UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 14,558,779 common shares, par value $1.00,
outstanding at March 31, 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 March 31, 1997 and December 31, 1996; (ii) consolidated statements of
income for the three months ended March 31, 1997 and 1996; (iii)
consolidated statement of shareholders' equity for the three months ended
March 31, 1997; and, (iv) consolidated statements of cash flows for the
three months ended March 31, 1997 and 1996. Also attached are the
accompanying notes to the Company's consolidated financial statements that
have changed significantly during the three months ended March 31, 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
First Quarter 1997 Compared with First Quarter 1996
The consolidated net loss for the first quarter of 1997 was $5.7 million,
or $0.39 per share, compared with a net loss of $7.2 million, or $0.52 per
share, in 1996. The operating loss for the first quarter of 1997 was $5.4
million compared to an operating loss of $5.2 million for 1996. Alaska's
operating loss narrowed to $1.5 million from $3.4 million loss for 1996,
while Horizon's operating loss widened to $3.7 million from $1.5 million
loss for 1996. Airline financial and statistical data is shown following
the Air Group financial statements. A discussion of this data follows.
Alaska Airlines The operating loss decreased to $1.5 million, resulting in
a negative 0.5% operating margin as compared to a negative 1.2% margin in
1996. Operating revenue per available seat mile (ASM) increased 8.6% to
8.70 cents while operating expenses per ASM increased 7.8% to 8.74 cents.
The increase in revenue per ASM was primarily due to a 4.7 point
improvement in system passenger load factor. Essentially all markets
experienced increases in load factors. The Seattle-Anchorage market
experienced a 13.2 point increase in load factor. The increase in revenue
per ASM was also favorably impacted by a 2.8% increase in system passenger
yield. Increased yields in the Pacific Northwest to the Bay Area and to
Southern California markets were partially offset by lower yields in the
Seattle-Anchorage market.
Freight and mail revenues decreased 7% due to a reduction in military
charter work in Alaska and lower mail volumes. Other-net revenues
increased 1.2% due to increased revenues from travel partners in Alaska's
frequent flyer program, offset by lower maintenance service revenue.
The table below shows the major operating expense elements on a cost per
ASM basis for Alaska for the first quarters of 1996 and 1997.
Alaska Airlines Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 2.61 2.77 .16 6
Aircraft fuel 1.22 1.50 .28 23
Aircraft maintenance .39 .41 .02 5
Aircraft rent 1.02 1.02 - -
Commissions .56 .63 .07 13
Depreciation & amortization .41 .38 (.03) (7)
Landing fees and other rentals .34 .36 .02 6
Other 1.56 1.67 .11 7
Alaska Airlines Total 8.11 8.74 .63 8
Alaska's higher unit costs were primarily due to higher fuel prices and
costs associated with higher load factors. Significant unit cost changes
are discussed below.
Higher load factors resulted in revenue passengers increasing by 7.5% while
ASMs grew only 2.3%. Employees increased 8.6% (primarily in reservation
and customer service positions) to service the added workload. The net
effect was that wages and benefits expense increased more than the ASM
growth, resulting in a 6% increase in cost per ASM.
Fuel expense per ASM increased 23%, due to a 21% increase in the price of
fuel and lower fuel efficiency due to heavier passenger loads and shorter
average aircraft stage length.
Maintenance expense per ASM increased 5% 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 13%, in line with the 13% increase in
passenger revenues.
Depreciation and amortization expense per ASM decreased 7% primarily due to
the sale (and leaseback) of two aircraft in late March 1996 and a 2%
increase in aircraft utilization.
Other expense per ASM increased 7% primarily due to higher costs related to
higher loads, such as booking fees, communications charges, credit card
commissions and food expense.
Horizon Air The operating loss increased to $3.7 million, resulting in a
negative 5.2% operating margin as compared to a negative 2.1% margin in
1996. Operating revenue per ASM increased 0.6% to 20.60 cents while
operating expenses per ASM increased 3.7% to 21.66 cents.
The increase in revenue per ASM was due to a small increase in passenger
yield while the system passenger load factor remained constant.
Freight and mail revenues decreased 4% due to decreased capacity.
The table below shows the major operating expense elements on a cost per
ASM basis for Horizon for the first quarters of 1996 and 1997.
Horizon Air Operating Expenses Per ASM (In Cents)
1996 1997 Change % Change
Wages and benefits 6.42 6.76 .34 5
Aircraft fuel 2.16 2.62 .46 21
Aircraft maintenance 2.81 3.00 .19 7
Aircraft rent 2.43 2.48 .05 2
Commissions 1.37 1.30 (.07) (5)
Depreciation & amortization .80 .85 .05 6
Loss (gain) on sale of assets .17 (.20) (.37) NM
Landing fees and other rentals .87 .94 .07 8
Other 3.86 3.91 .05 1
Horizon Air Total 20.89 21.66 .77 4
NM = Not Meaningful
Horizon's unit costs increased 4% primarily due to: (a) higher wage rates
and fringe benefits costs; (b) 19% higher fuel prices; (c) higher
maintenance expense on leased aircraft that will be returned to lessors
earlier than originally planned; and (d) one-time costs to prepare F-28-
4000 aircraft for service to replace F-28-1000 aircraft.
Consolidated Other Income (Expense) Non-operating expense decreased $3.6
million to $4.7 million primarily due to smaller average debt balances and
lower interest rates on variable debt.
Income Tax Credit 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 difficult to accurately forecast 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 43.6% tax rate for the first
quarter 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 March 31, 1997 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $ 101.8 $ 78.2 $ (23.6)
Working capital (deficit) (185.6) (218.5) (32.9)
Long-term debt
and capital lease obligations 404.1 397.3 (6.8)
Shareholders' equity 272.5 268.9 (3.6)
Book value per common share $ 18.83 $ 18.47 $ (0.36)
Debt-to-equity 60%:40% 60%:40% NA
The Company's cash and marketable securities portfolio decreased by $24
million during the first three months of 1997. Operating activities
provided $37 million of cash during this period. Cash was used for $39
million of capital expenditures including the purchase of a previously
leased B737-200C aircraft, a new Dash 8-200 aircraft, flight equipment
deposits and airframe and engine overhauls, net repayment of short-term
borrowings ($19 million) and the repayment of debt ($6 million).
The working capital deficit increased by $33 million primarily due to the
purchase of property and equipment.
Shareholders' equity decreased only $4 million in spite of a $6 million net
loss due to the issuance of $2 million of common stock under stock plans.
PART II. OTHER INFORMATION
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 effective March 7, 1997. These taxes are due to expire
on September 30, 1997.
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) A report on Form 8-K describing changes in the employee profit sharing
programs was filed on February 20, 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: May 2, 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
December 31, March 31,
(In Millions) 1996 1997
Current Assets
Cash and cash equivalents $49.4 $18.3
Marketable securities 52.4 59.9
Receivables - net 69.7 82.7
Inventories and supplies 47.8 48.3
Prepaid expenses and other assets 80.9 69.4
Total Current Assets 300.2 278.6
Property and Equipment
Flight equipment 815.9 830.8
Other property and equipment 270.4 277.7
Deposits for future flight equipment 84.5 91.1
1,170.8 1,199.6
Less accumulated depreciation and amortization 326.3 339.2
844.5 860.4
Capital leases
Flight and other equipment 44.4 44.4
Less accumulated amortization 25.5 25.9
18.9 18.5
Total Property and Equipment - Net 863.4 878.9
Intangible Assets - Subsidiaries 61.6 61.1
Other Assets 86.2 90.1
Total Assets $1,311.4 $1,308.7
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
(In Millions) 1996 1997
Current Liabilities
Accounts payable $65.4 $72.2
Accrued aircraft rent 52.8 51.9
Accrued wages, vacation and payroll taxes 51.5 46.2
Other accrued liabilities 82.0 64.8
Short-term borrowings
(Interest rate: 1996 - 5.6%; 1997 - 5.9%) 47.0 28.0
Air traffic liability 163.0 209.4
Current portion of long-term debt and
capital lease obligations 24.1 24.6
Total Current Liabilities 485.8 497.1
Long-Term Debt and Capital Lease Obligations 404.1 397.3
Other Liabilities and Credits
Deferred income taxes 49.5 44.7
Deferred income 18.1 16.8
Other liabilities 81.4 83.9
149.0 145.4
Shareholders' Equity
Common stock, $1 par value
Authorized: 50,000,000 shares
Issued: 1996 - 17,223,281 shares
1997 - 17,307,356 shares 17.2 17.3
Capital in excess of par value 166.8 168.4
Treasury stock, at cost: 1996 - 2,748,550 shares
1997 - 2,748,577 shares (62.6) (62.6)
Deferred compensation (2.8) (2.3)
Retained earnings 153.9 148.1
272.5 268.9
Total Liabilities and Shareholders' Equity $1,311.4 $1,308.7
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Three Months Ended March 31
(In Millions except Per share Amounts) 1996 1997
Operating Revenues
Passenger $312.6 $342.9
Freight and mail 21.4 20.0
Other - net 17.4 17.5
Total Operating Revenues 351.4 380.4
Operating Expenses
Wages and benefits 114.3 122.5
Aircraft fuel 50.5 62.7
Aircraft maintenance 23.5 25.2
Aircraft rent 44.1 44.9
Commissions 23.0 24.8
Depreciation and amortization 17.1 16.7
Loss (gain) on sale of assets 0.7 (0.7)
Landing fees and other rentals 15.0 15.9
Other 68.4 73.8
Total Operating Expenses 356.6 385.8
Operating Loss (5.2) (5.4)
Other Income (Expense)
Interest income 2.6 1.9
Interest expense (11.1) (8.4)
Interest capitalized 0.0 1.0
Other - net 0.2 0.8
(8.3) (4.7)
Loss before income tax (13.5) (10.1)
Income tax credit 6.3 4.4
Net Loss $(7.2) $(5.7)
Loss Per Share $(0.52) $(0.39)
Shares used for computation 13.7 14.5
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 loss for the three months
ended March 31, 1997 (5.7) (5.7)
Stock issued under stock plans 0.1 1.6 1.7
Employee Stock Ownership Plan
shares allocated 0.4 0.4
Balances at March 31, 1997 $17.3 $168.4 $(62.6) $(2.3) $148.1 $268.9
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Three Months Ended March 31 (In Millions) 1996 1997
Cash flows from operating activities:
Net loss $(7.2) $(5.7)
Adjustments to reconcile net loss to cash:
Depreciation and amortization 17.1 16.7
Amortization of airframe and engine overhauls 7.6 8.4
Loss (gain) on disposition of assets 0.7 (0.7)
Deferred income taxes (6.7) (4.8)
Increase in accounts receivable (26.6) (13.0)
Decrease in other current assets 14.1 11.0
Increase in air traffic liability 45.5 46.5
Decrease in other current liabilities (4.9) (16.6)
Other-net 4.5 (5.1)
Net cash provided by operating activities 44.1 36.7
Cash flows from investing activities:
Proceeds from disposition of assets 1.0 2.9
Purchases of marketable securities (13.4) (14.6)
Sales and maturities of marketable securities 48.4 7.0
Restricted deposits 2.5 (0.6)
Additions to flight equipment deposits - (6.7)
Additions to property and equipment (20.5) (32.1)
Net cash provided by (used in) investing activities 18.0 (44.1)
Cash flows from financing activities:
Proceeds from short-term borrowings - 28.0
Repayment of short-term borrowings (65.9) (47.0)
Proceeds from sale and leaseback transactions 57.4 -
Long-term debt and capital lease payments (19.7) (6.4)
Proceeds from issuance of common stock 4.9 1.7
Net cash used in financing activities (23.3) (23.7)
Net increase (decrease) in cash and cash equivalents 38.8 (31.1)
Cash and cash equivalents at beginning of year 25.8 49.4
Cash and cash equivalents at end of year $64.6 $18.3
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) $9.0 $4.7
Income taxes (refunds) (0.8) (4.5)
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 THREE MONTHS ENDED MARCH 31, 1997
Alaska Air Group, Inc.
Note 1. Summary of Significant Policies (See Note 1 to Consolidated
Financial Statements at December 31, 1996)
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).
Airline Financial and Statistical Data
Quarter Ended March 31
Alaska Airlines Horizon Air
% %
Financial Data (in millions): 1996 1997 Change 1996 1997 Change
Operating Revenues:
Passenger $245.1 $277.4 13.2 $69.0 $67.8 (1.7)
Freight and mail 18.7 17.4 (7.0) 2.7 2.6 (3.7)
Other - net 16.6 16.8 1.2 0.8 0.6 (25.0)
Total Operating Revenues 280.4 311.6 11.1 72.5 71.0 (2.1)
Operating Expenses:
Wages and benefits 91.5 99.2 8.4 22.7 23.3 2.6
Aircraft fuel 42.8 53.7 25.5 7.6 9.0 18.4
Aircraft maintenance 13.6 14.8 8.8 9.9 10.4 5.1
Aircraft rent 35.6 36.4 2.2 8.6 8.5 (1.2)
Commissions 19.6 22.6 15.3 4.9 4.5 (8.2)
Depreciation and amortization 14.2 13.7 (3.5) 2.8 2.9 3.6
Loss (gain) on sale of assets 0.1 0.0 NM 0.6 (0.7) NM
Landing fees and other rentals 11.9 12.7 6.7 3.1 3.2 3.2
Other 54.5 60.0 10.1 13.8 13.6 (1.4)
Total Operating Expenses 283.8 313.1 10.3 74.0 74.7 0.9
Operating Loss (3.4) (1.5) (1.5) (3.7)
Interest income 2.6 2.4 0.0 0.0
Interest expense (8.9) (6.2) (0.1) (0.5)
Interest capitalized 0.0 0.7 0.0 0.3
Other - net 0.4 0.8 (0.0) 0.1
(5.9) (2.3) (0.1) (0.1)
Loss before income tax credit $(9.3) $(3.8) $(1.6) $(3.8)
Operating Statistics:
Revenue passengers (000) 2,576 2,770 7.5 907 856 (5.6)
RPMs (000,000) 2,126 2,342 10.2 209 204 (2.6)
ASMs (000,000) 3,500 3,582 2.3 354 345 (2.6)
Passenger load factor 60.7% 65.4% 4.7 pts 59.1% 59.1% 0.0 pts
Breakeven load factor 64.2% 67.1% 2.9 pts 60.0% 63.4% 3.4 pts
Yield per passenger mile 11.53c 11.84c 2.8 33.02c 33.30c 0.8
Operating revenues per ASM 8.01c 8.70c 8.6 20.48c 20.60c 0.6
Operating expenses per ASM 8.11c 8.74c 7.8 20.89c 21.66c 3.7
Fuel cost per gallon 68.5c 83.2c 21.3 73.6c 87.9c 19.4
Fuel gallons (000,000) 62.5 64.6 3.4 10.4 10.3 (1.0)
Average number of employees 7,297 7,921 8.6 2,840 2,812 (1.0)
Aircraft utilization (block hours) 10.9 11.2 2.3 7.6 7.0 (7.8)
Operating fleet at period-end 74 75 1.4 62 59 (4.8)
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
March 31,
1997 1996
PRIMARY -
Net income ($5,662) ($7,185)
Average number of shares outstanding 14,489 13,700
Assumed exercise of stock options reduced
by the number of shares purchased with
the proceeds from exercise of such options 0 0
Average shares as adjusted 14,489 13,700
Primary earnings per common share ($0.39) ($0.52)
FULLY DILUTED -
Net income ($5,662) ($7,185)
After tax interest on convertible debt 1,867 2,019
Income applicable to common shares ($3,795) ($5,166)
Average number of shares outstanding 14,489 13,700
Assumed exercise of stock options 201 307
Assumed conversion of 6.5% debentures 6,151 6,151
Assumed conversion of 7.75% debentures 0 381
Assumed conversion of 6.875% debentures 1,608 1,608
Average shares as adjusted 22,449 22,147
Fully diluted earnings per common share ($0.17) ($0.23)
* *
* Anti-dilutive
5
1000
3-MOS
DEC-31-1997
MAR-31-1997
18300
59900
82700
0
48300
278600
1244000
365100
1308700
497100
397300
0
0
17300
251600
1308700
380400
380400
385800
385800
0
0
8400
(10100)
(4400)
(5700)
0
0
0
(5700)
(.39)
.00
