircraft maintenance 23.6 30.1
Aircraft rent 45.3 46.6
Food and beverage service 12.8 13.2
Commissions 29.0 30.7
Other selling expenses 23.4 24.8
Depreciation and amortization 17.0 17.3
Gain on sale of assets (3.6) (0.4)
Landing fees and other rentals 16.1 17.6
Other 29.8 31.9
Total Operating Expenses 401.9 424.9
Operating Income 63.0 76.3
Other Income (Expense)
Interest income 2.6 3.0
Interest expense (9.3) (8.6)
Interest capitalized 0.2 1.3
Other - net 0.1 0.5
(6.4) (3.8)
Income before income tax 56.6 72.5
Income tax expense 23.8 30.3
Net Income $32.8 $42.2
Primary Earnings Per Share $2.25 $2.85
Fully Diluted Earnings Per Share $1.53 $1.95
Shares used for computation:
Primary 14.6 14.8
Fully diluted 22.7 22.6
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Nine Months Ended September 30
(In Millions except Per share Amounts) 1996 1997
Operating Revenues
Passenger $1,109.8 $1,191.9
Freight and mail 71.7 70.7
Other - net 51.5 54.0
Total Operating Revenues 1,233.0 1,316.6
Operating Expenses
Wages and benefits 364.2 398.5
Contracted services 30.9 35.5
Aircraft fuel 173.3 174.8
Aircraft maintenance 71.7 82.1
Aircraft rent 134.7 136.2
Food and beverage service 35.4 36.2
Commissions 78.9 82.6
Other selling expenses 63.0 65.1
Depreciation and amortization 51.0 50.7
Gain on sale of assets (2.8) (0.9)
Landing fees and other rentals 46.8 50.3
Other 88.5 93.7
Total Operating Expenses 1,135.6 1,204.8
Operating Income 97.4 111.8
Other Income (Expense)
Interest income 8.1 7.0
Interest expense (30.2) (25.6)
Interest capitalized 0.2 3.6
Other - net 0.5 2.1
(21.4) (12.9)
Income before income tax 76.0 98.9
Income tax expense 32.4 41.6
Net Income $43.6 $57.3
Primary Earnings Per Share $3.06 $3.90
Fully Diluted Earnings Per Share $2.22 $2.78
Shares used for computation:
Primary 14.3 14.7
Fully diluted 22.4 22.6
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
Capital in Treasury Deferred
Common Excess of Stock Compen- Retained
(In Millions) Stock Par Value at Cost sation Earnings Total
Balances at December 31, 1996 $17.2 $166.8 $(62.6) $(2.7) $153.8 $272.5
Net income for the nine months
ended September 30, 1997 57.3 57.3
Stock issued under stock plans 0.3 5.4 5.7
Treasury stock activity:
Purchase (2,084 shares) (0.1) (0.1)
Sale (2,614 shares) 0.1 0.1
Employee Stock Ownership Plan
shares allocated 0.6 0.6
Balances at September 30, 1997 $17.5 $172.2 $(62.6) $(2.1) $211.1 $336.1
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Nine Months Ended September 30 (In Millions) 1996 1997
Cash flows from operating activities:
Net income $43.6 $57.3
Adjustments to reconcile net income to cash:
Depreciation and amortization 51.0 50.7
Amortization of airframe and engine overhauls 24.9 26.3
Gain on disposition of assets and debt retirement (2.8) (0.9)
Increase in deferred income taxes 23.4 34.6
Decrease (increase) in accounts receivable 10.7 (18.4)
Increase (decrease) in other current assets (1.0) 20.0
Increase in air traffic liability 43.5 21.0
Increase in other current liabilities 27.6 43.4
Other-net 1.0 (6.8)
Net cash provided by operating activities 221.9 227.2
Cash flows from investing activities:
Proceeds from disposition of assets 23.6 2.5
Purchases of marketable securities (45.6) (236.2)
Sales and maturities of marketable securities 75.4 195.2
Flight equipment deposits returned 1.1 7.9
Additions to flight equipment deposits (50.9) (47.0)
Additions to property and equipment (160.8) (269.8)
Restricted deposits and other 1.2 (0.7)
Net cash used in investing activities (156.0) (348.1)
Cash flows from financing activities:
Proceeds from short-term borrowings - 56.4
Repayment of short-term borrowings (65.9) (103.4)
Proceeds from sale and leaseback transactions 85.6 199.4
Proceeds from issuance of long-term debt - 28.0
Long-term debt and capital lease payments (80.5) (15.9)
Proceeds from issuance of common stock 10.1 5.7
Proceeds from sale of treasury stock 10.9 -
Net cash used in financing activities (39.8) 170.2
Net increase in cash and cash equivalents 26.1 49.3
Cash and cash equivalents at beginning of period 25.8 49.4
Cash and cash equivalents at end of period $51.9 $98.7
Supplemental disclosure of cash paid during the period for:
Interest (net of amount capitalized) $33.1 $19.7
Income taxes 6.6 1.5
Noncash investing and financing activities None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Alaska Air Group, Inc.
Note 1. Summary of Significant Policies (See Note 1 to Consolidated
Financial Statements at December 31, 1996)
Basis of presentation
Effective with the second quarter 1997, three new line items have been
added to the statement of income to provide more details of operating
expenses. Contracted services includes the expenses for aircraft ground
handling, security, temporary employees and similar outside services.
Other selling expenses includes computerized reservations systems (CRS)
charges, credit card commissions, advertising and promotional costs.
Property, Equipment and Depreciation
Effective January 1, 1997, the estimated salvage value of B737-400
flight equipment was changed to 10% from 20%. The new estimate was
adopted to recognize the lower expected salvage values for this aircraft
type. The annual effect of the change will be to increase depreciation
expense $0.5 million and decrease net income $0.3 million ($.02 per
share).
Note 2. Commitments (See Note 5 to Consolidated Financial Statements at
December 31, 1996)
During the first nine months of 1997, Alaska's lease commitments
increased approximately $200 million due to the sale and leaseback of
four B737-400 aircraft under 18-year operating leases.
During the first nine months of 1997, Horizon's lease commitments
increased approximately $100 million due to the sale and leaseback of
eight Dash 8-200 aircraft under 15-year operating leases.
Alaska Airlines Financial and Statistical Data
Quarter Ended September 30 Nine Months Ended Sept. 30
Financial Data (in millions): 1996 1997 % Change 1996 1997 % Change
Operating Revenues:
Passenger $344.3 $380.5 10.5 $892.1 $984.0 10.3
Freight and mail 22.6 22.9 1.3 63.4 62.3 (1.7)
Other - net 15.9 16.9 6.3 49.3 51.6 4.7
Total Operating Revenues 382.8 420.3 9.8 1,004.8 1,097.9 9.3
Operating Expenses:
Wages and benefits 100.4 111.8 11.4 286.7 317.7 10.8
Employee profit sharing 7.6 6.7 NM 7.6 9.7 NM
Contracted services 9.1 11.0 20.9 26.7 30.9 15.7
Aircraft fuel 56.7 49.4 (12.9) 148.9 150.4 1.0
Aircraft maintenance 12.9 17.8 38.0 40.8 48.8 19.6
Aircraft rent 36.2 37.7 4.1 108.4 110.2 1.7
Food and beverage service 12.2 12.7 4.1 33.6 34.9 3.9
Commissions 25.6 30.1 17.6 69.0 77.9 12.9
Other selling expenses 18.9 20.3 7.4 49.8 52.2 4.8
Depreciation and amortization 14.3 14.4 0.7 42.4 42.1 (0.7)
Gain on sale of assets (3.8) (0.4) NM (3.6) (0.3) NM
Landing fees and other rentals 13.0 14.1 8.5 37.5 40.4 7.7
Other 22.7 25.4 11.9 66.0 73.1 10.8
Total Operating Expenses 325.8 351.0 7.7 913.8 988.0 8.1
Operating Income 57.0 69.3 21.6 91.0 109.9 20.8
Interest income 2.7 3.3 8.4 8.4
Interest expense (7.1) (6.4) (23.6) (19.1)
Interest capitalized 0.1 0.8 0.1 2.4
Other - net 0.2 0.6 0.7 2.1
(4.1) (1.7) (14.4) (6.2)
Income Before Income Tax $52.9 $67.6 $76.6 $103.7
Operating Statistics:
Revenue passengers (000) 3,420 3,441 0.6 9,001 9,325 3.6
RPMs (000,000) 2,893 2,933 1.4 7,524 7,896 4.9
ASMs (000,000) 4,100 4,179 1.9 11,409 11,589 1.6
Passenger load factor 70.6% 70.2% (0.4)pts 65.9% 68.1% 2.2 pts
Breakeven load factor 59.7% 56.6% (3.1)pts 60.4% 60.5% 0.1 pts
Yield per passenger mile 11.90c 12.97c 9.0 11.86c 12.46c 5.1
Operating revenue per ASM 9.34c 10.06c 7.7 8.81c 9.47c 7.6
Operating expenses per ASM 7.95c 8.40c 5.7 8.01c 8.53c 6.4
Fuel cost per gallon 77.6c 66.9c (13.8) 73.5c 72.8c (0.9)
Fuel gallons (000,000) 73.1 73.9 1.1 202.7 206.4 1.8
Average number of employees 7,877 8,534 8.3 7,562 8,240 9.0
Aircraft utilization (block hours) 11.9 11.9 0.0 11.4 11.5 0.9
Operating fleet at period-end 75 78 4.0 75 78 4.0
NM = Not Meaningful
c=cents
Horizon Air Financial and Statistical Data
Quarter Ended September 30 Nine Months Ended Sept. 30
% %
Financial Data (in millions): 1996 1997 Change 1996 1997 Change
Operating Revenues:
Passenger $80.5 $81.0 0.6 $222.5 $216.8 (2.6)
Freight and mail 2.8 3.0 7.1 8.4 8.5 1.2
Other - net 0.6 0.9 50.0 2.1 2.0 (4.8)
Total Operating Revenues 83.9 84.9 1.2 233.0 227.3 (2.4)
Operating Expenses:
Wages and benefits 23.7 24.1 1.7 69.2 70.5 1.9
Employee profit sharing 0.7 0.6 NM 0.7 0.6 NM
Contracted services 1.5 1.7 13.3 4.2 4.6 9.5
Aircraft fuel 8.9 7.9 (11.2) 24.4 24.4 0.0
Aircraft maintenance 10.7 12.3 15.0 30.9 33.3 7.8
Aircraft rent 9.1 8.9 (2.2) 26.3 26.0 (1.1)
Food and beverage service 0.5 0.5 0.0 1.8 1.4 (22.2)
Commissions 5.2 4.9 (5.8) 14.8 13.7 (7.4)
Other selling expenses 4.6 4.5 (2.2) 13.2 12.9 (2.3)
Depreciation and amortization 2.6 2.9 11.5 8.5 8.5 0.0
Loss (gain) on sale of assets 0.2 0.1 NM 0.8 (0.6) NM
Landing fees and other rentals 3.4 3.5 2.9 9.7 10.0 3.1
Other 6.9 6.0 (13.0) 21.3 19.4 (8.9)
Total Operating Expenses 78.0 77.9 (0.1) 225.8 224.7 (0.5)
Operating Income 5.9 7.0 18.6 7.2 2.6 (63.9)
Interest income 0.0 0.1 0.1 0.1
Interest expense (0.2) (0.4) (0.6) (1.5)
Interest capitalized 0.1 0.4 0.1 1.2
Other - net 0.3 0.1 0.2 0.3
0.2 0.2 (0.2) 0.1
Income Before Income Tax $6.1 $7.2 $7.0 $2.7
Operating Statistics:
Revenue passengers (000) 1,022 1,010 (1.1) 2,849 2,747 (3.6)
RPMs (000,000) 239 246 2.9 656 658 0.3
ASMs (000,000) 387 380 (1.7) 1,097 1,070 (2.4)
Passenger load factor 61.7% 64.7% 3.0 pts 59.8% 61.5% 1.7 pts
Breakeven load factor 56.5% 58.3% 1.8 pts 57.5% 60.9% 3.4 pts
Yield per passenger mile 33.69c 32.96c (2.2) 33.92c 32.94c (2.9)
Operating revenue per ASM 21.68c 22.32c 3.0 21.25c 21.24c (0.0)
Operating expenses per ASM 20.15c 20.47c 1.6 20.59c 21.00c 2.0
Fuel cost per gallon 79.6c 71.8c (9.9) 77.0c 78.0c 1.3
Fuel gallons (000,000) 11.1 11.0 (0.9) 31.7 31.3 (1.3)
Average number of employees 2,947 2,735 (7.2) 2,873 2,750 (4.3)
Aircraft utilization (block hours) 8.0 7.5 (6.3) 7.8 7.1 (9.0)
Operating fleet at period-end 62 57 (8.1) 62 57 (8.1)
NM = Not Meaningful
c=cents
Alaska Air Group, Inc. EXHIBIT 11
Computation of Earnings Per Common Share
(In thousands, except per share)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
PRIMARY -
Net income $42,200 $32,816 $57,300 $43,611
Average number of shares outstanding 14,671 14,467 14,580 14,165
Assumed exercise of stock options reduced
by the number of shares purchased with
the proceeds from exercise of such options 128 121 123 110
Average shares as adjusted 14,799 14,588 14,703 14,275
Primary earnings per common share $2.85 $2.25 $3.90 $3.06
FULLY DILUTED -
Net income $42,200 $32,816 $57,300 $43,611
After tax interest on convertible debt 1,910 2,038 5,667 6,070
Income applicable to common shares $44,110 $34,854 $62,967 $49,681
Average number of shares outstanding 14,671 14,467 14,580 14,165
Assumed exercise of stock options 217 121 302 110
Assumed conversion of 6.5% debentures 6,151 6,151 6,151 6,151
Assumed conversion of 7.75% debentures 0 381 0 381
Assumed conversion of 6.875% debentures 1,608 1,608 1,608 1,608
Average shares as adjusted 22,647 22,728 22,641 22,415
Fully diluted earnings per common share $1.95 $1.53 $2.78 $2.22
5
1000
9-MOS
DEC-31-1997
SEP-30-1997
98700
93300
88100
0
46000
62800
1302100
387400
1450700
507800
411600
0
0
17500
318600
1450700
1316600
1316600
1204800
1204800
0
0
25600
98900
41600
57300
0
0
0
57300
3.90
2.78
