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, 1995.
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 13,402,186 common shares, par value $1.00, outstanding at
March 31, 1995.
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 sheet as of March 31,
1995 and December 31, 1994; (ii) consolidated statements of income for the
quarters ended March 31, 1995 and 1994; (iii) consolidated statement of
shareholders' equity for the three months ended March 31, 1995; and, (iv)
consolidated statements of cash flows for the three months ended March 31, 1995
and 1994. Also attached are the accompanying notes to the Company's
consolidated financial statements that have changed significantly during the
three months ended March 31, 1995. These statements include all adjustments
which 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 1995 Compared with First Quarter 1994 The consolidated net loss
for the first quarter of 1995 was $16.3 million, or $1.22 per share compared
with a net loss of $6.3 million, or $.47 per share, in 1994. The operating loss
for the first quarter of 1995 was $18.3 million compared to an operating loss of
$2.9 million for 1994. The larger loss reflects lower average fares and load
factors at both Alaska Airlines and Horizon Air. A discussion of operating
revenues and expenses for the two airlines follows.
Alaska Airlines Operating revenues increased 2.4% to $232.7 million. Passenger
revenues, which accounted for 86% of total operating revenues, increased 1.5% on
a 17% rise in passenger traffic. Capacity increased 25%, primarily due to
increases in the Pacific Northwest to California markets. The load factor
dropped from 60.2% in 1994 to 56.4% in 1995. Passenger yields declined 13% to
11.2 cents in 1995, reflecting increased competition on the West Coast. During
the fourth quarter of 1994 and the first quarter of 1995, Alaska experienced
yield declines resulting from low fare offerings across its system. Although
several fare increases have occurred since early February, the lingering effect
of these low fare offerings will have an impact on second quarter results. In
addition, for the past several months, capacity increases have exceeded traffic
increases resulting in lower load factors.
MarkAir, a significant competitor in the Alaska marketplace since 1992, filed
for Chapter 11 bankruptcy for the second time on April 14, 1995. Since then,
it has withdrawn from all Alaska markets.
Freight and mail revenues increased 2.5% as higher freight volumes were
partially offset by lower mail volumes. The lower mail volumes resulted from
Alaska's decision, effective in March 1994, to not bid on certain U.S. mail
contracts so that capacity could be made available for higher yielding freight.
Other-net revenues rose 17% due to increased revenues from travel partners in
Alaska's frequent flyer program.
The table below shows the major operating expense elements on a unit-cost basis,
based on available seat miles (ASM), for Alaska in 1995 and 1994.
Alaska Airlines Operating Expenses Per ASM (In Cents)
%
1995 1994 Change Change
Wages and benefits 2.48 2.96 (.48) (16)
Aircraft fuel 1.04 1.12 (.08) (7)
Aircraft maintenance .37 .34 .03 9
Aircraft rent 1.05 1.27 (.22) (17)
Commissions .50 .63 (.13) (21)
Depreciation & amortization .46 .42 .04 10
Other 1.86 2.21 (.35) (16)
Alaska Airlines Total 7.76 8.95 (1.19) (13)
Alaska's lower unit costs were due to continuing cost reduction efforts and
better utilization of aircraft. Average daily aircraft utilization increased 7%
from 9.7 block hours to 10.4 block hours. Wages and benefits per ASM decreased
16% primarily due to improved productivity. The number of equivalent employees
increased 10% while capacity increased 25% and traffic increased 17%. Fuel
expense per ASM decreased 7%, in spite of a 1% increase in the price of fuel,
due to the continued transition to more fuel-efficient aircraft and an increase
in the average number of seats per aircraft.
Aircraft maintenance per ASM increased 9% due to more engine repair work.
Aircraft rent per ASM decreased 17% due to an increase in aircraft utilization,
and a restructuring of B737-400 aircraft leases that resulted in lower rents.
Commission expense per ASM decreased 21% because passenger revenues, upon which
commissions are paid, did not keep pace with ASM growth.
Depreciation and amortization expense per ASM increased 10% primarily due to
the purchase of four MD-83 aircraft in the second quarter of 1994, and the
reduction in estimated salvage value from 20% to 5% (effective January 1, 1995)
for all MD80 aircraft. Other expense per ASM decreased 16% due to lower unit
costs for advertising, building rentals, food, landing fees and outside
services expenses.
Horizon Air Operating revenues increased 17% to $62.8 million. Passenger
revenues, which accounted for 95% of total operating revenues, increased 16% on
a 30% rise in passenger traffic. Capacity increased 34% due to the addition of
larger capacity Fokker F-28 jet and Dornier 328 turboprop aircraft. The load
factor dropped from 59.4% in 1994 to 57.7% in 1995. Passenger yields declined
11% to 31.9 cents in 1995, reflecting increased competition and longer passenger
trips.
Freight, mail and other revenues increased 33% due to increased freight and mail
volumes as well as increased revenues from providing services to other airlines.
The table below shows the major operating expense elements on a unit-cost basis,
based on available seat miles, for Horizon for 1995 and 1994.
Horizon Air Operating Expenses Per ASM (In Cents)
%
1995 1994 Change Change
Wages and benefits 6.42 7.18 (.76) (11)
Aircraft fuel 1.88 1.84 .04 2
Aircraft maintenance 2.71 3.32 (.61) (18)
Aircraft rent 2.61 2.85 (.24) (8)
Commissions 1.40 1.58 (.18) (11)
Depreciation & amortization .68 .91 (.23) (25)
Other 4.90 5.22 (.32) (6)
Horizon Air Total 20.60 22.90 (2.30) (10)
Horizon's cost per ASM declined 10% to 20.60 cents due to the acquisition of
higher capacity aircraft and cost reduction efforts.
Other Income (Expense) Other Income (Expense) increased $3.6 million to $11.6
million expense primarily due to higher interest rates on variable debt and
higher average debt balances.
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. 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
45.4% tax rate for the first quarter of 1995, the Company considered a variety
of factors, including the 45.0% tax rate used for full year 1994. This rate is
evaluated each quarter and adjustments are made if necessary.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
March 31, 1995 December 31, 1994 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $ 65.5 $ 104.9 $ (39.4)
Working capital (deficit) (188.1) (147.1) (41.0)
Long-term debt 579.2 589.9 (10.7)
Shareholders' equity 175.3 191.3 (16.0)
Book value per common share $13.08 $ 14.27 $ (1.19)
Debt-to-equity 77%:23% 76%:24% NA
The Company's cash and marketable securities portfolio decreased by $39 million
during the first three months of 1995. Operating activities provided $16
million of cash during this period. Cash was used for airframe and engine
overhauls and other capital expenditures ($21 million), the repayment of debt
($13 million), and the net repayment of short-term borrowings ($21 million).
The working capital deficit increased by $41 million due to the net loss,
payments for capital expenditures and debt repayments.
PART II. OTHER INFORMATION
ITEM 5. Other Information
In May 1995, Alaska's clerical, office and passenger service employees approved
an amended four-year contract between the International Association of
Machinists (IAM) and Alaska.
In April 1995, Horizon's mechanics and related classifications of the Transport
Workers Union of America ratified a new three-year contract.
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 first quarter of 1995.
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 11, 1995
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Planning and Finance
(Principal Financial Officer)
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
March 31, Dec 31,
(In Thousands) 1995 1994
Current Assets
Cash and cash equivalents $4,191 $11,605
Marketable securities 61,299 93,337
Receivables - net 77,381 70,055
Inventories and supplies 41,106 40,250
Prepaid expenses and other assets 54,094 57,396
Total Current Assets 238,071 272,643
Property and Equipment
Flight equipment 789,384 776,551
Other property and equipment 213,849 208,502
Deposits for future flight equipment 52,885 52,885
1,056,118 1,037,938
Less accum. depreciation and amort. 273,489 260,001
782,629 777,937
Capital leases
Flight and other equipment 103,076 103,076
Less accumulated amortization 22,789 21,676
80,287 81,400
Total Property and Equipment - Net 862,916 859,337
Intangible Assets - Subsidiaries 65,161 65,671
Other Assets 121,685 118,120
Total Assets $1,287,833 $1,315,771
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, Dec 31,
(In Thousands) 1995 1994
Current Liabilities
Accounts payable $55,878 $48,592
Accrued aircraft rent 37,869 43,762
Other accrued liabilities 66,690 59,591
Accrued wages and related 41,989 47,364
Short-term borrowings 4,000 25,000
Air traffic liability 147,699 123,433
Current portion of long-term debt and
capital lease obligations 72,080 72,005
Total Current Liabilities 426,205 419,747
Long-Term Debt and Capital Lease
Obligations 579,236 589,904
Other Liabilities and Credits
Deferred income taxes 16,957 28,585
Deferred income 23,021 23,018
Other liabilities 67,101 63,239
107,079 114,842
Shareholders' Equity
Common stock, $1 par value
Authorized: 30,000,000 shares
Issued: 1995 - 16,555,779 shares
1994 - 16,553,679 shares 16,556 16,554
Capital in excess of par value 152,785 152,756
Treasury stock, at cost:
1995-3,153,593 sh; 1994-3,153,589 sh (71,807) (71,807)
Deferred compensation (4,353) (4,697)
Retained earnings 82,132 98,472
175,313 191,278
Total Liabilities and
Shareholders' Equity $1,287,833 $1,315,771
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Three Months Ended March 31
(In Thousands except Per share Amounts) 1995 1994
Operating Revenues
Passenger $259,382 $248,221
Freight and mail 21,098 20,236
Other - net 14,093 11,925
Total Operating Revenues 294,573 280,382
Operating Expenses
Wages and benefits 99,811 92,795
Aircraft fuel 39,218 32,927
Aircraft maintenance 20,639 16,801
Aircraft rent 41,696 39,408
Commissions 20,287 19,997
Depreciation and amortization 16,938 12,927
Other 74,285 68,455
Total Operating Expenses 312,874 283,310
Operating Loss (18,301) (2,928)
Other Income (Expense)
Interest income 1,361 1,424
Interest expense (13,329) (9,877)
Interest capitalized - 103
Loss on sale of assets (13) (175)
Other - net 345 441
(11,636) (8,084)
Loss before income tax credit (29,937) (11,012)
Income tax credit (13,597) (4,699)
Net Loss $(16,340) $(6,313)
Loss Per Share $(1.22) $(0.47)
Shares used for computation 13,400 13,349
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
Common Stock
Capital in Treasury Deferred
$1 Par Excess of Stock Compen- Retained
(In Thousands) Value Par Value at Cost sation Earnings Total
Balances at December 31, 1994 $16,554 $152,756 $(71,807) $(4,697) $98,472 $191,278
Net loss for the three months
ended March 31, 1995 (16,340) (16,340)
Stock issued under stock plans 2 29 31
Employee Stock Ownership Plan
shares allocated 344 344
Balances at March 31, 1995 $16,556 $152,785 $(71,807) $(4,353) $82,132 $175,313
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Three Months Ended March 31 (In Thousands) 1995 1994
Cash and cash equivalents at beginning of period $11,605 $27,179
Cash flows from operating activities:
Net loss (16,340) (6,313)
Adjustments to reconcile net loss to cash:
Depreciation and amortization 16,938 12,927
Amortization of airframe and engine ovhls 5,538 4,976
Loss on disposition of assets 13 175
Deferred income taxes (11,628) (5,172)
Increase in accounts receivable (7,326) (2,063)
Decrease in other current assets 2,446 16,272
Increase in air traffic liability 24,266 26,071
Increase (decrease) in other current liab. 3,117 (5,496)
Interest on zero coupon notes 2,233 2,522
Leased aircraft return payments and other-net (2,865) (7,904)
Net cash provided by operating activities 16,392 35,995
Cash flows from investing activities:
Proceeds from disposition of assets 99 1,727
Purchases of marketable securities (841) (18,568)
Sales and maturities of mkt. securities 32,879 22,932
Restricted deposits (737) (2,674)
Flight equipment deposits returned - 610
Additions to flight equipment deposits - (672)
Additions to property and equipment (21,411) (88,902)
Net cash provided by (used in) investing activities 9,989 (85,547)
Cash flows from financing activities:
Proceeds from short-term borrowings 4,000 -
Repayment of short-term borrowings (25,000) (20,000)
Proceeds from issuance of long-term debt - 78,000
Long-term debt and capital lease payments (12,826) (8,213)
Proceeds from issuance of common stock 31 141
Net cash provided by (used in) financing activities (33,795) 49,928
Net increase (decrease) in cash and cash equivalents (7,414) 376
Cash and cash equivalents at end of period $4,191 $27,555
Supplemental disclosure of cash paid (received) during the period for:
Interest (net of amount capitalized) $10,659 $7,122
Income taxes (refunds) (1,969) (6,715)
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, 1995
Alaska Air Group, Inc.
Note 1. Summary of Significant Accounting Policies (See Note 1 to
Consolidated Financial Statements at December 31, 1994)
Property, Equipment and Depreciation
Effective January 1, 1995, the estimated salvage value of MD-80 flight
equipment was changed to 5% from 20%. The new estimate was adopted to
recognize the lower expected salvage values for this aircraft type. The
effect of the change on the three months ending March 31, 1995 was to
increase depreciation expense $1.2 million and decrease net income
$757,000 ($.06 per share).
Alaska Air Group, Inc. EXHIBIT 11
Computation of Earnings Per Common Share
(In thousands, except per share)
Three Months Ended
March 31,
-------------------
1995 1994
------ ------
Primary -
Net income ($16,340) ($6,313)
====== ======
Average number of shares outstanding 13,400 13,349
Assumed exercise of stock options reduced
by the number of shares purchased with
the proceeds from exercise of such options - -
------ ------
Average shares as adjusted 13,400 13,349
====== ======
Earnings per common share ($1.22) ($0.47)
====== ======
Fully Diluted -
Net income ($16,340) ($6,313)
After tax interest on convertible securities 2,111 2,428
------ ------
Income applicable to common shares ($14,229) ($3,885)
====== ======
Average number of shares outstanding 13,400 13,349
Assumed exercise of stock options 4 18
Assumed conversion of 7.75% debentures 508 518
Assumed conversion of 6.875% debentures 1,608 1,791
Assumed conversion of 7.25% zero coupon notes 3,565 4,277
Assumed conversion of preferred shares 0 0
------ ------
Average shares as adjusted 19,085 19,953
====== ======
Earnings per Common Share ($0.75) ($0.19)
====== ======
* *
* Anti-dilutive
5
1000
3-MOS
DEC-31-1995
MAR-31-1995
4191
61299
77381
0
41106
238071
1159194
296278
1287833
426205
579236
16556
0
0
158757
1287833
294573
294573
312874
312874
0
0
13329
(29937)
(13597)
(16340)
0
0
0
(16340)
(1.22)
.00
