UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
January 25, 2018
(Date of earliest event reported)
ALASKA AIR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
1-8957 | 91-1292054 | |
(Commission File Number) | (IRS Employer Identification No.) | |
19300 International Boulevard, Seattle, Washington | 98188 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(206) 392-5040
(Registrant's Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).
o Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
ITEM 2.02. Results of Operations and Financial Condition
On January 25, 2018, Alaska Air Group, Inc. (Air Group) issued a press release reporting financial results for the fourth quarter and full year of 2017. The press release is furnished herein as Exhibit 99.1.
ITEM 7.01. Regulation FD Disclosure
Pursuant to 17 CFR Part 243 (“Regulation FD”), the Company is submitting information relating to its financial and operational outlook in an Investor Update. The Investor Update is furnished herein as Exhibit 99.2.
In accordance with General Instruction B.2 of Form 8-K, the information under this item and Exhibit 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing. This report will not be deemed an admission as to the materiality of any information required to be disclosed solely to satisfy the requirements of Regulation FD.
ITEM 9.01. Financial Statements and Other Exhibits
Fourth Quarter and Full-Year 2017 Earnings Press Release dated January 25, 2018 | ||
Investor Update dated January 25, 2018 | ||
Signatures
Pursuant to the requirements of the Securities Exchange 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: January 25, 2018
/s/ Brandon S. Pedersen
Brandon S. Pedersen
Executive Vice President/Finance and Chief Financial Officer
Exhibit 99.1
January 25, 2018
Media contact: | Investor/analyst contact: | |
Media Relations | Matt Grady | |
(206) 304-0008 | Director, Investor Relations | |
(206) 392-5382 | ||
Alaska Air Group Reports Fourth Quarter 2017 and Full-Year Results and Raises Dividend 7%
Dividend Increase:
• | Announced today a 7% increase in the quarterly dividend, from $0.30 per share to $0.32 per share. This is the fifth time the Company has raised the dividend since initiating the quarterly dividend in July 2013, with a cumulative increase of 220% since that time. |
Financial Highlights:
• | Reported net income for the fourth quarter and full year under Generally Accepted Accounting Principles (GAAP) of $367 million, or $2.97 per diluted share, and $1.0 billion, or $8.30 per diluted share. These results compared to fourth quarter 2016 net income of $114 million, or $0.92 per diluted share, and full year 2016 net income of $814 million, or $6.54 per diluted share. As the acquisition of Virgin America Inc. (Virgin America) closed on December 14, 2016, 2017 information reflects the results of Virgin America. 2016 information reflects the results of Virgin America from December 14, 2016 through December 31, 2016. |
• | Reported fourth quarter 2017 adjusted diluted earnings per share of $0.83 compared to $1.56 reported in the fourth quarter of 2016. Fourth quarter adjusted net income, excluding merger-related costs, special income tax benefits related to tax law changes, and mark-to-market fuel hedging adjustments, was $103 million compared to $193 million in the fourth quarter of 2016. This quarter's adjusted results compare to the First Call analyst consensus estimate of $0.82 per share. |
• | Reported full year 2017 adjusted net income, excluding merger-related costs, the special income tax benefit, and mark-to-market fuel hedging adjustments, of $823 million, compared to $911 million in 2016. Reported 2017 adjusted diluted earnings per share of $6.64, compared to $7.32 in 2016. |
• | Paid a $0.30 per-share quarterly cash dividend in the fourth quarter, bringing total dividend payments in 2017 to $148 million. |
• | Repurchased a total of 981,277 shares of common stock for approximately $75 million in 2017. |
• | Generated approximately $1.6 billion of operating cash flow and used approximately $1.0 billion for capital expenditures, resulting in approximately $550 million of free cash flow in 2017. |
• | Grew passenger revenues by 32% compared to the fourth quarter of 2016, and by 36% compared to full-year 2016, largely enabled by our acquisition of Virgin America in December of 2016. |
• | Generated full-year adjusted pretax margin of 17% in 2017. |
• | Held $1.6 billion in unrestricted cash and marketable securities as of December 31, 2017. |
• | Reduced debt-to-capitalization ratio to 51% as of December 31, 2017, compared to 59% as of December 31, 2016. |
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2017 Accomplishments and Highlights:
Recognition and Awards - Alaska
• | Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2017 by J.D. Power for the tenth year in a row. |
• | Ranked first in the U.S. News & World Report's list of Best Travel Rewards Programs for the third consecutive year. |
• | Won the "Best Rewards Program" for Mileage Plan™ for carriers in the "Americas" region in the sixth annual FlyerTalk Award. |
• | Mileage Plan™ ranked Best Airline Elite Status Program in the U.S. by The Points Guy. |
• | Ranked among Forbes' 2017 "America's Best Employers" for the third year in a row. |
• | Received 16th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training. |
• | Ranked by AirlineRatings.com as one of only two U.S. airlines in the Top 20 safest airlines in the world. |
• | Rated "Best Airline Staff in North America" and "Best Regional Airline in North America" by Skytrax World Airline Awards. |
• | Awarded TripAdvisor's 2017 Travelers' Choice Award for second-best midsize and low-cost airlines in North America and one of the top 10 best airlines in the world. |
• | Recognized by the Puget Sound Business Journal as the 2017 Board Diversity Champion, as well as by the Women Corporate Directors Global Institute for diversity among our Directors. |
• | Ranked as the top U.S. airline in the Dow Jones Sustainability Index (DJSI), receiving perfect scores for “efficiency” and “reliability.” |
• | Recognized as No. 1 in fuel efficiency for U.S. airlines by the International Council on Clean Transportation for the 7th consecutive year. |
• | Named one of the overall five-star major regional airlines at the Passenger Choice Awards during the APEX EXPO. |
• | Ranked fifth of most engaged companies in the U.S. by Forbes Insights, which measured social media engagement, net promoter scores, and year-over-year sales growth. |
Recognition and Awards - Virgin America
• | Rated Best U.S. Airline by Conde Nast Traveler in their "Annual Readers' Choice Awards" for the tenth year in a row. |
• | Rated Best Domestic Airline in Travel + Leisure "World's Best Awards" for the tenth year in a row. |
• | Received a five-star rating for low-cost carrier, and received a top honor with a Passenger Choice Award for “Best Seat Comfort” during the APEX EXPO. |
Our People
• | Awarded $135 million in incentive pay to employees for 2017. |
• | Awarded employees a $1,000 bonus in January 2018 in connection with the passing of the Tax Cuts and Jobs Act, amounting to approximately $25 million to be paid on January 29, 2018. |
• | Granted "Single Carrier Determination" by the National Mediation Board (NMB) for Alaska Airlines and Virgin America, paving the way for labor integration and union representation. The NMB officially certified the Association of Flight Attendants as the union representative for Virgin America inflight teammates and the International Association of Machinists and Aerospace Workers as the union representative for Virgin America clerical, office and passenger service employees. |
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• | Entered into an agreement with the International Brotherhood of Teamsters to amend the eight-year contract with Horizon's pilots, providing Horizon the ability to attract and retain the best pilots in the regional industry. |
• | Alaska received a perfect score of 100% for workplace equality on the 2018 Corporate Equality Index (CEI). Virgin America received a score of 95%. |
Our Guests and Product
• | Launched various new in-flight amenities, including Free Chat, upgraded food and beverage options, and Premium Class service. |
• | Selected Gogo to provide next-generation satellite-based Wi-Fi across the entire Boeing and Airbus fleets, providing guests a faster and more-reliable internet connection. |
• | Dropped fees for bikes, golf clubs, skis, surfboards, and other sporting equipment that exceed Alaska’s normal checked baggage weight and dimensions to $25. |
• | Added Condor Airlines, Finnair, and Singapore Airlines as global Mileage Plan™ partners. |
• | Announced plans to fly 13 daily departures from Paine Field-Snohomish County Airport in Everett, Washington to eight West Coast markets starting in fall 2018. |
• | Announced a seven-year partnership to be the official airline of the San Francisco Giants which includes, among other things, exclusive naming rights to the AT&T Park Club Level which will now be called the "Alaska Airlines Club Level." |
• | Signed an exclusive multi-year partnership with Golden State Warriors star Kevin Durant naming him "Advisor to the CEO," and extended our partnership with Russell Wilson and Ciara. |
• | Converted the world's first Boeing 737-700 from a passenger plane to a freighter and placed it into revenue service. |
• | Added 14 Boeing 737-900ER aircraft and 4 Airbus A321neo aircraft to the operating fleet in 2017, bringing the total Mainline fleet to 221 aircraft. |
• | Added 10 Embraer 175 (E175) regional jets to Horizon Air's fleet in 2017. |
• | Added 44 new markets in 2017 across the Alaska Air Group and Virgin America networks. |
Our Communities
• | Donated over $14 million and contributed more than 32,000 volunteer hours to support nonprofits in our local communities, focusing on youth and education, medical (research/transportation) and community outreach. |
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SEATTLE — Alaska Air Group, Inc. (NYSE: ALK) today reported fourth quarter 2017 GAAP net income of $367 million, or $2.97 per diluted share, compared to $114 million, or $0.92 per diluted share in 2016. Excluding the impact of merger-related costs, the special income tax benefit, and mark-to-market fuel hedge adjustments, the company reported fourth quarter adjusted net income of $103 million, or $0.83 per diluted share, compared to adjusted net income of $193 million, or $1.56 per diluted share in the fourth quarter of 2016.
The company reported full-year 2017 GAAP net income of $1,028 million, compared to $814 million in the prior year. Excluding the impact of merger-related costs, the special income tax benefit, and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $823 million, or $6.64 per diluted share for 2017, compared to adjusted net income of $911 million, or $7.32 per diluted share in 2016.
“2017 was a great year - we invested in our route network, our fleet, our product, and laid the foundation for our future,” said Brad Tilden, Alaska’s CEO. “We added 44 new routes to our network (in addition to the 38 added through Virgin America), grew membership in our loyalty program, and made great progress on our integration of Virgin America. By early spring, we’ll have the bulk of the integration behind us, and working with our people to do more of what Alaska does best - running a highly reliable operation and offering our guests outstanding customer service.”
The following tables reconcile the company's adjusted net income and earnings per diluted share (EPS) during the full year and fourth quarters of 2017 and 2016 to amounts as reported in accordance with GAAP:
Three Months Ended December 31, | |||||||||||||||
2017 | 2016 | ||||||||||||||
(in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||
Reported GAAP net income and diluted EPS | $ | 367 | $ | 2.97 | $ | 114 | $ | 0.92 | |||||||
Mark-to-market fuel hedge adjustments | (14 | ) | (0.11 | ) | (4 | ) | (0.03 | ) | |||||||
Special items—merger-related costs | 30 | 0.24 | 81 | 0.65 | |||||||||||
Income tax effect on special items and fuel hedge adjustments(a) | (6 | ) | (0.05 | ) | (15 | ) | (0.12 | ) | |||||||
Special tax (benefit)/expense(b) | (274 | ) | (2.22 | ) | 17 | 0.14 | |||||||||
Non-GAAP adjusted net income and diluted EPS | $ | 103 | $ | 0.83 | $ | 193 | $ | 1.56 | |||||||
Twelve Months Ended December 31, | |||||||||||||||
2017 | 2016 | ||||||||||||||
(in millions, except per share amounts) | Dollars | Diluted EPS | Dollars | Diluted EPS | |||||||||||
Reported GAAP net income and diluted EPS | $ | 1,028 | $ | 8.30 | $ | 814 | $ | 6.54 | |||||||
Mark-to-market fuel hedge adjustments | (7 | ) | (0.06 | ) | (13 | ) | (0.11 | ) | |||||||
Special items—merger-related costs | 118 | 0.95 | 117 | 0.94 | |||||||||||
Income tax effect on special items and fuel hedge adjustments(a) | (42 | ) | (0.34 | ) | (24 | ) | (0.19 | ) | |||||||
Special tax (benefit)/expense(b) | (274 | ) | (2.21 | ) | 17 | 0.14 | |||||||||
Non-GAAP adjusted net income and diluted EPS | $ | 823 | $ | 6.64 | $ | 911 | $ | 7.32 | |||||||
(a) | Certain merger-related costs in 2016 were non-deductible for tax purposes, resulting in a smaller income tax effect for prior year adjusting items. |
(b) | The special tax benefit in 2017 is due to the remeasurement of deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by certain state tax law enactments. The resulting net tax benefit is excluded from our adjusted non-GAAP earnings. |
Statistical data, as well as a reconciliation of other reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.
A conference call regarding the fourth quarter and full year results will be simulcast online at 8:30 a.m. Pacific time on January 25, 2018. It can be accessed through the company's website at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.
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###
References in this news release to “Air Group,” “company,” “we,” “us” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as “Alaska,” “Horizon,” and "Virgin America" respectively, and together as our “airlines.”
This news release may contain forward-looking statements subject to the safe harbor protection provided by 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. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2016, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. 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.
Alaska Airlines, together with Virgin America and its regional partners, flies 44 million guests a year to 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada, and Costa Rica. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Carriers in North America” in the J.D. Power North America Satisfaction Study for 10 consecutive years from 2008 to 2017. Learn more about Alaska’s award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines, Virgin America and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).
###
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) | |||||||||||||||||||||
Alaska Air Group, Inc. | |||||||||||||||||||||
Amounts below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016. | |||||||||||||||||||||
Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||||||||
(in millions, except per share amounts) | 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||
Operating Revenues: | |||||||||||||||||||||
Passenger | |||||||||||||||||||||
Mainline | $ | 1,468 | $ | 1,062 | 38 | % | $ | 5,858 | $ | 4,098 | 43 | % | |||||||||
Regional | 235 | 226 | 4 | % | 960 | 908 | 6 | % | |||||||||||||
Total passenger revenue | 1,703 | 1,288 | 32 | % | 6,818 | 5,006 | 36 | % | |||||||||||||
Freight and mail | 26 | 26 | — | % | 114 | 108 | 6 | % | |||||||||||||
Other - net | 233 | 210 | 11 | % | 1,001 | 817 | 23 | % | |||||||||||||
Total Operating Revenues | 1,962 | 1,524 | 29 | % | 7,933 | 5,931 | 34 | % | |||||||||||||
Operating Expenses: | |||||||||||||||||||||
Wages and benefits | 532 | 374 | 42 | % | 1,924 | 1,382 | 39 | % | |||||||||||||
Variable incentive pay | 37 | 32 | 16 | % | 135 | 127 | 6 | % | |||||||||||||
Aircraft fuel, including hedging gains and losses | 396 | 238 | 66 | % | 1,447 | 831 | 74 | % | |||||||||||||
Aircraft maintenance | 120 | 73 | 64 | % | 391 | 270 | 45 | % | |||||||||||||
Aircraft rent | 70 | 34 | 106 | % | 274 | 114 | 140 | % | |||||||||||||
Landing fees and other rentals | 122 | 88 | 39 | % | 460 | 320 | 44 | % | |||||||||||||
Contracted services | 80 | 64 | 25 | % | 314 | 247 | 27 | % | |||||||||||||
Selling expenses | 88 | 63 | 40 | % | 357 | 225 | 59 | % | |||||||||||||
Depreciation and amortization | 97 | 82 | 18 | % | 372 | 363 | 2 | % | |||||||||||||
Food and beverage service | 50 | 33 | 52 | % | 195 | 126 | 55 | % | |||||||||||||
Third-party regional carrier expense | 37 | 21 | 76 | % | 121 | 95 | 27 | % | |||||||||||||
Other | 141 | 100 | 41 | % | 565 | 365 | 55 | % | |||||||||||||
Special items—merger-related costs | 30 | 81 | (63 | )% | 118 | 117 | 1 | % | |||||||||||||
Total Operating Expenses | 1,800 | 1,283 | 40 | % | 6,673 | 4,582 | 46 | % | |||||||||||||
Operating Income | 162 | 241 | (33 | )% | 1,260 | 1,349 | (7 | )% | |||||||||||||
Nonoperating Income (Expense): | |||||||||||||||||||||
Interest income | 9 | 7 | 34 | 27 | |||||||||||||||||
Interest expense | (26 | ) | (22 | ) | (103 | ) | (55 | ) | |||||||||||||
Interest capitalized | 4 | 4 | 17 | 25 | |||||||||||||||||
Other - net | — | 1 | (1 | ) | (1 | ) | |||||||||||||||
Total Nonoperating Income (Expense) | (13 | ) | (10 | ) | (53 | ) | (4 | ) | |||||||||||||
Income Before Income Tax | 149 | 231 | 1,207 | 1,345 | |||||||||||||||||
Income tax expense | 56 | 100 | 453 | 514 | |||||||||||||||||
Special income tax benefit | (274 | ) | 17 | (274 | ) | 17 | |||||||||||||||
Total Income Tax Expense/(Benefit) | $ | (218 | ) | $ | 117 | $ | 179 | $ | 531 | ||||||||||||
Net Income | $ | 367 | $ | 114 | $ | 1,028 | $ | 814 | |||||||||||||
Basic Earnings Per Share: | $ | 2.98 | $ | 0.92 | $ | 8.34 | $ | 6.59 | |||||||||||||
Diluted Earnings Per Share: | $ | 2.97 | $ | 0.92 | $ | 8.30 | $ | 6.54 | |||||||||||||
Shares Used for Computation: | |||||||||||||||||||||
Basic | 123.147 | 123.286 | 123.211 | 123.557 | |||||||||||||||||
Diluted | 123.670 | 124.102 | 123.854 | 124.389 | |||||||||||||||||
Cash dividend declared per share | $ | 0.300 | $ | 0.275 | $ | 1.200 | $ | 1.100 | |||||||||||||
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CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) | |||||||
Alaska Air Group, Inc. | |||||||
(in millions) | December 31, 2017 | December 31, 2016 | |||||
Cash and marketable securities | $ | 1,621 | $ | 1,580 | |||
Total current assets | 2,128 | 2,050 | |||||
Property and equipment-net | 6,284 | 5,666 | |||||
Goodwill | 1,943 | 1,934 | |||||
Intangible assets-net | 133 | 143 | |||||
Other assets | 234 | 169 | |||||
Total assets | $ | 10,722 | $ | 9,962 | |||
Air traffic liability | 937 | 849 | |||||
Current portion of long-term debt | 307 | 319 | |||||
Other current liabilities | 1,456 | 1,367 | |||||
Current liabilities | $ | 2,700 | $ | 2,535 | |||
Long-term debt | 2,262 | 2,645 | |||||
Other liabilities and credits | 2,045 | 1,851 | |||||
Shareholders' equity | 3,715 | 2,931 | |||||
Total liabilities and shareholders' equity | $ | 10,722 | $ | 9,962 | |||
Debt to Capitalization, adjusted for operating leases(a) | 51% | 59% | |||||
Number of common shares outstanding | 123.061 | 123.328 | |||||
(a) | Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date. |
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OPERATING STATISTICS SUMMARY (unaudited) | |||||||||||
Alaska Air Group, Inc. | |||||||||||
Consolidated and Mainline amounts presented below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016. | |||||||||||
Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||
2017 | 2016 | Change(d) | 2017 | 2016 | Change(d) | ||||||
Consolidated Operating Statistics:(a) | |||||||||||
Revenue passengers (000) | 10,971 | 8,752 | 25.4% | 44,034 | 34,289 | 28.4% | |||||
RPMs (000,000) "traffic" | 13,265 | 9,640 | 37.6% | 52,338 | 37,209 | 40.7% | |||||
ASMs (000,000) "capacity" | 15,901 | 11,407 | 39.4% | 62,072 | 44,135 | 40.6% | |||||
Load factor | 83.4% | 84.5% | (1.1) pts | 84.3% | 84.3% | — | |||||
Yield | 12.84¢ | 13.36¢ | (3.9)% | 13.03¢ | 13.45¢ | (3.1)% | |||||
PRASM | 10.71¢ | 11.29¢ | (5.1)% | 10.98¢ | 11.34¢ | (3.2)% | |||||
RASM | 12.34¢ | 13.36¢ | (7.6)% | 12.78¢ | 13.44¢ | (4.9)% | |||||
CASMex(b) | 8.64¢ | 8.45¢ | 2.2% | 8.23¢ | 8.23¢ | —% | |||||
Economic fuel cost per gallon(b) | $2.00 | $1.68 | 19.0% | $1.82 | $1.52 | 19.7% | |||||
Fuel gallons (000,000) | 205 | 144 | 42.4% | 797 | 554 | 43.9% | |||||
ASM's per gallon | 77.6 | 79.2 | (2.0)% | 77.9 | 79.7 | (2.3)% | |||||
Average full-time equivalent employees (FTEs) | 21,561 | 15,566 | 38.5% | 20,183 | 14,760 | 36.7% | |||||
Employee productivity (PAX/FTEs/months) | 169.6 | 187.4 | (9.5)% | 181.8 | 193.6 | (6.1)% | |||||
Mainline Operating Statistics: | |||||||||||
Revenue passengers (000) | 8,664 | 6,406 | 35.2% | 34,539 | 24,838 | 39.1% | |||||
RPMs (000,000) "traffic" | 12,191 | 8,722 | 39.8% | 48,238 | 33,489 | 44.0% | |||||
ASMs (000,000) "capacity" | 14,547 | 10,257 | 41.8% | 56,945 | 39,473 | 44.3% | |||||
Load factor | 83.8% | 85.0% | (1.2) pts | 84.7% | 84.8% | (0.1) pts | |||||
Yield | 12.04¢ | 12.17¢ | (1.1)% | 12.14¢ | 12.24¢ | (0.8)% | |||||
PRASM | 10.09¢ | 10.35¢ | (2.5)% | 10.29¢ | 10.38¢ | (0.9)% | |||||
RASM | 11.74¢ | 12.46¢ | (5.8)% | 12.10¢ | 12.51¢ | (3.3)% | |||||
CASMex(b) | 7.94¢ | 7.57¢ | 4.9% | 7.47¢ | 7.30¢ | 2.3% | |||||
Economic fuel cost per gallon(b) | $1.99 | $1.67 | 19.2% | $1.82 | $1.52 | 19.7% | |||||
Fuel gallons (000,000) | 180 | 124 | 45.2% | 706 | 474 | 48.9% | |||||
ASM's per gallon | 80.8 | 82.7 | (2.3)% | 80.7 | 83.3 | (3.1)% | |||||
Average number of FTEs | 16,295 | 12,037 | 35.4% | 15,653 | 11,447 | 36.7% | |||||
Aircraft utilization | 11.5 | 10.1 | 13.9% | 11.2 | 10.5 | 6.7% | |||||
Average aircraft stage length | 1,316 | 1,243 | 5.9% | 1,301 | 1,225 | 6.2% | |||||
Operating fleet | 221 | 218 | 3 a/c | 221 | 218 | 3 a/c | |||||
Regional Operating Statistics:(c) | |||||||||||
Revenue passengers (000) | 2,307 | 2,346 | (1.7)% | 9,495 | 9,452 | 0.5% | |||||
RPMs (000,000) "traffic" | 1,074 | 918 | 17.0% | 4,101 | 3,720 | 10.2% | |||||
ASMs (000,000) "capacity" | 1,354 | 1,150 | 17.7% | 5,127 | 4,662 | 10.0% | |||||
Load factor | 79.3% | 79.8% | (0.5) pts | 80.0% | 79.8% | 0.2 pts | |||||
Yield | 21.87¢ | 24.64¢ | (11.2)% | 23.41¢ | 24.42¢ | (4.1)% | |||||
PRASM | 17.35¢ | 19.67¢ | (11.8)% | 18.72¢ | 19.49¢ | (4.0)% | |||||
Operating Fleet | 83 | 67 | 16 a/c | 83 | 67 | 16 a/c | |||||
(a) | Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements. |
(b) | See a reconciliation of this non-GAAP measure and Note A for a discussion of potential importance of this measure to investors in the accompanying pages. |
(c) | Data presented includes information related to flights operated by Horizon and third-party carriers. |
(d) | See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America. |
8
SUPPLEMENTARY COMBINED COMPARATIVE FINANCIAL AND OPERATING INFORMATION (unaudited)
We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The table below provides "Combined Comparative" results for the three and twelve months ended December 31, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America's financial information has been conformed to reflect Air Group's historical financial statement presentation for each period presented. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.
Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||||||
(in millions, except operating statistics) | As Reported | Combined | Change | As Reported | Combined | Change | |||||||||||||
Combined Comparative Operating Results | |||||||||||||||||||
Passenger revenue | $ | 1,703 | $ | 1,587 | 7% | $ | 6,818 | $ | 6,420 | 6% | |||||||||
Other revenue | 259 | 267 | (3)% | 1,115 | 1,075 | 4% | |||||||||||||
Total Operating Revenues | 1,962 | 1,854 | 6% | 7,933 | 7,495 | 6% | |||||||||||||
Non-fuel operating expense | 1,404 | 1,282 | 10% | 5,226 | 4,800 | 9% | |||||||||||||
Fuel expense | 396 | 302 | 31% | 1,447 | 1,124 | 29% | |||||||||||||
Total Operating Expenses | 1,800 | 1,584 | 14% | 6,673 | 5,924 | 13% | |||||||||||||
Operating Income | 162 | 270 | (40)% | 1,260 | 1,571 | (20)% | |||||||||||||
Nonoperating income (expense) | (13 | ) | (15 | ) | (13)% | (53 | ) | (23 | ) | 130% | |||||||||
Income Before Tax | 149 | 255 | (42)% | 1,207 | 1,548 | (22)% | |||||||||||||
Special items—merger-related costs | 30 | 94 | (68)% | 118 | 138 | (14)% | |||||||||||||
Mark-to-market fuel hedge adjustments | (14 | ) | (4 | ) | 250% | (7 | ) | (15 | ) | (53)% | |||||||||
Adjusted Income Before Tax | $ | 165 | $ | 345 | (52)% | $ | 1,318 | $ | 1,671 | (21)% | |||||||||
Combined Comparative Operating Statistics | |||||||||||||||||||
Revenue passengers (000) | 10,971 | 10,382 | 5.7% | 44,034 | 41,947 | 5.0% | |||||||||||||
RPMs (000,000) | 13,265 | 12,084 | 9.8% | 52,338 | 48,754 | 7.4% | |||||||||||||
ASMs (000,000) | 15,901 | 14,404 | 10.4% | 62,072 | 57,953 | 7.1% | |||||||||||||
Load Factor | 83.4% | 83.9% | (0.5) pts | 84.3% | 84.1% | 0.2 pts | |||||||||||||
PRASM | 10.71¢ | 11.02¢ | (2.8)% | 10.98¢ | 11.08¢ | (0.9)% | |||||||||||||
RASM | 12.34¢ | 12.87¢ | (4.1)% | 12.78¢ | 12.93¢ | (1.2)% | |||||||||||||
CASMex | 8.64¢ | 8.25¢ | 4.7% | 8.23¢ | 8.04¢ | 2.4% | |||||||||||||
9
OPERATING SEGMENTS (unaudited) | |||||||||||||||||||||||||||
Alaska Air Group, Inc. | |||||||||||||||||||||||||||
Amounts below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016. | |||||||||||||||||||||||||||
Three Months Ended December 31, 2017 | |||||||||||||||||||||||||||
(in millions) | Mainline | Regional | Horizon | Consolidating & Other | Air Group Adjusted(b) | Special Items(c) | Consolidated | ||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||||
Passenger | |||||||||||||||||||||||||||
Mainline | $ | 1,468 | $ | — | $ | — | $ | — | $ | 1,468 | $ | — | $ | 1,468 | |||||||||||||
Regional | — | 235 | — | — | 235 | — | 235 | ||||||||||||||||||||
Total passenger revenues | 1,468 | 235 | — | — | 1,703 | — | 1,703 | ||||||||||||||||||||
Revenue from CPA with Alaska | — | — | 109 | (109 | ) | — | — | — | |||||||||||||||||||
Freight and mail | 26 | 1 | — | (1 | ) | 26 | — | 26 | |||||||||||||||||||
Other-net | 214 | 17 | 1 | 1 | 233 | — | 233 | ||||||||||||||||||||
Total operating revenues | 1,708 | 253 | 110 | (109 | ) | 1,962 | — | 1,962 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||
Non-fuel operating expenses | 1,156 | 226 | 104 | (112 | ) | 1,374 | 30 | 1,404 | |||||||||||||||||||
Fuel expense | 358 | 52 | — | — | 410 | (14 | ) | 396 | |||||||||||||||||||
Total operating expenses | 1,514 | 278 | 104 | (112 | ) | 1,784 | 16 | 1,800 | |||||||||||||||||||
Nonoperating income (expense) | |||||||||||||||||||||||||||
Interest income | 12 | — | — | (3 | ) | 9 | — | 9 | |||||||||||||||||||
Interest expense | (24 | ) | — | (4 | ) | 2 | (26 | ) | — | (26 | ) | ||||||||||||||||
Other | 3 | — | — | 1 | 4 | — | 4 | ||||||||||||||||||||
Total Nonoperating income (expense) | (9 | ) | — | (4 | ) | — | (13 | ) | — | (13 | ) | ||||||||||||||||
Income (loss) before income tax | $ | 185 | $ | (25 | ) | $ | 2 | $ | 3 | $ | 165 | $ | (16 | ) | $ | 149 | |||||||||||
Three Months Ended December 31, 2016 | |||||||||||||||||||||||||||
(in millions) | Mainline(a) | Regional | Horizon | Consolidating & Other | Air Group Adjusted(b) | Special Items(c) | Consolidated | ||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||||
Passenger | |||||||||||||||||||||||||||
Mainline | $ | 1,062 | $ | — | $ | — | $ | — | $ | 1,062 | $ | — | $ | 1,062 | |||||||||||||
Regional | — | 226 | — | — | 226 | — | 226 | ||||||||||||||||||||
Total passenger revenues | 1,062 | 226 | — | — | 1,288 | — | 1,288 | ||||||||||||||||||||
Revenue from CPA with Alaska | — | — | 102 | (102 | ) | — | — | — | |||||||||||||||||||
Freight and mail | 25 | 2 | — | (1 | ) | 26 | — | 26 | |||||||||||||||||||
Other-net | 192 | 17 | 1 | — | 210 | — | 210 | ||||||||||||||||||||
Total operating revenues | 1,279 | 245 | 103 | (103 | ) | 1,524 | — | 1,524 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||
Non-fuel operating expenses | 776 | 189 | 102 | (103 | ) | 964 | 81 | 1,045 | |||||||||||||||||||
Fuel expense | 207 | 35 | — | — | 242 | (4 | ) | 238 | |||||||||||||||||||
Total operating expenses | 983 | 224 | 102 | (103 | ) | 1,206 | 77 | 1,283 | |||||||||||||||||||
Nonoperating income (expense) | |||||||||||||||||||||||||||
Interest income | 7 | — | — | — | 7 | — | 7 | ||||||||||||||||||||
Interest expense | (19 | ) | — | (2 | ) | (1 | ) | (22 | ) | — | (22 | ) | |||||||||||||||
Other | 4 | — | 1 | — | 5 | — | 5 | ||||||||||||||||||||
Total Nonoperating income (expense) | (8 | ) | — | (1 | ) | (1 | ) | (10 | ) | — | (10 | ) | |||||||||||||||
Income (loss) before income tax | $ | 288 | $ | 21 | $ | — | $ | (1 | ) | $ | 308 | $ | (77 | ) | $ | 231 | |||||||||||
10
OPERATING SEGMENTS (unaudited) | |||||||||||||||||||||||||||
Alaska Air Group, Inc. | |||||||||||||||||||||||||||
Twelve Months Ended December 31, 2017 | |||||||||||||||||||||||||||
(in millions) | Mainline | Regional | Horizon | Consolidating & Other | Air Group Adjusted(b) | Special Items(c) | Consolidated | ||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||||
Passenger | |||||||||||||||||||||||||||
Mainline | $ | 5,858 | $ | — | $ | — | $ | — | $ | 5,858 | $ | — | $ | 5,858 | |||||||||||||
Regional | — | 960 | — | — | 960 | — | 960 | ||||||||||||||||||||
Total passenger revenues | 5,858 | 960 | — | — | 6,818 | — | 6,818 | ||||||||||||||||||||
Revenue from CPA with Alaska | — | — | 426 | (426 | ) | — | — | — | |||||||||||||||||||
Freight and mail | 110 | 4 | — | — | 114 | — | 114 | ||||||||||||||||||||
Other-net | 922 | 74 | 4 | 1 | 1,001 | — | 1,001 | ||||||||||||||||||||
Total operating revenues | 6,890 | 1,038 | 430 | (425 | ) | 7,933 | — | 7,933 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||
Non-fuel operating expenses | 4,257 | 851 | 427 | (427 | ) | 5,108 | 118 | 5,226 | |||||||||||||||||||
Fuel expense | 1,282 | 172 | — | — | 1,454 | (7 | ) | 1,447 | |||||||||||||||||||
Total operating expenses | 5,539 | 1,023 | 427 | (427 | ) | 6,562 | 111 | 6,673 | |||||||||||||||||||
Nonoperating income (expense) | |||||||||||||||||||||||||||
Interest income | 39 | — | — | (5 | ) | 34 | — | 34 | |||||||||||||||||||
Interest expense | (92 | ) | — | (13 | ) | 2 | (103 | ) | — | (103 | ) | ||||||||||||||||
Other | 14 | — | 2 | — | 16 | — | 16 | ||||||||||||||||||||
Total Nonoperating income (expense) | (39 | ) | — | (11 | ) | (3 | ) | (53 | ) | — | (53 | ) | |||||||||||||||
Income (loss) before income tax | $ | 1,312 | $ | 15 | $ | (8 | ) | $ | (1 | ) | $ | 1,318 | $ | (111 | ) | $ | 1,207 | ||||||||||
Twelve Months Ended December 31, 2016 | |||||||||||||||||||||||||||
(in millions) | Mainline(a) | Regional | Horizon | Consolidating & Other | Air Group Adjusted(b) | Special Items(c) | Consolidated | ||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||||
Passenger | |||||||||||||||||||||||||||
Mainline | $ | 4,098 | $ | — | $ | — | $ | — | $ | 4,098 | $ | — | $ | 4,098 | |||||||||||||
Regional | — | 908 | — | — | 908 | — | 908 | ||||||||||||||||||||
Total passenger revenues | 4,098 | 908 | — | — | 5,006 | — | 5,006 | ||||||||||||||||||||
Revenue from CPA with Alaska | — | — | 424 | (424 | ) | — | — | — | |||||||||||||||||||
Freight and mail | 104 | 5 | — | (1 | ) | 108 | — | 108 | |||||||||||||||||||
Other-net | 738 | 74 | 4 | 1 | 817 | — | 817 | ||||||||||||||||||||
Total operating revenues | 4,940 | 987 | 428 | (424 | ) | 5,931 | — | 5,931 | |||||||||||||||||||
Operating expenses | |||||||||||||||||||||||||||
Non-fuel operating expenses | 2,883 | 769 | 407 | (425 | ) | 3,634 | 117 | 3,751 | |||||||||||||||||||
Fuel expense | 719 | 125 | — | — | 844 | (13 | ) | 831 | |||||||||||||||||||
Total operating expenses | 3,602 | 894 | 407 | (425 | ) | 4,478 | 104 | 4,582 | |||||||||||||||||||
Nonoperating income (expense) | |||||||||||||||||||||||||||
Interest income | 26 | — | 1 | — | 27 | — | 27 | ||||||||||||||||||||
Interest expense | (42 | ) | — | (9 | ) | (4 | ) | (55 | ) | — | (55 | ) | |||||||||||||||
Other | 19 | — | 1 | 4 | 24 | — | 24 | ||||||||||||||||||||
Total Nonoperating income (expense) | 3 | — | (7 | ) | — | (4 | ) | — | (4 | ) | |||||||||||||||||
Income (loss) before income tax | $ | 1,341 | $ | 93 | $ | 14 | $ | 1 | $ | 1,449 | $ | (104 | ) | $ | 1,345 | ||||||||||||
(a) | Includes Alaska activity for the full period, and Virgin America financial results for the period December 14, 2016 through December 31, 2016, and the impacts associated with purchase accounting as of December 14, 2016. |
(b) | The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information. |
(c) | Includes merger-related costs and mark-to-market fuel-hedge accounting charges. |
11
GAAP TO NON-GAAP RECONCILIATIONS (unaudited)
Alaska Air Group, Inc.
Consolidated and Mainline amounts presented below reflect the results of operations for Virgin America for the three and twelve months ended December 31, 2017 and for the period December 14, 2016 through December 31, 2016, including impacts associated with purchase accounting as of December 14, 2016.
CASM Excluding Fuel and Special Items Reconciliation (unaudited) | |||||||||||||||
Three Months Ended December 31, | Twelve Months Ended December 31, | ||||||||||||||
(in cents) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Consolidated: | |||||||||||||||
Total operating expenses per ASM (CASM) | 11.32 | ¢ | 11.25 | ¢ | 10.75 | ¢ | 10.38 | ¢ | |||||||
Less the following components: | |||||||||||||||
Aircraft fuel, including hedging gains and losses | 2.49 | 2.09 | 2.33 | 1.88 | |||||||||||
Special items—merger-related costs | 0.19 | 0.71 | 0.19 | 0.27 | |||||||||||
CASM, excluding fuel and special items | 8.64 | ¢ | 8.45 | ¢ | 8.23 | ¢ | 8.23 | ¢ | |||||||
Mainline: | |||||||||||||||
Total operating expenses per ASM (CASM) | 10.52 | ¢ | 10.33 | ¢ | 9.92 | ¢ | 9.39 | ¢ | |||||||
Less the following components: | |||||||||||||||
Aircraft fuel, including hedging gains and losses | 2.37 | 1.98 | 2.24 | 1.79 | |||||||||||
Special items—merger-related costs | 0.21 | 0.78 | 0.21 | 0.30 | |||||||||||
CASM, excluding fuel and special items | 7.94 | ¢ | 7.57 | ¢ | 7.47 | ¢ | 7.30 | ¢ | |||||||
Fuel Reconciliations (unaudited) | |||||||||||||||
Three Months Ended December 31, | |||||||||||||||
2017 | 2016 | ||||||||||||||
(in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||
Raw or "into-plane" fuel cost | $ | 406 | $ | 1.98 | $ | 238 | $ | 1.65 | |||||||
Losses on settled hedges | 4 | 0.02 | 4 | 0.03 | |||||||||||
Consolidated economic fuel expense | $ | 410 | $ | 2.00 | $ | 242 | $ | 1.68 | |||||||
Mark-to-market fuel hedge adjustments | (14 | ) | (0.07 | ) | (4 | ) | (0.03 | ) | |||||||
GAAP fuel expense | $ | 396 | $ | 1.93 | $ | 238 | $ | 1.65 | |||||||
Fuel gallons | 205 | 144 | |||||||||||||
Twelve Months Ended December 31, | |||||||||||||||
2017 | 2016 | ||||||||||||||
(in millions, except for per gallon amounts) | Dollars | Cost/Gal | Dollars | Cost/Gal | |||||||||||
Raw or "into-plane" fuel cost | $ | 1,437 | $ | 1.80 | $ | 828 | $ | 1.49 | |||||||
Losses on settled hedges | 17 | 0.02 | 16 | 0.03 | |||||||||||
Consolidated economic fuel expense | $ | 1,454 | $ | 1.82 | $ | 844 | $ | 1.52 | |||||||
Mark-to-market fuel hedge adjustments | (7 | ) | — | (13 | ) | (0.02 | ) | ||||||||
GAAP fuel expense | $ | 1,447 | $ | 1.82 | $ | 831 | $ | 1.50 | |||||||
Fuel gallons | 797 | 554 | |||||||||||||
12
Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:
• | By eliminating fuel expense and certain special items (including merger-related costs, changes resulting from the Tax Cuts and Jobs Act, and certain state tax law enactments) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management. |
• | Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance. |
• | Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees. |
• | CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors. |
• | Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines. |
• | Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business. |
13
GLOSSARY OF TERMS
Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit
Aircraft Stage Length - represents the average miles flown per aircraft departure
ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown
CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items
CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control
Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt
Diluted Earnings per Share - represents earnings per share using fully diluted shares outstanding
Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised
Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program
Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures
Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers
Mainline - represents flying Boeing 737 and Airbus jets and all associated revenues and costs
PRASM - passenger revenue per ASM; commonly called “passenger unit revenue”
Productivity - number of revenue passengers per full-time equivalent employee
RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™, and other ancillary revenue; represents the average total revenue for flying one seat one mile
Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir. In this segment, 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 capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.
RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM
Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile
14
Exhibit 99.2
Investor Update - January 25, 2018
References in this update to “Air Group,” “Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.
This update includes forecasted operational and financial information for our consolidated and mainline operations. Our disclosure of operating cost per available seat mile, excluding fuel and other items, provides us (and may provide investors) with the ability to measure and monitor our performance without these items. The most directly comparable GAAP measure is total operating expenses per available seat mile. However, due to the large fluctuations in fuel prices, we are unable to predict total operating expenses for any future period with any degree of certainty. In addition, we believe the disclosure of fuel expense on an economic basis is useful to investors in evaluating our ongoing operational performance. Please see the cautionary statement under “Forward-Looking Information.”
We are providing information that includes the historical financial information as reported, as well as historical periods recast for the expected impacts of certain new accounting standards. Most significantly, the new revenue recognition standard is effective January 1, 2018 and will require us to recast prior period financial information.
We are providing information about estimated fuel prices and our hedging program. Management believes it is useful to compare results between periods on an “economic basis.” Economic fuel expense is defined as the raw or “into-plane” fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period. Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.
We are also providing our expected capital expenditures and fleet count for future periods. These estimates are based on firm commitments we currently have in place for future aircraft deliveries and our current estimate of non-aircraft capital spending.
Forward-Looking Information
This update contains forward-looking statements subject to the safe harbor protection provided by 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. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2016, as well as in other documents filed by Alaska Air Group with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. 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.
AIR GROUP - CONSOLIDATED |
Impact of Accounting Changes
Under the new revenue recognition accounting standard, effective January 1, 2018, the primary changes to our financial information relate to frequent flyer accounting, ticket breakage, and ancillary revenue geography. Miles or points earned through travel in our Mileage Plan or Elevate programs have historically been accounted for using the incremental cost approach, but will now require us to allocate a portion of the ticket price to deferred revenue. Ticket breakage was historically recognized at the time of expiration and will now be recorded based on an estimate at the original departure date. A majority of ancillary revenues, which were historically reported as Other revenue, will be reclassified to Passenger revenue. This will affect common industry metrics such as Passenger Revenue per Available Seat Mile (PRASM), Revenue per Available Seat Mile (RASM) and Cost per Available Seat Mile excluding fuel and special items (CASMex).
As a result of the standard, we expect to restate 2017 and 2016 financial information in our future filings beginning in the first quarter 2018. We expect 2017 reported revenues will be reduced by approximately $43 million and reported non-fuel operating costs will increase by approximately $11 million, resulting in a net reduction of $54 million to reported adjusted pretax profit. We expect a similar impact in 2018.
As a reminder, this standard impacts the timing of revenue recognition, and is not indicative of a weaker revenue environment, lower traffic or yields and has no impact to cash flows.
Although less significant, the new retirement benefits accounting standard is also effective January 1, 2018. Under this new standard, all components of net periodic benefit cost will be presented in Nonoperating income (expense), except service cost, which will remain in Wages and benefits. As a result of the standard, we expect to restate 2017 and 2016 accordingly. For 2017 reported Wages and benefits will increase approximately $7 million and reported Nonoperating expense will decrease by $7 million. This change has an impact on previously reported CASMex. Management believes it is useful to compare forecasted results with the restated results under the new standards.
The following tables show restated quarterly and full year 2017 RASM and CASMex reflecting the impact of these new accounting standards. Due to the reclassification of the majority of Other revenue to Passenger revenue, PRASM is not restated below as it closely correlates with RASM. All restated amounts below are provisional. We will provide all periods recast for 2016 and 2017 in future filings.
RASM (cents) | CASMex (cents) | ||||||
As Reported | As Restated (a) | As Reported | As Restated (a) | ||||
Q1 2017 | 12.15¢ | 12.09¢ | 8.37¢ | 8.39¢ | |||
Q2 2017 | 13.46¢ | 13.45¢ | 7.94¢ | 7.98¢ | |||
Q3 2017 | 13.12¢ | 13.04¢ | 7.98¢ | 8.00¢ | |||
Q4 2017 | 12.34¢ | 12.21¢ | 8.64¢ | 8.67¢ | |||
Full Year 2017 | 12.78¢ | 12.71¢ | 8.23¢ | 8.26¢ | |||
(a) | 2017 restated amounts reflect the impacts of the updated accounting standards, effective for the Company beginning January 1, 2018. |
All future guidance in this Investor Update is based on the restated 2017 figures as noted in the table above.
Forecast Information
The cost guidance below excludes a $25 million special charge in January 2018 for the $1,000 bonus awarded to employees in connection with the passing of the Tax Cuts and Jobs Act.
Forecast Full Year 2018 | Full Year 2017 As Restated (a) | % Change | |||
Cost per ASM excluding fuel and special items (cents) | 8.45¢ - 8.50¢ | 8.26¢ | ~ 2.5% | ||
Fuel gallons (000,000) | 870 | 797 | ~ 9% | ||
We expect full year 2018 capacity to increase by approximately 7.5%. We expect first quarter 2018 capacity to increase by approximately 8% and Revenue per Available Seat Mile (RASM) to decline approximately 3.5% to 4.5%.
Forecast Q1 2018 | Q1 2017 As Restated (a) | % Change | |||
Cost per ASM excluding fuel and special items (cents) | 8.84¢ - 8.89¢ | 8.39¢ | ~ 6% | ||
Fuel gallons (000,000) | 205 | 184 | ~ 11.5% | ||
Economic fuel cost per gallon(b) | $2.18 | $1.78 | ~ 21% | ||
(a) | Information not impacted by the updated accounting standards (Fuel gallons, Economic fuel cost per gallon) has not been restated. Restated amounts (RASM and CASMex) reflect the impacts of the updated accounting standards, effective for the Company January 1, 2018. Full year 2016 restated RASM will be provided in a future filing. |
(b) | Our economic fuel cost per gallon estimate for the first quarter includes the following per-gallon assumptions: crude oil cost - $1.56 ($66 per barrel); refining margin - 50 cents; benefit of settled hedges - (2) cents, with the remaining difference due to taxes and other into-plane costs. |
The preceding 2018 forecast CASMex includes the full impact of costs attributable to Alaska's maintenance cost per hour service agreement which went into effect October 1, 2017, the new pilot wage rates and benefits which went into effect November 1, 2017, as well as the net cost impact of higher regional mix offset by longer stage length. Adjusting for these new items, CASMex would have been expected to decline by approximately 1%. The cost per ASM impact of these items is quantified below:
Impact of Cost Items Noted Above to 2018 Full-Year Forecast | |||
$ impact (in millions) | per ASM impact | ||
Impact of incremental cost from new pilot wages and benefits rates | $125 | 0.19¢ | |
Impact of incremental cost from new MCPH agreement | $25 | 0.04¢ | |
Impact of net cost impact of higher regional mix offset by longer stage length | $35 | 0.05¢ | |
2018 Forecasted Capacity and CASMex by Quarter
The following table shows 2018 quarterly forecasted capacity by segment and forecasted consolidated CASMex with percent change on a recast basis from the same period in the prior year.
Forecast | |||||||||
Q1 | Q2 | Q3 | Q4 | Full Year | |||||
Mainline ASMs | ~ 7.0% | ~ 8.0% | ~ 6.0% | ~ 3.0% | ~ 6.0% | ||||
Regional ASMs | ~ 22.0% | ~ 25.5% | ~ 22.0% | ~ 26.0% | ~ 24.0% | ||||
Total Air Group ASMs | ~ 8.0% | ~ 9.5% | ~ 7.5% | ~ 5.0% | ~ 7.5% | ||||
CASMex (cents) | 8.84¢ - 8.89¢ | 8.20¢ - 8.25¢ | 8.20¢ - 8.25¢ | 8.55¢ - 8.60¢ | 8.45¢ - 8.50¢ | ||||
% Change | ~ 6% | ~ 3% | ~ 3% | ~ (1)% | ~ 2.5% | ||||
Capacity and Capital Expenditures Forecast
The guidance below is based on our current expectation of capacity growth and capital expenditures.
(in millions, except %) | 2017 Actuals | 2018 | 2019 | 2020 | |||
Capacity (ASMs) growth (a) | 7.1% | ~ 7.5% | ~ 4% | ~ 4% | |||
Targeted capital expenditures | $1,015 | ~$1,000 | ~$750 | ~$750 | |||
(a) | 2017 Capacity growth rate is on a Combined Comparative basis. |
Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $14 million in the first quarter of 2018.
Effective Tax Rate
We expect the 2018 effective tax rate to be approximately 24.5%.
Future Fuel Hedge Positions
All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. Our crude oil positions are as follows:
Approximate % of Expected Fuel Requirements | Weighted-Average Crude Oil Price per Barrel | Average Premium Cost per Barrel | |||
First Quarter 2018 | 50% | $62 | $2 | ||
Second Quarter 2018 | 50% | $63 | $1 | ||
Third Quarter 2018 | 40% | $62 | $2 | ||
Fourth Quarter 2018 | 30% | $62 | $2 | ||
Full Year 2018 | 42% | $62 | $2 | ||
First Quarter 2019 | 20% | $64 | $1 | ||
Second Quarter 2019 | 10% | $65 | $2 | ||
Full Year 2019 | 7% | $65 | $2 | ||