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3. | The number of miles used per award (i.e., free ticket): |
We estimate how many miles will be used per award. For example, our members may redeem credit for free travel to various locations or choose between a highly restricted award and an unrestricted award. Our estimates are based on the current requirements in our Mileage Plan program and historical travel redemption patterns.
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4. | The number of awards redeemed for travel on our airlines versus other airlines: |
The cost for us to carry an award passenger is typically lower than the cost we will pay to our travel partners. We estimate the number of awards that will be redeemed on our airlines versus on our travel partners and accrue the estimated costs based on historical redemption patterns. If the number of awards redeemed on our travel partner is higher or lower than estimated, we may need to adjust our liability and corr
esponding expense.
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5. | The costs that will be incurred to provide award travel: |
When a frequent flyer travels on his or her a
ward ticket on one of our airlines, incremental costs such as food, fuel and insurance are incurred to carry that passenger. We estimate what these costs will be (excluding any contribution to overhead and profit) and accrue a liability. If the passenger travels on another airline on an award ticket, we often must pay the other airline for carrying the passenger. The other airline costs are based on negotiated agreements and are often
substantially higher than the costs we would incur to carry that passenger. We estimate how much we will pay to other airlines for future travel awards based on historical redemptions and settlements with other carriers and accrue a liability accordingly. The costs actually incurred by us or paid to other airlines may be higher or lower than the costs that were estimated and accrued, and therefore we may need to adjust our liability and recognize a corresponding expense.
We regularly review signif
icant Mileage Plan assumptions and change our assumptions if facts and circumstances indicate that a change is necessary. Any such change in assumptions could have a significant effect on our financial position and results of operations.
PENSION PLANS
Accounting rules require recognition of the overfunded or underfunded status of an entity’s defined-benefit pension and other postretirement plans as an asset or liability in the financial statements and requires recognition of the funded status in othe
r comprehensive income. Pension expense is recognized on an accrual basis over employees’ approximate service periods and is generally independent of funding decisions or requirements. We recognized expense for our qualified defined-benefit pension plans of $50.2 million, $93.0 million, and $48.0 million in 2010, 2009, and 2008, respectively. We expect the 2011 expense to be approximately $44 million.
The calculation of pension expense and the corresponding liability requires the use of a number of important assumptions, including the expected long-term rate of return on plan assets and the assumed discount rate. Changes in these assumptions can result in different expense and liability amounts, and future actual experie
nce can differ from these assumptions.
Pension expense increases as the expected rate of return on pension plan assets decreases. As of December 31, 2010, we estimate that the pension plan assets will generate a long-term rate of return of 7.75%. This rate was developed using historical data, the current value of the underlying assets, as well as long-term inflation assumptions. We regularly review the actual asset allocation and periodically rebalance investments as appropriate. This expected long-term rate of return on plan assets at December 31, 2010 is based on an allocation of U.S. and non-U.S. equities and U.S. fixed-income securities. Decreasing the expected long-term rate of return by 0.5% (from 7.75% to 7.25%) would increase our estimated 2011 pension expense by approximately $5.7 million.
Pension liability and future pension expense increase as the discount rate is reduced. We discounted future pension obligations using a rate of 5.55% and 5.85% at December 31, 2010 and 2009, respectively. The discount rate at December 31, 2010 was determined using current rates earned on high-quality long-term bonds with maturities that correspond with the estimated cash distributions from the pension plans. Decreasing the discount rate by 0.5% (from 5.55% to 5.05%) would increase our projected benefit obligation at December 31, 2010 by approximately $97.7 million and increase estimated 2011 pension expense by approximately $9.1 million.
All of our defined-benefit pension plans are now closed to new entrants.
Future changes in plan asset returns, assumed discount rates and various other factors related to the participants in our pension plans will impact our future pension expense and liabilities. We cannot predict what these factors will be in the future.
LONG-LIVED ASSETS
As of December 31, 2010, we had approximately $3.1 billion of property and equipment and related assets, net of accumulated depreciation. In accounting for these long-lived assets, we make estimates about the expected useful lives of the assets, changes in fleet plans, the expec
ted residual values of the assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long-lived assets, management decisions regarding the future use of the assets, a significant change in the long-lived assets condition, and operating cash flow losses associated with the use of the long-lived asset.
In 2008, Horizon announced plans to ultimately exit its CRJ-700 fleet and transition to an all-Q400 fleet. As a result of the decision, we determined that the two owned CRJ-700s were impaired and recorded an impairment charge on the aircraft and their related spare parts of $5.5 million in 2008 to reduc
e the carrying value of these assets to their estimated fair value.
There is inherent risk in estimating the fair value of our aircraft and related parts and their salvage values at the time of impairment. Actual proceeds upon disposition of the aircraft or related parts could be materially less than expected, resulting in additional loss. Our estimate of salvage value at the time of disposal could also change, requiring us to increase the depreciation expense on the affected aircraft.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In September 2009, the Financial Accounting Standards Board (“FASB”) issued AS
U 2009-13, Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. This accounting standard is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. This guidance is effective for us on January 1, 2011 and will change our accounting for recognition of revenue associated with frequent flyer credits. Management does not believe that there will be an immediat
e significant impact of this new standard on the Company's financial position, results of operations, cash flows, or disclosures.
Recently, the Financial Accounting Standards Board (FASB) has issued a number of proposed Accounting Standards Updates (ASUs). Those proposed ASUs are as follows:
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• | Proposed ASU - Revenue Recognition - was issued in June 2010 and continues to evolve. We believe that a new revenue recognition standard could significantly impact the Company's accounting for the Company's Mileage Plan miles earned by passengers who fly on us or our partners, or miles sold to third parties. |
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• &n
bsp; | Proposed ASU - Leases - was issued in August 2010. This proposed standard overhauls accounting for leases and will apply a “right-of-use” model in accounting for nearly all leases. For lessees, this will result in recognizing an asset representing the lessee's right to use the leased asset for the lease term and a liability to make lease payments. This proposed standard eliminates the operating lease concept from an accounting perspective, thereby eliminating rent expense from the income statement. This proposed standard, if adopted, will significantly impact the Company's statement of operations, financial position, and disclosures. For example, we estimate the capitalized value of airplane leases to be approximately $1.0 bi
llion using a seven times annual rent factor. |
These proposed ASUs are currently in comment period and are subject to change. There are no effective dates assigned to these proposals.
In July 2010, the FASB also issued an initial draft of new financial statement presentation requirements. These new requirements, as currently drafted, would substantially change the way financial statements are presented by disaggregating information in financial statements to explain the components of its financial position and financial
performance. These changes will impact the presentation of the financial statements only and are not expected to impact the Company's overall financial position, results of operations, or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
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• | Our existing cash and marketable securities balance of $1.2 billion (which represents 32% of trailing 12 months revenue) and our expected cash from operations; |
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• | Aircraft financing – the 18 unencumbered aircraft in our operating fleet that could be financed, if necessary; |
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• &n
bsp; | Our combined $200 million bank line-of-credit facilities (currently nothing outstanding); |
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• | Other potential sources such as a “forward sale” of mileage credits to our bank partner. |
Because of the recent economic recession, we intentionally increased our cash and marketable securities to current levels (roughly 32% of trailing 12 months revenues). In 2010, we paid off outstanding debt associated with six B737-800 aircraft and a portion of a seventh aircraft loan totaling $169.2 million. Subsequent to the end of 2010, we paid off outstanding balances on two additional aircraft loans totaling $51.8 million. In addition, we repurchased $45.1 million of our common stock in 2010 and have $31.2 million remaining to repurchase under our existing $50 million Board authorization. Finally, we made a voluntary contribution to our defined-benefit pension plans of $100 million in December
2010, bringing our total pension contributions to $145.6 million in 2010. We will continue to focus on preserving a strong liquidity position and evaluate our cash needs as conditions change.
We believe that our current cash and marketable securities balance combined with future cash flows from operations and other sources of liquidity will be sufficient to fund our operations for the foreseeable future.
In our cash and marketable securities portfolio, we invest only in U.S. government securities, certain asset-backed obligations and corporate debt securities. We do not invest in equities or auction-rate securities. As of December 31, 2010, we had a $12.8 million net unrealized gain on our $1.2 billion cash and marketable securities balance.
Our overall investment strategy for our marketable securities portfolio has a primary goal of maintaining and securing its investment principal. Our investment portfolio is managed by reputable financial institutions and is continually reviewed to ensure that the investments are aligned with our strategy.
The table below presents the major indicators of financial condition and liquidity:
| | | | | | | | | | | |
(in millions, except per-share and debt-to-capital amounts) | December 31, 2010 | | December 31, 2009 | | Change |
Cash and marketable securities | $ | 1,208.2 | | | $ | 1,192.1 | | | $ | 16.1 | |
Cash and marketable securities as a percentage of trailing twelve months revenue | 32 | % | | 35 | % | | (3) pts | |
Long-term debt, net of current portion | 1,313.0 | | | 1,699.2 | | | <
div style="text-align:right;font-size:8pt;">(386.2 | ) |
Shareholders’ equity | 1,105.4 |
| | 872.1 | | | 233.3 | |
Long-term debt-to-capital assuming aircraft operating leases are capitalized at seven times annualized rent | 67%:33% | | | 76%:24% | | | (9) pts | |
The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.
ANALYSIS OF OUR CASH FLOWS
Cash Provided by Operating Activities
During 2010, net cash provided by operating activities was $553.7 million, compared to $292.5 million during 2009. The $261.2 million increase was primarily driven by higher revenues, growth in the air traffic liability and a decline in paid income taxes compared to the prior year. The increases were partially offset by the payment of 2009 incentive pay in the first quarter of 2010, which was significantly larger than the payment of 2008 incentive pay in 2009.
We typically generate positive cash flows from operations, but historically have consumed substantially all of that cash plus additional debt proceeds for capital expenditures and debt payments. In 2010, however, we had much lower capital expenditures than in the past several years due to fewer aircraft deliveries.
Cash Used in Investing Activities
Our investing activities are primarily made up of capital expenditures and, to a lesser extent, purchases and sales of marketable securities. Cash used in investing activities was $295.2 million during 2010, compared to $657.4 million in 2009. Our capital expenditures were $183.0 million, or $255.4 million lower than in 2009 due to fewer aircraft purchases and advance deposits.
We currently expect capital expenditures for 2011 to be as follows (in millions):
| | | |
| 2011 | |
Aircraft-related | $ | 330 | |
Non-aircraft | 55 | |
Total Air Group | $ | 385 | |
The expected increase in capital expenditures from 2010 is due to payments associated with the deliveries of three B737-800 aircraft, eight Q400 aircraft, and the advance deposits related to the new Boeing aircraft order discussed later under "Aircraft Purchase Commitments". We preliminarily expect 2012 capital expenditures to be approximately $370 million.
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Cash Provided by Financing Activities
Net cash used by financing activities was $333.2 million during 2010 compared to net cash provided of $246.0 million during 2009. The change is primarily due to proceeds from the sale-leaseback transactions on six B737-800 aircraft and debt proceeds
in 2009 compared to no borrowings in 2010, combined with $169.2 million of debt prepayment in 2010. Additionally, we repurchased $45.1 million of our common stock in 2010, compared to $23.8 million repurchased in 2009.
We plan to meet our capital and operating commitments through internally generated funds from operations and cash and marketable securities on hand, along with additional debt financing if necessary.
Bank Line-of-Credit Facility
We terminated our previous $185 million credit facility effective March 30, 2010. That facility was replaced with two new $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. Borrowings on one of the $100 million facilities, which expires in March 2013, are secured by aircraft. Borrowings on the other $100 million facility, which expires in March 2014, are secured by certain accounts receivable, spare engines, spare parts and ground service equipment. There are no outstanding balances on these facilities at December 31,
2010. We have no immediate plans to borrow using either of these facilities. See Note 4 in the consolidated financial statements for further discussion.
Pre-delivery Payment Facility
We terminated our pre-delivery payment facility in the second quarter of 2010. There were no outstanding borrowings under this facility at the time of termination. See Note 4 in the consolidated financial statements for furt
her discussion.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Purchase Commitments
In January 2011, we executed an aircraft purchase agreement with Boeing fo
r 15 new B737 aircraft, two 737-800 aircraft and 13 new B737-900ER aircraft, with deliveries starting late in 2012 and going through 2014. The agreement also includes options for 15 additional B737-900ER aircraft with delivery positions in 2016 and 2017. The firm orders mentioned above were inclusive of the conversion of eleven existing options.
For purposes of the aircraft purchase commitment table below, we are including the recent aircraft transactions and their related obligations. All other obligations are as of December 31, 2010. Overall, we had firm orders to purchase 36 aircraft requiring future aggregate payments of approximately $1,150.9 million, as set forth below. Alaska has options to acquire 42 additional B737s and Horizon has options to acquire 10 Q400s.
The following table summarizes aircraft purchase commitments and payments by year, including the January aircraft order:
| | | | | | | | | | | | | | | | | | | | | | | | |
Aircraft | | Delivery Period - Firm Orders |
2011 | | 2012 | | 2013 | | 2014 | | Beyond 2014 | | Total |
Boeing 737-800 |
| 3 | | |
6 | | | 3 | | | 1 | | | 2<
/font> | | | 15 | |
Boeing 737-900ER | | — | | | — | | | 6 | | | 7 | | | — | | | 13 | |
Bombardier Q400 | | 8 | | | — | | | — | | | — | | | — |  
; | | 8 | |
Total | | 11 | | | 6 | | | 9 | | | 8 | | | 2 | | | 36 | |
| | | | | | | | | | | | |
Payments (millions)* | | $ | 331.8 | | <
/div> | $ | 315.0 | | | $ | 297.7 | | | $ | 167.0 | | | $ | 39.4 | | | $ | 1,150.9 | |
* Includes pre-delivery payments to Boeing and Bombardier as well as final aircraft payments.
We expect to pay for the three B737-800 aircraft deliveries in 2011 with cash on hand and the eight Q400 aircraft with long-term debt financing. We expect to pay for firm orders beyond 2011 and the option aircraft, if exercised, through internally generated cash, long-term debt, or operating lease arrangements.
Contractual Obligations
The following table provides a summary of our principal payments under current and long-term debt obligations, operating lease commitments, aircraft purchase commitments and other obligations as of December 31, 2010. The ai
rcraft purchase commitments in the table below do not reflect the January 2011 aircraft order:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | Beyond 2015 | | Total |
Current and long-term debt obligations | $ | 221.2 | | | $ | 216.9 | | | $ | 175.7 | | | $ | 141.9 | | | $ | 128.2 | | | $ | 650.3 | | | $ | 1,534.2 | |
Operating lease commitments (1) | 214.5 | | | 197.4 | | | 157.8 | | | 140.0 | | | 106.7 | | | 285.5 | | | 1,101.9 | |
Aircraft purchase commitments | 238.4 | | | 112.5
| | | 79.7 | | | 59.6 | | | 34.6 | | | 4.8 | | | 529.6 |
div> |
Interest obligations (2) | 77.4 | | | 69.8 | | | 58.0 | | | 49.7 | | | 42.8 | | | 111.1 | | | 408.8 | |
Other obligations (3) | 51.9 | | | 52.2 | | | 42.2 | | | 54.3 | | | — | | | — | | | 200.6 | |
Total | $ | 803.4 | | | $ | 648.8 | | | $ | 513.4 | | | $ | 445.5 | | | $ | 312.3 | | | $ | 1,051.7 | | | $ | 3,775.1 | |
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(1) | Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. The aircraft operating leases include lease obligations for 16 leased Q200 aircraft and three CRJ-700 aircraft, all of which are no longer in our operating fleets. We have accrued for these lease commitments based on their discounted future cash flows as we remain obligated under the existing lease contracts on these aircraft. |
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(2) | For variable-rate debt, future obligations are shown above using interest rates in effect as of December 31, 2010. |
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(3) | Includes minimum obligations under our long-term power-by-the-hour maintenance agreements for all B737 engines other than the B737-800. |
Pension Obligations
The table above excludes contributions to our various pension plans, which could be approximately $35 million to $50 million per year based on our historical funding practice, although there is no minimum required contribution in 2011. In both 2010 and 2009, we made year-end
voluntary supplemental pension contributions of $100 million, bringing the funding total in both years to approximately $300 million. The unfunded liability for our qualified defined-benefit pension plans was $200.3 million at December 31, 2010 compared to $272.9 million at December 31, 2009. This results in a 85.1% funded status on a projected benefit obligation basis compared to 76.9% funded as of December 31, 2009.
Los Angeles International Airport Improvements
In 2009, we announced plans to move from Terminal 3 to Terminal 6 at Los Angeles International Airport (LAX). As part of this move, we have agreed to manage and fund up to $175 million of the project during the design and construction phase. The project is e
stimated to cost approximately $250 million and is expected to be completed in 2012. We expect Los Angeles World Airports and the Transportation Security Administration to reimburse us for the majority of the construction costs either during the course of, or upon the completion of, construction. We are currently working with the City of Los Angeles and Los Angeles World Airports on a funding agreement and expect to have it finalized in the near future. We anticipate that our proprietary share will be approximately $25 million of the total cost of the project. As of December 31, 2010, we capitalized $34 million associated with this project, which represents total project costs to date.
Credit Card Agreements
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by the agreement. Under another such agreement, we would be obligated to maintain a reserve if our cash balance fell below $350 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.
EFFECT OF INFLATION AND PRICE CHANGES
Inflation and price changes other than for aircraft fuel do not have a significant effect on our operating revenues, operating expenses and operating income and did not have such an effect in the last three fiscal years.
RETURN ON INVESTED CAPITAL
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We strive to provide a return to our investors that exceeds the cost of the capital employed in our business. Our target return on invested capital (ROIC) is 10%. We surpassed this goal in 2010, but have not historically reached this threshold on average over our business cycle. Our strategic plan is built on the premise of providing an appropriate return to all capital providers, which we believe is a 10% average return.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
We have interest-rate risk on our variable-rate debt obligations and our available-for-sale marketable investment portfolio, and commodity-price risk in jet fuel required to operate our aircraft fleet. We purchase the majority of our jet fuel at prevailing market prices and seek to manage market risk through execution of our hedging strategy and other means. We have market-sensitive instruments in the form of fixed-rate debt instruments, and fina
ncial derivative instruments used to hedge our exposure to jet-fuel price increases and interest-rate increases. We do not purchase or hold any derivative financial instruments for trading purposes.
Market Risk – Aircraft Fuel
Currently, our fuel-hedging portfolio consists of crude oil call options and jet fuel refining margin swap contracts. We utilize the contracts in our portfolio as hedges to decrease our exposure to the
volatility of jet fuel prices. Call options are designed to effectively cap our cost of the crude oil component of fuel prices, allowing us to limit our exposure to increasing fuel prices. With these call option contracts, we still benefit from the decline in crude oil prices, as there is no downward exposure other than the premiums that we pay to enter into the contracts. We believe there is risk in not hedging against the possibility of fuel price increases. We estimate that a 10% increase or decrease in crude oil prices as of December 31, 2010 would increase or decrease the fair value of our crude oil hedge portfolio by approximately $56.6 million and $47.5 million, respectively.
Our portfolio of fuel hedge contracts was worth $131.3 million at December 31, 2010, for which we have paid $108.6 million of premiums to counterparties, compared to a portfolio value of $117.0 million at December 31, 2009. We do not have any collateral held by counterparties to these agreements as of December 31, 2010.
We continue to believe that our fuel hedge program is an important part of our strategy to reduce our exposure to volatile fuel prices. We expect to continue to enter into these types of contracts prospectively, although significant changes in market conditions could affect our decisions. For more discussion, see Note 3 to our consolidated financial statements.
Financial Market Risk
We have exposure to market risk associated with changes in interest rates related primarily to our debt obligations and short-term investment portfolio. Our debt obligations include variable-rate instruments, which have exposure to changes in interest rates. This exposure is somewhat mitigated through our variable-rate investment portfolio. A hypothetical 10% change in the average interest rates incurred on variable-rate debt during 2010 would correspondingly change our net earnings and cash flows associated with these items by approximately $0.8 millio
n. In order to help mitigate the risk of interest rate fluctuations, we have fixed the interest rates on certain existing variable-rate debt agreements over the past several years. Our variable-rate debt is approximately 20% of our total long-term debt at December 31, 2010 compared to 22% at December 31, 2009.
We also have investments in marketable securities, which are exposed to market risk associated with changes in interest rates. If short-term interest rates were to average 1% more
than they did in 2010, interest income would increase by approximately $11.9 million.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
SELECTED QUARTERL
Y CONSOLIDATED FINANCIAL INFORMATION (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 1st Quarter | | 2nd Quarter | | 3rd Quarter | | 4th Quarter |
(in millions, except per share) | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Operating revenues | $ | 829.9 | | | $ | 742.4 | | | $ | 976.4 | | | $ | 843.9 | | | $ | 1,067.5 | | | $ | 967.4 | | | $ | 958.5 | | | $ | 846.1 | |
Operating income (loss) | 26.0 | | | (11.9 | ) | | 109.9 | | | 66.7 | | | 216.4 | | | 159.8 | | | 119.3 | | | 52.8 | |
Net income (loss) | 5.3 | | | (19.2 | ) | | 58.6 | | | 29.1 | | | 122.4 | | | 87.6 | | | 64.8 | | | 24.1 | |
Basic earnings (loss) per share* | 0.15 | | | (0.53 | ) | | 1.64 | | | 0.80 | | | 3.41 | | | 2.48 | | | 1.80 | | | 0.68 | |
Diluted earnings (loss) per per share* | 0.15 | | | (0.53 | ) | | 1.60 | | | 0.79 | | | 3.32 | | | 2.46 | | | 1.75 | | | 0.67 | |
* For earnings per share, the sum of the quarters may not equal the total for the full year.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Alaska Air Group, Inc.:
We have audited the accompanying consolidated balance sheets of Alaska Air Group, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the re
sponsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alaska Air Group, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (U
nited States), Alaska Air Group, Inc.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2011 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Seattle, Washington
February 22, 2011
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
As of December 31 (in millions) | | 2010 | | 2009 |
ASSETS | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 89.5 | | | $ | 164.2 | |
Marketable securities | | 1,118.7 | | | 1,027.9 | |
Total cash and marketable securities | | 1,208.2 | |
font> | 1,192.1 | |
Receivables - less allowance for doubtful accounts of $0.9 and $1.5 | | 120.1 | | | 111.8 | |
Inventories and supplies - net | | 45.1 | | | 45.8 | |
Deferred income taxes | | 120.5 | | | 120.3 | |
Fuel hedge contracts | | 61.4 | | | 66.2 | |
Prepaid expenses and other current assets | | 106.7 | | | 98.1 | |
Total Current Assets | | 1,662.0 | | | 1,634.3 | |
| | | | |
Property and Equipment | | | | | | |
Aircraft and other flight equipment | | 3,807.6 | | | 3,660.1 | |
Other property and equipment | | 616.5 | | | 631.3 | |
Deposits for future flight equipment | | 202.5 | | | 215.5 |
|
| | 4,626.6 | | | 4,506.9 | |
Less accumulated depreciation and amortization | | 1,509.5 | | | 1,339.0 | |
Total Property and Equipment - Net | | 3,117.1 | | | 3,167.9 | |
| | | | |
Fuel Hedge Contracts | | 69.9 | | | 50.8 | |
| | | | |
Other Assets | | 167.6 | | | 143.2 | |
| | | | |
Total Assets | | $ | 5,016.6 | | | $ | 4,996.2 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS - (continued)
| | | | | | | | |
As of December 31 (in millions except share amounts) | | 2010 | | 2009 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current Liabilities | | | | |
Accounts payable | | $ | 60.2 | | | $ | 63.3 | |
Accrued aircraft rent | | 43.1 | | | 54.0 | |
Accrued wages, vacation and payroll taxes | | 176.6 | | | 155.4 | |
Other accrued liabilities | | 501.2 | | | 474.5 | |
Air traffic liability | | 422.4 | | | 366.3 | |
Current portion of long-term debt | | 221.2 | | | 156.0 | |
Total Current Liabilities | | 1,424.7 | | | 1,269.5 | |
| | | | |
Long-Term Debt, Net of Current Portion | | 1,313.0 | | | 1,699.2 | |
Other Liabilities and Credits | | | | | | |
Deferred income taxes | | 279.9 | | | 151.1 | |
Deferred revenue | | 403.5 | | | 435.1 | |
Obligation for pension and postretirement medical benefits | | 367.1 | | | 421.0 | |
Other liabilities | | 123.0 | | | 148.2 | |
| | 1,173.5 | | | 1,155.4 | |
Commitments and Contingencies | | | | | | |
Shareholders' Equity<
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Preferred stock, $1 par value Authorized: 5,000,000 shares, none issued or outstanding | | — | | | — | |
Commo
n stock, $1 par value Authorized: 100,000,000 shares, Issued: 2010 - 37,010,140 shares; 2009 - 35,843,092 shares | | 37.0 | | | 35.8 | |
Capital in excess of par value | | 815.5 | | | 767.0 | |
Treasury stock (common), at cost: 2010 - 1,086,172; 2009 - 252,084 shares | | (46.0 | ) | | (5.7 | ) |
Accumulated other comprehensive loss | | (267.2 | ) | | (240.0 | ) |
Retained earnings | | 566.1 | | | 315.0 | |
| | 1,105.4 | | | 872.1 | |
Total Liabilities and Shareholders' Equity | | $ | 5,016.6 | | | $ | 4,996.2 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | |
Year Ended December 31 (in millions except per share amounts) | | 2010 | | 2009 | | 2008 |
Operating Revenues | | | | | | |
Passenger | | $ | 3,472.9 | | | $ | 3,092.1 | | | $ | 3,355.8 | |
Freight and mail | | 106.2 | | | 95.9 | | | 103.6 | |
Other - net | | 253.2 | | | 211.8 | | | 160.9 | |
Change in Mileage Plan terms | | — | | | — | | | 42.3 | |
Total Operating Revenues | | 3,832.3 | | | 3,399.8 | | | 3,662.6 | |
| | | | | | |
Operating Expenses | | | | | | | | | |
Wages and benefits | | 960.9 | | | 988.1 | | | 943.7 | |
Variable incentive pay | | 92.0 | | | 76.0 | | | 21.4 | |
Aircraft fuel, including hedging gains and losses | | 900.9 | | | 658.1 | | | 1,398.4 | |
Aircraft maintenance | | 216.5 | | | 223.1 | | | 208.8 | |
Aircraft rent | | 138.9 | | | 153.7 | | | 163.1 | |
Landing fees and other rentals | | 232.8 | | | 223.2 | | | 223.7 | |
Contracted services | | 163.0 | | | 150.6 | | | 166.1 | |
Selling expenses | | 153.8 | | | 131.8 | | | 147.1 | |
Depreciation and amortization | | 230.5 | | | 219.2 | | | 204.6 | |
Food and beverage service | | 57.5 | | | 50.1 | | | 50.9 | |
Other | | <
td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;">200.7
| | 213.9 | | | 222.9 | |
New pilot contract transition costs | | — | | | 35.8 | | | — | |
Restructuring charges | | — | | | — | | | 12.9 | |
Horizon restructuring and CRJ-700 fleet transition costs | | 13.2 | | | — | | | — | |
Fleet transition costs - MD-80 | | — | | | — | | | 47.5 | |
Fleet transition costs - CRJ-700 | | — | | | — | | | 13.5 | |
Fleet transition costs - Q200 | | — | | | 8.8 | |
| 10.2 | |
Total Operating Expenses | | 3,360.7 | | | 3,132.4 | | | 3,834.8 | |
Operating Income (Loss) | | 471.6 | | <
/div> | 267.4 | | | (172.2 | ) |
| | | | | |
div> |
Nonoperating Income (Expense) | | | | | | | | | |
Interest income | | 29.4 | | | 32.6 | | | 42.4 | |
Interest expense | | (108.3 | ) | | (104.3 | ) | | (104.8 | ) |
Interest capitalized | | 6.2 | | | 7.6 | | | 23.2 | |
Other - net | | 7.0 | | | (0.4 | ) | | (1.8 | ) |
| | (65.7 | ) | | (64.5 | ) | | (41.0 | ) |
Income (loss) before income tax | | 405.9 | | | 202.9 | | | (213.2 | ) |
Income tax expense (benefit) | | 154.8 | | | 81.3 | | | (77.3 | ) |
Net Income (Loss) | | $ | 251.1 | | | $ | 121.6 | | | $ | (135.9 | ) |
| | | | | | |
Basic Earnings (Loss) Per Share: | | $ | 7.01 | | | $ | 3.39 | | | $ | (3.74 | ) |
Diluted Earnings (Loss) Per Share: | | $ | 6.83 | | | $ | 3.36 | | | $ | (3.74 | ) |
Shares used for computation: | | | | | | | | |
Basic | | 35.822 | | | 35.815 | | | 36.343 | |
Diluted | | 36.786 | | | 36.154 | | | 36.343 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common | | | | Capital in | | Treasury | | Accumulated Other | | | | |
| | Shares | | Common | | Excess of | | Stock, | | Comprehensive | | Retained | | |
(in millions) <
/td> | | Outstanding | | Stock | | Par Value | | at Cost | | Loss |
td> | Earnings | | Total |
Balances at December 31, 2007 | | 38.051 | | | $ | 42.8 | | | $ | 899.1 | | | $ | (112.5 | )<
/font> | | $ | (133.3 | ) | | $ | 329.3 | <
div style="text-align:left;"> | | $ | 1,025.4 | |
2008 net loss | | | | | | | | | | | | | | | | | (135.9 | ) | | (135.9 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | |
| | | | | | | |
Related to marketable securities: | | | | | | | | | | | | | | | | | | | | | |
Change in fair value | | | | | | | | | | | | | | (8.7 | ) | | | | | | |
Reclassification to earnings | | | | | | | | | | | | | | (0.2 | ) | | | | | | |
Income tax effect | | | | | | | | | | | | | | 3.3 | | | | | | | |
| | | | | | | | | | | | <
/td> | | (5.6 | ) | | | | | (5.6 | ) |
Related to employee benefit plans: | | | | | | | | | | | | |
| | | | | | | | |
Pension liability adjustment, net of $113.5 tax effect | | | | | | | | | | | | | | (188.9 | ) | | | | | (188.9 | ) |
Postretirement medical liability adjustment, net of $0.5 tax effect | | | | | | | | | | | | | | (0.8 | ) | | | | | (0.8 | ) |
Officers supplemental retirement plan, net of $0.1 tax effect | | | | | | | | | | | | | | 0.3 | | | | |
div> | 0.3 | |
| | | | | | | | | | | | |
| |
Total comprehensive loss | | |
| | | | | | | | | | &n
bsp; | | | | | | | (330.9 | ) |
Purchase of treasury stock | | (2.126 | ) | | — | | | — | | | (48.9 | ) | |
| | | | | | (48.9 | ) |
Stock-based compensation | | — | | | — | | | 13.4 | | | — |
| | | | |
font> | | | 13.4 | |
Treasury stock issued under stock plans | <
td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;">
0.001 | | | — | | | — | | | — | | | | | | | | | — | |
Stock issued for employee stock purchase plan | | 0.169 | | | 0.2 | | | 3.0 | | | — | &n
bsp; | | | | | &nbs
p; | | | 3.2 | |
Stock issued under stock plans | | 0.180 | | | 0.2 | | | (0.5 | ) | | — | | | | | | | | | (0.3 | ) |
Balances at December 31, 2008 | | 36.275 | |
| $ | 43.2 | | | $ | 915.0 | | | $ | (161.4 | ) | | $ | (328.3 | ) | | $ | 193.4 | | | $ | 661.9 | |
2009 net income | | | | | | | | | | | | | | | | | 121.6 | | | 121.6 | |
Other comprehensive income (loss): | |
| | | | | | | | | | | | | | | | | | | |
Related to marketable securities:
font> | | | | | | | | | | | | | | | | | | | | | |
Change in fair value | | | | | | | | | | | | | | 20.4 | | | | | | | |
Reclassification to earnings | | | | | | | | | | | | | | (2.5 | ) | | | | | | |
Income tax effect | | | | | | | | | | | | | | (6.7 | ) | | | | | | |
| | | | | | | | | | | | | | 11.2 | | | | | | 11.2 | |
Related to employee benefit plans: | | | | | |
div> | | | | | | | | | | | | | | | |
Pension liability adjustment, net of $42.3 tax effect | | | | | | | | | | | | | | 71.9 | | | | | | 71.9 | |
Postretirement medical liability adjustment, net of $2.3 tax effect | | | | | | | | | | | | | | 3.9 | | | | | | 3.9 | |
Officers supplemental retirement plan, net of $0.2 tax effect | | | | | | | |
| | | | | | (0.2 | ) | | | | | (0.2 | ) |
| | | | | | | | | | | | | | |
Related to interest rate derivative instruments: | <
/div> | | | | | | | | | | | | | | | | | | | | |
Change in fair value | | | | | | | | | | | | | | 2.4 | | | | | | | |
Income tax effect | | | | | | | | | | | | | | (0.9 | )
td> | | | | | | |
| | | | | | | | | | | | | | 1.5 | | | |
font> | | 1.5 | |
Total comprehensive income | | | | | &nb
sp; | | | | | | | | | |
| | | | | 209.9 | |
Purchase of treasury stock | | (1.325 | ) | | — | | | — | | | (23.8 | ) | | | | | | | | (23.8 | ) |
Stock-based compensation | | — | | | — | | | 11.9 | | | — | | | | | | | | | 11.9 | |
Treasury stock issued under stock plans | | 0.069 | | | — | | | — | | | 1.5 | | | | | | | | | 1.5 | |
Delisting o
f treasury shares | | — | | | (7.9 | ) | | (170.1 | ) | | 178.0 | | | | | | | | | — | |
Stock issued for employee stock purchase plan | | 0.185 | | | 0.2 | &
nbsp; | | 2.9 | | | &mdash
; | | | | | | | | | 3.1 | |
Stock issued under stock plans, including $0.3 million tax benefit | | 0.387 | | | 0.3 | | | 7.3 | | | — | | | | | | | | | 7.6 | |
Balances at December 31, 2009 | | 35.591 | | | $ | 35.8 | | | $ | 767.0 | | | $ | (5.7 | ) | | $ | (240.0 | ) | | $ | 315.0 | | | $ | 872.1 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | <
td colspan="2" style="vertical-align:bottom;background-color:#84b4d4;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;">Common
| | | Capital in | | Treasury | | Accumulated Other | | | | |
| | Shares | | Common | | Excess of | | Stock, | | Comprehensive | | Retained | | |
(In millions) | | Outstanding | | Stock | | Par Value | | at Cost | | Loss | | Earnings | | Total |
Balances at December 31, 2009 | | 35.591 | | | $ | 35.8 | | | $ | 767.0 | | | $ | (5.7 | ) | | $ | (240.0 | ) | | $ | 315.0 | | | $ | 872.1 | |
2010 net income | | | | | |
| | | | | | | | | | | 251.1 | | | 251.1 | |
Other comprehensive income (loss): | | | | | | |
| | | | | | | | | | | | | | |
Related to marketable securities: | | | |
td> | | | | | | | | | | | | | | | | | |
Change in fair value | | | | | | | | | | | | |
| 7.2 | | | | | | | |
Reclassification to earnings | | | | | | | | | | | | | | (8.3 | ) | | | | | | |
Income tax effect | | | <
font style="font-family:inherit;font-size:10pt;"> | | | | | | | | | | | 0.4 | | | | | | | |
| | | | | | | | | | | | | | (0.7 | ) | | | | | (0.7 | ) |
Related to employee benefit plans: | | | | | | | | | | | | | | | | | | | | | |
Pension liability adjustment, net of $8.5 tax effect | | | &
nbsp; | | | | | &nb
sp; | | | | | | (14.2 | ) | | | | | (14.2 | ) |
Postretirement medical liability adjustment, net of $1.7 tax effect | | | | |
| | | | | | | | | (2.9 | ) | | | | | (2.9 | ) |
Officers supplemental retirement plan, net of $1.5 tax effect | | | | | | | | | | | | | | (2.4 | ) | | | | | (2.4 | ) |
| | | &nbs
p; | | | | | | | | | | | |
Related to interest rate derivative instruments: | | | | | | | | | |
| | | | | | | | | | | |
Change in fair value | | | | | | | | | | | | | | (11.2 | ) | | <
div style="text-align:right;font-size:8pt;"> | | | | |
Income tax effect | | | | | | | | | | | | | | 4.2 | | | | | | | |
| | | | | | | | | | | | | | (7.0 | ) | | | | | (7.0 | ) |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | 223.9 | |
Purchase of treasury stock | | (1.001 | ) | | — | &
nbsp; | | — | | | (45.1 | ) | | |
td> | | | | | (45.1 | ) |
Stock-based compensation | | — | | | — | | | 13.7 | | | — | | | | | | | | | 13.7 | |
Treasury stock issued under stock plans | | 0.167 | | | — | | | — | | | 4.8 | | | | | | | | | 4.8 | |
Stock issued for employee stock purchase plan | | 0.016 | | | — | | | — | | | — | | | | | | | | | — | |
Stock issued under stock plans, including $5.8 million tax benefit | | 1.151 | | | 1.2 | | | 34.8 | | | — | | | | | | | | | 36.0 | |
Balances at December 31, 2010 | | 35.924 | | | $
| 37.0 | | | $ | 815.5 | | | $ | (46.0 | ) | | $ | (267.2 | ) | | $ | 566.1 | | | $ | 1,105.4 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | |
td> | | | | | | |
Year Ended December 31 (in millions) | | 2010 | | 2009 | | 2008 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | 251.1 | | | $ | 121.6 | | | $ | (135.9 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | |
Non-cash impact of pilot contract transitio
n costs | | — | | | 15.5 | | | — | |
Restructuring charges | | 13.2 | | | 8.8 | | | 84.1 | |
Depreciation and amortization | | 230.5 | | | 219.2 | | | 204.6 | |
Stock-based compensation | | 13.7 | | | 11.9 | | | 13.4 | |
Changes in fair values of open fuel hedge contracts | | (14.3 | ) | | (88.7 | ) | | 84.2 | |
Changes in deferred income taxes | | 145.3 | | | 84.1 | | | (61.0 | ) |
(Increase) decrease in receivables - net | | (8.3 | ) | | 4.9 | | | 21.3 | |
Increase in prepaid expenses and other current assets | | (9.7 | ) | | (10.3 | ) | | (8.6 | ) |
Increase (decrease) in air traffic liability | | 56.1 | | | (6.4 | ) | | 8.2 | | <
/tr>
Increase (decrease) in other current liabilities | | 25.1 | | | 8.1 | | | (40.7 | ) |
Increase (decrease) in deferred revenue and other-net | | (149.0 | ) | | (76.2 | ) | | 2.9 | |
Net cash provided by operating activities | | 553.7 | | | 292.5 | | | 172.5 | |
| | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Property and equipment additions: | | | | | | | | | |
Aircraft and aircraft purchase deposits | | (138.6 | ) | | (367.2 | ) | | (317.1 | ) |
Other flight equipment | | (27.2 | ) | | (30.6 | ) | | (56.5 | ) |
Other property and equipment | | (17.2 | ) | | (40.6 | ) | | (39.2 | ) |
Total property and equipment additions | | (183.0 | ) | | (438.4 | ) | | (412.8 | ) |
Proceeds from disposition of assets | | 7.2 | | | 6.7 | | | 9.6 | |
Purchases of marketable securities | | (1,022.0 | ) | | (942.6 | ) | | (766.0 | ) |
Sales and maturities of marketable securities | | 931.0 | | | 725.0 | | | 579.6 | |
Restricted deposits and other | | (28.4 | ) | | (8.1 | ) | | 8.3 | |
Net cash used in investing activities | |
(295.2 | ) | | (657.4 | ) | | (581.3 |
) |
| | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from issuance of long-term debt | | — | | | 275.0 | | | 883.9 | <
/td> |
Proceeds from sale-leaseback transactions, net | | — | | | 230.0 | | | <
font style="font-family:inherit;font-size:9pt;">— | |
Long-term debt payments | | (321.0 | ) | | (261.0 | ) | | (343.2 | ) |
Purchase of treasury stock | | (45.1 | ) | | (23.8 | ) | | (48.9 | ) |
Proceeds an
d tax benefit from issuance of common stock | | 36.5 | | | 13.0 | | | 4.0 | |
Oth
er financing activities | | (3.6 | ) | | 12.8 | | | (8.2 | ) |
Net cash (used in) provided by financing activities | | (333.2 | ) | | 246.0 | | | 487.6 | |
Net change in cash and cash equivalents | | (74.7 | ) | | (118.9 | ) | | 78.8 | |
Cash and cash equivalents at beginning of year | | 164.2 | | | 283.1 | | | 204.3 | |
Cash and cash equivalents at end of year | | $ | 89.5 | | | $ | 164.2 | | | $ | 283.1 | |
|
| | | |  
; | |
Supplemental disclosure of cash paid (refunded) during the year for: | | | | | | | | | |
Interest (net of amount capitalized) | | $ | 106.0 | | | $ | 94.6 | | | $ | 71.0 | |
Income taxes | | 0.4 | | | (8.8 | ) | | (0.6 | ) |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alaska Air Group, Inc.
December 31, 2010
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Com
pany) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and their preparation requires the use of management’s estimates. Actual results may differ from these estimates. Certain reclassifications have been made to confirm the prior year data to the current format.
Nature of Operations
Alaska and Horizon operate as airlines. However, their business plans, competition, and economic risks differ substantially. For more detailed information about the Company’s operations, see Item 1. “Our Business” in this Form 10-K.
The Company’s operations and financial results are subject to various uncertainties, such as general economic conditions, volatile fuel prices, industry instability, intense competition, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation, and potential aircr
aft incidents.
Approximately 73% of Air Group’s employees are covered by collective bargaining agreements, including approximately 10% that are covered under agreements that are currently in negotiations or become amendable prior to December 31, 2011.
The airline industry is characterized by high fixed costs. Small fluctuations in load factors and yie
ld (a measure of ticket prices) can have a significant impact on operating results. The Company has been and continues working to reduce unit costs to better compete with carriers that have lower cost structures.
Substantially all sales occur in the United States. See Note 12 for operating segment information and geographic concentrations.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less. They are carried at cost, which approximates market value. The Company reduces cash balances when checks are disbursed. Due to the time delay in checks clearing the banks, the Company normally maintains a negative balance in its cash disbursement accounts, which is reported as a current liability. The amount of the negative cash balance was $23.3 million and $26.9 million at December 31, 2010 and 2009, respectively, and is included in accounts payable.<
/font>
Receivables
Receivables consist primarily of airline traffic (including credit card) receivables, amounts from customers, Mileage Plan partners, government tax authorities, and other miscellaneous amounts due to the Company, and are net of an allowance for doubtful accounts. Management determines the allowance for doubtful accounts based on known troubled accounts and historical experience applied to an aging of accounts.
Inventories and Supplies—net
Expendable aircraft parts, materials and supplies are stated at average cost and are included in inventories and supplies—net. An obsolescence allowance for expendable parts is accrued based on estimated lives of the corresponding fleet type and salvage values. Surplus inventories are carried at their net realizable value. The allowance for
all non-surplus expendable inventories was $29.0 million and $26.0 million at December 31, 2010 and 2009, respectively. Inventory and supplies—net also includes fuel inventory of $20.2 million and $14.0 million at December 31, 2010 and 2009, respectively. Repair
able and rotable aircraft parts inventories are included in flight equipment.
Property, Equipment and Depreciation
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, which are as follows:
| |
Aircraft and related flight equipment: | |
Boeing 737-400/700/800/900 | 20 years |
Bombardier Q400 | 15 years |
Buildings | 25-30 years |
Minor building and land improvements | 10 years |
Capitalized leases and leasehold improvements | Shorter of lease term or estimated useful life |
Computer hardware and software | 3-5 years |
Other furniture and equipment | 5-10 years |
As a result of the planned early retirement of the CRJ-700 fleet, all remaining flight equipment is depreciated down to their expected salvage values. The estimated useful lives are aligned with the fleet’s average expected retirement date.
“Related flight equipment” includes rotable and repairable spare inventories, which are depreciated over the associated fleet life unless otherwise noted.
Maintenance and repairs, other than engine maintenance on B737-400, -700 and -900 engines, are expensed when incurred. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated period of use. Maintenance on B737-400, -700 and -900 engines is covered under power-by-the-hour agreements with third parties, whereby the Company pays a determinable amount, and transfers risk, to a third party. The Company expenses the contract amounts based on engine usage.
The Company evaluates long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the total carrying amount of an asset or asset group may not be r
ecoverable. The Company groups assets for purposes of such reviews at the lowest level for which identifiable cash flows of the asset group are largely independent of the cash flows of other groups of assets and liabilities. An impairment loss is considered when estimated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount. If the asset or asset group is not considered recoverable, a write- down equal to the excess of the carrying amount over the fair value will be recorded. The Company determined that its two owned CRJ-700 aircraft and the fleet’s related spare parts were impaired during 2008. See Note 7 for further discussion of this impairment and other fleet transition costs.
Internally Used Software Costs
The Company capitalizes costs to develop internal-use software that are incurred in the application development stage. Amortization commences when the software is ready for its intended use and the amortization period is the estimated useful life of the software, generally three to five years. Capitalized costs primarily include contract labor and payroll costs of the individuals dedicated to the development of internal-use software. The Company capitalized software development costs of $0.7 million in both 2010 and 2009, and $1.0 million in 2008.
Workers Compensation and Employee Health-Care Accruals
The Company uses a combination of self-insurance and insurance programs to provide for workers compensation claims and employee health care benefits. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, sev
erity factors and other actuarial assumptions. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends. The accrual is part of other current and long-term liabilities, and was $42.4 million and $41.9 million as of December 31, 2010 and December 31, 2009, respectively.
Deferred Revenue
Deferred revenue results primarily from the sale of Mileage Plan miles to third-parties. This revenue is recognized when award transportation is provided or over the term of the applicable agreement.
Operating Leases
The Company leases aircraft, airport and
terminal facilities, office space, and other equipment under operating leases. Some of these lease agreements contain rent escalation clauses or rent holidays. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases in the consolidated statements of operations.
Leased Aircraft Return Costs
Cash payments associated with returning leased aircraft are accrued when it is probable that a cash payment will be made and that amount is reasonably estimable. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return will not be known with certainty until lease termination.
As leased aircraft are returned, any payments are charged against the established accrual. The accrual is part of other current and long-term liabilities, and was $2.9 million and $9.2 million as of December 31, 2010 and December 31, 2009, respectively.
Revenue Recognition
Passenger revenue is recognized when the passenger travels. Tickets sold but not yet used are reported as air traffic liability until travel or date of expiration. Commissions to travel agents and related fees are expensed when the related revenue is recognized. Pas
senger traffic commissions and related fees not yet recognized are included as a prepaid expense. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized as revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the Company’s historical data.
Passenger revenue also includes certain “ancillary” or non-ticket revenue such as reservations fees, ticket change fees, and baggage service charges. These fees are recognized as revenue when the related services are provided.
Freight and mail revenues are recognized when service is provided.
Other—net revenues are primarily related to the Mileage Plan and they are recognized as described in the “Mileage Plan” paragraph below. Other—net also includes certain ancillary revenues such as on-board food and beverage sales, and to a much lesser extent commissions from car and hotel vendors, and from the sales of travel insurance. These items are recognized as revenue when the services are provided. &
nbsp;Boardroom (airport lounges) memberships are recognized as revenue over the membership period.
Mileage Plan
Alaska operates a frequent flyer program (“Mileage Plan”) that provides travel awards to members based on accumulated mileage. For miles earned by flying on Alaska or Horizon and through airline partners, the estimated cost of providing free travel awards is recognized as a selling expense and accrued as a liability as miles are earned an
d accumulated.
Alaska also sells miles to non-airline partners such as hotels, car rental agencies, and a major bank that offers Alaska Airlines affinity credit cards. The Company defers the portion of the sales proceeds that represents the estimated fair value of the award transportation and recognizes that amount as revenue when the award transportation is provided. The deferred proceeds are recognized as passenger revenue for awards redeemed and flown on Alaska or Horizon, and as other-net revenue for awards redeemed and flown on other airlines (less the cost paid to the other airline). The portion of the sales proceeds not deferred is recognized as commission income in the period that the mileage credits are sold and included in other revenue—net in the consolidated statements of operations.
Alaska’s Mileage Plan deferred revenue and liabilities are included under the following consolidated balance sheet captions at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Current Liabilities: | | | |
Other accrued liabilities | $ | 278.0 | | | $
| 267.9 | |
Other Liabilities and Credits: | |
| | | |
Deferred revenue | 382.1 | | | 410.6 | |
Other liabilities | 13.8 | | | 13.2 | |
Total | $ | 673.9 | | | $ | 691.7 | |
The amounts recorded in other accrued liabilities relate primarily to deferred revenue expected to be realized within one year, including $43.0 million and $41.6 million at December 31, 2010 and 2009, respectively, associated with Mileage Plan awards issued but not yet flown.
Alaska’s Mileage Plan revenue is included under the following consolidated statements of operations captions for the years ended December 31 (in millions):
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Passenger revenues | $ | 189.5 | <
td style="vertical-align:bottom;background-color:#cceeff;">
| $ | 182.1 | | | $ | 144.2 | |
Other-net revenues | 183.3 | | | 151.5 | | | 101.5 | |
Change in Mileage Plan terms | — | | | — | | | 42.3 | |
Total Mileage Plan revenues | $ | 372.8 | | | $ | 333.6 | | | $ | 288.0 | |
During 2008, the Company changed the terms of its Mileage Plan program regarding the expiration of award miles, whereby Mileage Plan accounts with no activity for two years are now deleted. As a result of the deletion of a number of accounts, the Company reduced its liability for future travel awards by $42.3 million, which was recorded in the consolidated statements of operations as “Change in Mileage Plan terms.” Other—net revenues includes commission revenue of $123.7 million, $96.8 million and $57.0 million in 2010, 2009 and 2008.
Aircraft Fuel
Aircraft fuel includes raw jet fuel and associated “into-plane” costs, fuel taxes, oil, and all of the gains and losses associated with fuel hedge contracts.
Contracted Services
Contracted services includes expenses for ground handling, security, navigation fees, temporary employees, data processing fees, and other similar services.
Selling Expenses
Selling expenses include credit card fees, global distribution systems charges, the estimated cost of Mileage Plan free travel awards earned through air travel, advertising, promotional costs, commissions, and incentives. Advertising production costs are expensed the first time the advertising takes place. Advertising expense was $16.0 million, $16.8 million, and $14.0 million during the years ended December 31, 2010, 2009, and 20
08, respectively.
Capitalized Interest
Interest is capitalized on flight equipment purchase deposits as a cost of the related asset, and is depreciated over the estimated useful life of the asset. The capitalized interest is based on the Company’s weighted-average borrowing rate.
Derivative Financial Instruments
The Company accounts for financial derivative instruments as prescribed under the accounting standards for derivatives and hedging activity. See Note 2 and Note 3 for further discussion.
Income Taxes
The Company uses the asset and liability approach for accounting and reporting income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized.
The Company accounts for unrecognized tax benefits in accordance with the accounting standards. See Note 11 for further discussion.
Taxes Collected from Passengers
Taxes collected from passengers, including sales taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations.
Stock-Based Compensation
Accounting standards require companies to recognize as expense the fair value of stock options and other equity-based compensation issued to employees as of the grant date. These standards apply to all stock awards that the Company grants to employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which features a look-back provision and allows employees to purchase stock at a 15% discount. All stock-based compensation expense is recorded in
wages and benefits in the consolidated statements of operations.
Accounting Pronouncements Adopted in 2009
Effective July 2, 2009, the Accounting Standards Codification (ASC) of the Financial Accounting Standards Board (FASB) became the single official source of authoritative, nongovernmental GAAP in the United States. Although the Company's accounting policies were not affected by the conversion to ASC, references to specific accounting standards in these notes to the conso
lidated financial statements have been changed to eliminate references to previous standards.
In March 2008, the FASB issued new standards regarding disclosures about derivatives instruments and hedging. These new standards require entities that use derivative instruments to provide certain qualitative disclosures about their objectives and strategies for using such instruments, amounts and location of the derivatives in the financial statements, among other disclosures. This standard was adopted as of January 1, 2009. The required disclosures are included in Note 3 and Note 12. The adoption of this standard did not have a material impact on the disclosures historically provided.
In April 2009, the FASB issued a new standard that clarifies the determination of fair value for assets and liabilities that may be involved in transactions that would not be considered orderly as defined in the position statement. In April 2009, the FASB also issued new accounting standards that provide additional guidance in determining whether a debt security is other-than-temporarily impaired and how entities should record the impairment in the financial statements. The standard requires credit losses, as defined, to be recorded through the statement of operations and the remaining impairment loss to be recorded through accumulated other comprehensive income. Both of these standards were effective for the Company as of June 30, 2009. See Note 5 and Note 12 for a discussion of the impact of these new positions to the Company's financial statements.
In April 2009, the FASB issued new accounting standards that require companies to provide, on an interim basis, disclosures that were previously only required in annual statements for the fair value of financial instruments. This new standard was effective for the Company as of June 30, 2009. The required disclosures impacted the Company's Form 10Q filings for the second and third quarters in 2009. The new standards did not have an impact on annual financial statements.
In December 2008, the FASB issued new accounting standards regarding discl
osure about pension and other postretirement benefits which, among other things, expands the disclosure regarding assets in an employer's pension and postretirement benefit plans. The standard requires the Company to add the fair value hierarchy disclosures required by the accounting standards as it relates to the investments of the pension and postretirement benefit plans. This statement is effective for annual financial statements for fiscal years ending after December 15, 2009. See Note 6 for the disclosures required by this standard. This position had no impact on the Company's financial position or results of operations.
Fourth Quarter Adjustments
There were no significant adjustments in the fourth quarters of 2010, 2009 and 2008.
NOTE 2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Measurements
Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Cash, Cash Equivalents and Marketable Securities
The Company uses the “market approach” in determining the fair value of its cash, cash equivalents and marketable securities. The securities held by the Company are valued based on observable prices in active markets.
Amounts measured at fair value as of December 31, 2010 are as follows (in millions):
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 89.5 | | | $ | — | | | $ | — | | | $ | 89.5 | |
Marketable securities | 254.8 | | | 863.9 | | | — | | | 1,118.7 | |
Total | $ | 344.3 | | | $ | 863.9 | | | $ | — | | | $ | 1,208.2 | |
Amounts measured at fair value as of December 31, 2009 are as follows (in millions):
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | $ | 164.2 | | | $ | — | | | $ | — | | | $ | 164.2 | |
Marketable securities | 108.9 | | | 919.0 | | | — | | | 1,027.9 | |
Total | $ | 273.1 | | | $ | 919.0 | | | $ | — | | | $ | 1,192.1 | |
All of the Company’s marketable securities are classified as available-for-sale. The securities are carried at fair value, with the unrealized gains and losses reported in shareholders’ equity under the caption “accumulated other comprehensive loss” (AOCL). Realized gains and losses are included in other nonoperating income (expense) in the consolidated statements of operations.
The cost of securities sold is based on the specific identification method. Interest and dividends on marketable securities are included in interest income in the consolidated statements of operations.
The Company’s overall investment strategy has a primary goal of maintaining and securing its investment principal. The Company’s investment portfolio is managed by well-known financial institutions and continually reviewed to ensure that the investments are aligned with the Company’s documented strategy.
Marketable securities consisted of the following at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Amortized Cost: | | | |
U.S. government securities | $ | 514.8 | | | $ | 376.7 | |
Asset-backed obligations | 176.8 | | | 215.4
| |
Other corporate obligations | 414.2 | | | 421.8 | |
| $ | 1,105.8 | | | $ | 1,013.9 | |
Fair value: | | | | | |
U.S. government securities | $ | 518.5 | | | $ | 381.2 | |
Asset-backed obligations | 176.7 | | | 214.7 | |
Other corporate obligations | 423.5 | | | 432.0 | |
| $ | 1,118.7 | | | $ | 1,027.9 | |
Activity for marketable securities for the years ended December 31, 2010, 2009 and 2008 is as follows:
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Proceeds from sales and maturities | $ | 931.0 | | | $ | 725.0 | | | $ | 579.6 | |
Gross realized gains | 10.4 | | | 7.0 | | | 7.2 | |
Gross realized losses | 2.3 | | | 2.3 | | | 3.8 | |
Of the marketable securities on hand at <
font style="font-family:inherit;font-size:10pt;color:#000000;text-decoration:none;">December 31, 2010, 23% mature in 2011, 29% in 2012, and 48% thereafter.
Some of the Company’s asset-backed securities held at December 31, 2010 had credit losses, as defined in the accounting standards. Based on a future cash flow analysis, the Company determined that it does not expect to recover the full amortized cost basis of certain asset-backed obligations. This analysis estimated the expected future cash flows by using a discount rate equal to the effective interest rate implicit in the
securities at the date of acquisition. The inputs used to estimate future cash flows included the default, foreclosure, and bankruptcy rates on the underlying mortgages and expected home pricing trends. The Company also looked at the average credit scores of the individual mortgage holders and the average loan-to-value percentage. These credit losses of $2.2 million were recorded in 2009 in other nonoperating expenses.
Management does not believe the securities associated with the remaining $3.4 million unrealized loss recorded in AOCL are “other-than-temporarily” impaired, as defined in the accounting standards, based on the current facts and circumstances. Management currently does not intend to sell these securities prior to their recovery nor does it believe that it will be
more-likely-than-not that the Company would need to sell these securities for liquidity or other reasons.
During 2008, the Company determined that certain corporate debt securities were other-than-temporarily impaired. As such, the Company recorded a $3.5 million loss in other—net nonoperating expense in 2008 representing the difference between the estimated fair market value and the amortized cost of the securities.
Gross unrealized gains and los
ses at December 31, 2010 are presented in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized Losses | | | | |
| Unrealized Gains | | Less than 12 months | | Greater than 12 months | | Total Unrealized Losses | | Less: Credit Loss Recorded in Earnings | | Net Unrealized Losses in AOCL | | Net Unrealized Gains/(Losses) in AOCL | | Fair Value of Securities with Unrealized Losses |
U.S. Government Securities | $ | 5.1 | | | $ | (1.3 | ) | | $ | — | | | $ | (1.3 | ) | | $ | — | | | $ | (1.3 | ) | | $ | 3.8 | | | $ | 163.7 | |
Asset-backed obligations | 1.3 | | | (0.5 | ) | | (3.2 | ) | | (3.7 | ) | | (2.2 | ) | | (1.5 | ) | | (0.2 | ) | | 77.7 | |
Other corporate obligations | 9.8 | | | (0.6 | ) | <
/td> | — | | | (0.6 | ) | | — | | | (0.6 | ) | | 9.2 | | | 62.4 | |
Total | $ | 16.2 | | | $ | (2.4 | ) | | $ | (3.2 | ) | | $ | (5.6 | ) | | $ | (2.2 | ) | | $ | (3.4
) | | $ | 12.8 | | | $ | 303.8 | |
Gross unrealized gains and losses at December 31, 2009 are presented in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized Losses | | | | |
| Unrealized Gains | | Less than 12 months | | Greater than 12 months | | Total Unrealized Losses | | Less: Credit Loss Recorded in Earnings | | Net Unrealized Losses in AOCL | | Net Unrealized Gains/(Losses) in AOCL | | Fair Value of Securities with Unrealized Losses |
U.S. Government Securities | $ | 4.7 | | | $ | (0.2 | ) | | $ | — | | | $ | (0.2 | ) | | $ | — | | | $ | (0.2 | ) | | $ | 4.5 |  
; | | $ | 76.8 | |
Asset-backed obligations | 2.4 | | | (0.2 | ) | | (5.1 | ) | | (5.3 | ) | | (2.2 | ) | | (3.1 | ) | | (0.7 | ) | | 61.2 | |
Other corporate obligatio
ns | 10.4 | | | (0.2 | ) | | — | | | (0.2 | ) | | — | | | (0.2 | ) | | 10.2 | | | 37.7 | |
Total | $ | 17.5 | | | $ | (0.6 | ) | | $ | (5.1 | ) | | $ | (5.7 | ) | | $ | (2.2 | ) | | $ | (3.5 | ) | | $ | 14.0 | | | $ | 175.7 | |
Fair Value of Financial Instruments
The majority of the Company’s financial instruments are carried at fair value. Those include cash, cash equivalents and marketable securities (Note 2), restricted deposits (Note 9), fuel hedge contracts (Note 3), and interest rate swap agreements (Note 3). The Company’s long-term fixed-rate debt is not carried at fair value.
The estimated fair value of the Company’s long-term debt was as follows (in millions):
| | | | | | | |
| Carrying Amount | | Fair Value |
Long-term debt at December 31, 2010 | $ | 1,534.2 | | | $ | 1,531.0 | |
Long-term debt at December 31, 2009 | $ | 1,855.2 | | | $ | 1,821.3 | |
The fair value of cash equivalents approximates carrying values due to the short maturity of these instruments. The fair value of marketable securities is based on market prices. The fair value of fuel hedge contracts is based on commodity exchange prices. The fair value of restricted deposits approximates the carrying amount. The fair value of interest rate swap agreements is based on quoted market swap rates. The fair value of long-term debt is based on a discounted cash flow analysis using the Company’s current borrowing rate.
Concentrations of Credit
The Company continually monitors its positions with, and the credit quality of, the financial institutions that are counterparties to its fuel-hedging contracts and interest rate swap agreements and does not anticipate nonperformance by the counterparties.
The Company could realize a loss in the event of nonperformance by any single counterparty to these contracts. However, the Company enters into transactions only with large, well-known financial institution counterparties that have strong credit ratings. In addition, the Company limits the amount of investment credit exposure with any one institution.
The Company’s trade receivables do not represent a significant concentration of credit risk at December 31, 2010 due to the frequency that settlement takes place and the dispersion across many industry and government segments.
NOTE 3. DERIVATIVE INSTRUMENTS
Fuel Hedge Contracts
The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and swap agreements for jet fuel refining margins, among other initiatives. The Company records these instruments on the balance sheet at their fair value. Changes in the fair value of these fuel hedge contracts are recorded each period in aircraft fuel expense.
The following table summarizes the components of aircraft fuel expense for the years ended December 31, 2010, 2009 and 2008 (in millions):
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Raw or “into-plane” fuel cost | $ | 898.9 | | | $ | 686.2 | | | $ | 1,328.8 | |
(Gains) or losses in value and settlements of fuel hedge contracts | 2.0 | | | (28.1 | ) | | 69.6 | |
Aircraft fuel expense | $ | 900.9 | | | $ | 658.1 | | | $ | 1,398.4 | |
The cash received, net of premiums expensed, in 2010 and 2008 was $3.3 million and $122.7 million, respectively. The premiums expensed, net of any cash received, for hedges that settled during 2009 totaled $60.7 million. The Company also realized losses of $50 million on fuel hedge contracts terminated in the fourth quarter of 2008 that had scheduled settlement dates in 2009 and 2010. These amounts rep
resent the difference between the cash paid or received at settlement and the amount of premiums paid for the contracts at origination.
The Company uses the “market approach” in determining the fair value of its hedge portfolio. The Company’s fuel hedging contracts consist of over-the-counter contracts, which are not traded on an exchange. The fair value of these contracts is determined based on observable inputs that are readily available in active markets or can be derived from information available in active, quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy described in Note 2.
Outstanding fuel hedge positions as of December 31, 2010 are as follows:
| | | | | | |
| Approximate % of Expected Fuel Requirements | Gallons Hedged (in millions) | Approximate Crude Oil Price per Barrel | Approximate Premium Price per Barrel |
First Quarter 2011 | 50 | % | 47.0 | | $87 | $11 |
Second Quarter 2011 | 50 | % | 49.4 | | $86 | $10 |
Third Quarter 2011 | 50 | % | 51.9 | | $86 | $11 |
Fourth Quarter 2011 | 50 | % | 48.6 | | $86 | $11 |
Full Year 2011 | 50 | % | 196.9 | | $86 | $11 |
First Quarter 2012 | 41 | % | 40.1 | | $86 | $
12 |
Second Quarter 2012 | 34 | % | 34.8 | | $88 | $13 |
Third Quarter 2012 | 30 | % | 32.0 | | $90 | $13 |
Fourth Quarter 2012 | 26 | % | 26.2 | | $88 | $13 |
Full Year 2012 | 33 | % | 133.1 | | $88 | $13 |
First Quarter 2013 | 21 | % | 21.0 | | $88 | $13 |
Second Quarter 2013 | 16 | % | 16.6 | | $86 | $14 |
Third Quarter 2013 | 11 | % | 11.7 | | $89 | $15 |
Fourth Quarter 2013 | 5 | % | 5.4 | | $92 | $14 |
Full Year 2013 | 13 | % | 54.7 | | $88 | $14 |
As of December 31, 2010 and 2009, the net fair values of the Company's fuel hedge positions were as follows (in millions):
| | | | | | |
| December 31, 2010 | | December 31, 2009 | |
Crude oil call options or “caps” | $ | 129.3 | | $ | 115.9 | |
Refining margin swap contracts | 2.0 | | 1.1 | <
td style="vertical-align:bottom;border-bottom:1px solid #000000;">
Total | $ | 131
.3 | | $ | 117.0 | |
The balance sheet amounts include capitalized premiums paid to enter into the contracts of $108.6 million and $88.9 million at December 31, 2010 and 2009, respectively.
Interest Rate Swap Agreements
The Company has interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company's aircraft lease agreements for six B737-800 aircraft. The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate. All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and underlying notional values. The agreements expire from September 2020 through March 2021 to coincide with the lease termination dates.
The Company has formally designated these swap agreements as hedging instruments and records the effective portion of the hedge as an adjustment to aircraft rent in the consolidated statement of operations in the period of contract settlement. The effective portion of the changes in fair value for instruments that settle in the future is recorded in AOCL in the condensed consolidated balance sheets.
At December 31, 2010 and 2009, the Company had a liability of $8.8 million and an asset of $2.4 million, respectively, associated with these contracts, with the corresponding unrealized loss or gain in accumulated other comprehensive loss. The Company expects that $6 million will be reclassified into earnings within the next twelve months. The fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by the total notional value. As such, the Company places these contracts in Level 2 of the fair value hierarchy.
NOTE 4. LONG-TERM DEBT
At December 31, 2010 and 2009, long-term debt obligations were as follows (in millions):
| | | | | | | |
| 2010 | | 2009 |
Fixed-rate notes payable due through 2024* | $ | 1,233.6 | | | $ | 1,440.2 | |
Variable-rate notes payable due through 2024* | 300.6 | | | 415.0 | |
Long-term debt | 1,534.2 | | | 1,855.2 | |
Less current portion | (221.2 | ) | | (156.0 | ) |
| $ | 1,313.0 | | | $ | 1,699.2 | |
* The weighted-average fixed-interest rate was 6.0% as of December 31, 2010 and 2009. The weighted-average variable-interest rate was 1.8% and 2.5% as of December 31, 2010 and 2009, respectively.<
/font>
At December 31, 2010, all of the Company’s borrowings were secured by flight equipment.
During 2010, the Company had no new debt borrowings and made scheduled debt payments of $151.8 million. The Company
also prepaid the full debt balance on six outstanding aircraft debt agreements and a partial payment on a seventh totaling $169.2 million. Subsequent to December 31, 2010, the Company prepaid the full balance on two additional aircraft debt agreements totaling $51.8 million. This amount is included in the current portion of long-term debt in the consolidated balance sheet.
At December 31, 2010, long-term debt principal payments for the next five years are as follows (in millions):
| | | |
| Total |
2011 | $ | 221.2 | |
2012 | 216.9 | |
2013 | 175.7 | |
2014 | 141.9 | |
2015 | 128.2 | |
Thereafter | 650.3 | |
<
font style="font-family:inherit;font-size:9pt;">Total principal payments | $ | 1,534.2 | |
Bank Line of Credit
The Company has two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. Borrowings on one of the $100 million facilities, which expires in March 2013, are secured by aircraft. Borrowings on the other $100 million facility, which expires in March 2014, are secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has no immediate plans to borrow using either of these facilities. These facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is in compliance with this covenant at December 31, 2010.
The Company had a $185 million credit facility with a syndicate of financial institutions that expired on March 31, 2010.
Pre-delivery Payment Facility
Effective March 31, 2010, the Company terminated its variable-rate pre-delivery payment facility that had been used to provide a portion of the pre-delivery funding requirements for the purchase of new Boeing 737-800 aircraft. There were no borrowings on this facility at December 31, 2009, or the date of termination.
NOTE 5. COMMITMENTS
Lease Commitments
At December 31, 2010, the Company had lease contracts for 77 aircraft, which have remaining noncancelable lease terms of less than one year to over ten years. Of these aircraft, 19 are non-operating (i.e. not in our fleet) and subleased to third party carriers. The majority of airport and terminal facilities are also leased. Total rent expense was $294.5 million, $303.1 million, and $313.5 million, in 2010, 2009
, and 2008, respectively.
Future minimum lease payments with noncancelable terms in excess of one year as of December 31, 2010 are shown below (in millions):
| | | | | | | |
| Operating Leases |
| Aircraft | | Facilities |
2011 | 153.2 | | | 61.3 | |
2012 | 143.3 | | | 54.1 | |
2013 | 131.3 | | &nbs
p; | 26.5 | |
2014 | 117.1 | | | 22.9 | |
2015 | 93.9 | | | 12.8 | |
Thereafter | 185.9 | | | 99.6 | |
Total lease payments | $ | 824.7 | | | $ | 277.2 | <
/td> |
Aircraft Commitments
In 2005, Alaska entered into an aircraft purchase agreement to acquire B737-800 aircraft with deliveries beginning in January 2006 and continuing through April 2011. As of December 31, 2010, Alaska was committed to purchasing 13 B737-800 aircraft, three of which will be delivered in 2011. Subsequent to
December 31, 2010, the Company entered into an agreement with Boeing for 15 B737 aircraft, two B737-800 aircraft and 13 B737-900ER aircraft, with deliveries in late 2012 through 2014. Giving consideration to this agreement, Alaska is committed to purchasing 28 B737 aircraft and has options to purchase an additional 42 B737 aircraft.
Horizon entered into an aircraft purchase agreement in 2007 for 15 Q400 aircraft. As of December 31, 2010, Horizon was committed to purchasing eight Q400
aircraft, all of which will be delivered in 2011. Horizon has options to purchase an additional ten Q400 aircraft.
At December 31, 2010, the Company had firm aircraft purchase commitments requiring future aggregate payments of approximately $530 million. Giving consideration to the aircraft order in January 2011, the Company has firm commitments for 36 aircraft requiring aggregate payments of $1.2 billion.
The Company expects to pay for the 2011 B737-800 deliveries with cash on hand and expects to debt finance the Q400 aircraft deliveries. The Company expects to pay for firm orders beyond 2011 and the option aircraft, if exercised, through internally generated cash, long-term debt, or operating lease arrangements.
NOTE 6. EMPLOYEE BENEFIT PLANS
Four defined-benefit and five defined-contribution retirement plans cover
various employee groups of Alaska and Horizon. The defined-benefit plans provide benefits based on an employee’s term of service and average compensation for a specified period of time before retirement. The qualified defined-benefit pension plans are closed to new entrants.
Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers and an unfunded, non-
contributory defined-contribution plan for other elected officers.
Accounting standards require recognition of the overfunded or underfunded status of an entity’s defined-benefit pension and other postretirement plan as an asset or liability in the financial statements and requires recognition of the funded status in other
comprehensive income.
Qualified Defined-Benefit Pension Plans
The Company’s pension plans are funded as required by the Employee Retirement Income Security Act of 1974 (ERISA).
The defined-benefit plan assets consist primarily of marketable equity and fixed-income securities. The Company uses a December 31 measurement date for these plans.
Weighted average assumptions used to determine benefit obligations as of December 31:
Discount rates of 5.55% and 5.85% were used as of December 31, 2010 and 2009, respectively. For 2010, the rate of compensation increase used varied from 2.99% to 4.35%, depending on the related workgroup. For 2009, the rate of compensation increases was 3.21% to 4.53%.
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:
Discount rates of 5.85%, 6.20%, and 6.00% were used
for the years ended December 31, 2010, 2009, and 2008, respectively. For all three years, the expected return on plan assets used was 7.75%, and the rate of compensation increase used varied from 3.21% to 4.53%, depending on the plan and the related workgroup.
In determining the discount rate used, the Company’s policy is to
use the rates at the end of the year on high-quality long-term bonds with maturities that closely match the expected timing of future cash distributions from the plan. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
Plan assets are invested in common commingled trust funds invested in equity and fixed income securities
. The asset allocation of the funds in the qualified defined-benefit plans, by asset category, is as follows as of the end of 2010 and 2009:
| | | | | |
<
/font> | 2010 | | 2009 |
Asset category: | | | |
Money market fund | 2 | % | | 10 | % |
Domestic equity securities | 51 | % | | 45 | % |
Non-U.S. equity securities | 18 | % | | 18 | % |
Fixed income securities | 29 | % | | 27 | % |
Plan assets | 100 | % | | 100 | % |
The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle. The Company uses a fund manager and invests in various asset classes to diversify risk. Target allocations for the primary asset classes are approximately:
| | |
Domestic equities: | 50 | % |
Non-U.S. equities: | 20 | % |
Fixed income: | 30 | % |
Pension assets are rebalanced periodically to maintain these target asset
allocations. An individual equity investment will not exceed 10% of the entire equity portfolio. Fixed-income securities carry a minimum “A” rating by Moody’s and/or Standard and Poor’s and the average life of the bond portfolio may not exceed ten years. The Company does not currently intend to invest plan assets in the Company’s common stock.
The Company made a $100 million contribution to the plan in December 2009. The majority of that contribution was invested in a money market account at year-end and was distributed to the other investment categories throughout 2010 in accordance
with the target asset allocations. The Company also made a $100 million contribution to the plan in December 2010, the majority of which was distributed immediately to investments in accordance with the target asset allocations.
As of December 31, 2010, other than the money market fund, all assets were invested in common commingled trust funds. The Company uses the net asset values of these funds to determine fair value as allowed using the practical expediency method outlined in the accounting standards. The fund categories included in plan assets as of December 31, 2010 and 2009, their amounts, and their fair value hierarchy level are as follows (dollars in millions):
| | | | | | | | | | |
| 2010 | | 2009 | | Level
|
Fund type: | | | | | |
Money market fund | $ | 27.7 | | | $ | 90.6 | | | 1 | |
U.S. equity market fund | 561.9 | | | 408.0 | | | 2 | |
Non-U.S. equity fund | 210.0 | | | 164.4 | | <
/td> | 2 | |
U.S. debt index fund | 135.0 | | | 147.6 | | | 2 | |
Government/credit bond index fund | 208.1 | | | 96.3 | | | 2 | |
Plan assets | $ | 1,142.7 |
font> | | $ | 906.9 | | | | |
Nonqualified Defined-Benefit Pension Plan
Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This plan uses a December 31 measurement date.
Weighted average assumptions used to determine benefit obligations as of December 31:
Discount rates of 5.55% and 5.85% were used as of December 31, 2010 and 2009 respectively. The rate of compensation increase used was 5.00% as of December 31, 2010 and 2009.
Weighted average assumptions used to determine net period
ic benefit cost for the years ended December 31:
Discount rates of 5.85%, 6.20%, and 6.00% were used for the years ended December 31, 2010, 2009, and 2008, respectively. The rate of compensation increase used was 5.00% for all three years presented.
Combined Disclosures for Defined-Benefit Pension Plans
The following table sets forth the status of the plans for 2010 and 2009 (in millions):
| | | | | | | | | | | | | | | |
| Qualified | | Nonqualified |
| 2010 | | 2009 | | 2010 | | 2009 |
Projected benefit obligation (PBO) | | | | | | | |
Beginning of year | $ | 1,179.8 | | | $ | 1,094.9 | | | $ | 37.3 | | | $ | 36.0 | |
Service cost | 32.3 | | | 44.2 | | | 0.8 | | | 0.7 | |
Interest cost | 67.7 | | | 66.9 | | | 2.1 | | | 2.2 | |
Plan amendments | — | | | (29.6 | ) | | — | | | — | |
Actuarial loss | 101.0 | | | 47.3 | | | 4.1 | | <
div style="overflow:hidden;font-size:10pt;"> | 0.6 | |
Transfer to pilot long-term disability plan | — | | | (3.0 | ) | | — | | | — | |
Benefits paid | (37.8 | ) | | (40.9 | ) | | (3.2<
/div> | ) | | (2.2 | ) |
End of year | $ | 1,343.0 | | | $ | 1,179.8 | | | $ | 41.1 | | | $ | 37.3 | |
| | | | |
div> | | |
Plan assets at fair value | <
/td> | | | | | | | | | | |
Beginning of year | $ | 906.9 | | | $ | 650.0 | | | $ | — | | | $ | — | |
Actual return on plan assets | 128.0 | | | 150.0 | | | — | <
/div> | | — | |
Employer contributions | 145.6 | | | 147.8 | | | 3.2 | | | 2.2 | |
Benefits paid | (37.8 | ) | | (40.9 | ) | | (3.2 | ) | | (2.2 | )
|
End of year | $ | 1,142.7 | | | $ | 906.9 | | | $ | — | | | $ | — | |
F
unded status (unfunded) | $ | (200.3 | ) | | $ | (272.9 | ) | | $ | (41.1 | ) | | $ | (37.3 | ) |
| | | | | | | |
Percent funded | 85.1 | % | | 76.9 | % |
| — | | | — | |
Of the total $1.3 billion PBO for the qualified plans, approximately 57% represents the obligation of the plan covering Alaska’s pilots. The accumulated benefit obligation for the combined qualified defined-benefit pension plans was $1,232.1 million and $1,102.5 million at December 31, 2010 and 2009, respectively. The accumulated benefit obligation for the nonqualified defined-benefit plan was $40.4 million and $36.9 million at December 31, 2010 and 2009, respectively.
The plan amendment and the tran
sfer to the pilot long-term disability plan in 2009 were the result of plan changes in the new pilot collective bargaining agreement ratified during the year. See further discussion under “Pilot Long-term Disability Benefits” below.
As of December 31, 2010 and 2009, the amounts recognized in the consolidated balance sheets were as follows (in millions):
| | | | | | | | | | | | | | | |
| 2010 | | 2009 |
| Qualified | | Nonqualified | | Qualified | | Nonqualified |
Accrued benefit liability-current | $ | — | | | <
font style="font-family:inherit;font-size:9pt;font-weight:bold;">$ | 2.3 | | | $ | — | | | $ | 2.5 | |
Accrued benefit liability-long term | 200.3 | |
| 38.8 | | | 272.9 | | | 34.8 | |
Total liability recognized | $ | 200.3 | | | $ | 41.1 | | | $ | 272.9 | | | $ | 37.3 | |
AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME OR LOSS (AOCI):
| | | | | | | | | | | | | | | | | 2010 | | 2009 |
| Qualified | | Nonqualified | | Qualified | | Nonqualified |
Prior service cost (credit) | $ | (16.7 | ) | | $ | 0.1 | | | $ | (17.5 | ) | | $ | 0.1 | |
Net loss | 417.0 | |
div> | 8.7 | | | 395.0 | | | 4.8 | |
Amount recognized in AOCI (pretax) | $ | 400.3 | | | $ | 8.8 | | | $ | 377.5 | | | $ | 4.9 | |
The expected amortization of prior service credit and net loss from AOCI in 2011 is $1.0 million and $24.3 million, respectively, for the qualified defined-benefit pension plans. For the nonqualified defined-benefit pension plans, the expected combined amortization of prior service
cost and net loss from AOCI in 2011 is $0.5 million.
Net pension expense for the defined-benefit plans included the following components for 2010, 2009, and 2008 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Qualified | | Nonqualified |
| 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 |
Service cost | $ | 32.3 | |
td> | $ | 44.2 | | | $ | 46.6 | | | $ | 0.8 | | | $ | 0.7 | | | $ | 0.9 | |
Interest cost | 67.7 | | | 66.9 | | | 62.7 | | | 2.1 | | | 2.2 | |
| 2.1 | |
Expected return on assets | (70.9 |
) | | (51.3 | ) | | (71.8 | ) | | &md
ash; | | | — | | | — | |
Amortization of prior service cost | (0.9 | ) | | 4.3 | | | 4.4 | | | 0.1 | | | 0.1 | | | 0.1 | |
Curtailment loss | — | | | — | | | 0.5 | | | — | | | — | | | — | | Recognized actuarial loss | 22.0 | | | 28.9<
/font> | | | 5.6 | | | 0.1 | | | 0.1 | | | 0.2 | |
Net pension expense | $ | 50.2 | | | $ | 93.0 | | | $ | 48.0 | | | $ | 3.1 | | | $ | 3.1 | | | $ | 3.3 | |
Historically, the Company’s practice has been to contribute to the qualified defined-benefit pension plans in an amount equal to the greater of 1) the minimum required by law, 2) the Pension Protection Act (PPA) target liability, or 3) the service cost as actuarially calculated. There are no current funding requirements for the Company’s plans in 2011. However, the Company anticipates that it will continue with its historical funding practice, which would result in funding of approximately $35 million. The Company expects to contribute approximately $2.2 million to the nonqualified defined-benefit pension plans during 2011.
Future benefits expected to be paid over the next ten years under the defined-benefit pension plans from the assets of those plans as of
December 31, 2010 are as follows (in millions):
| | | | | | | |
| Qualified | | Nonqualified |
2011 | $ | 46.4 | | | $ | 2.3 | |
2012 | 50.7 | | | 2.4 | |
2013 | 59.6 | | | 2.4 | |
2014 | 65.7 | | | 2.6 | |
2015 | 74.7 | | | 2.9 | |
2016– 2020 | 451.5 | | | 17.9 | |
Postretirement Medical Benefits
The Company allows retirees to continue their medical, dental, and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, curren
tly age 65. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims. The accumulated postretirement benefit obligation (APBO) for this subsidy is unfunded. This liability was determined using an assumed discount rate of 5.55% and 5.85% at December 31, 2010 and 2009, respectively. The Company does not believe the U.S. Health Care Reform: The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act will have a significant impact.
<
hr style="page-break-after:always">
| | | | | | | |
(in millions) | 2010 | | 2009<
/div> |
Accumulated postretirement benefit obligation | | | |
Beginning of year | $ | 117.3 | | | $ | 109.9 | |
Service cost | 5.3 | | | 5.6 | |
Interest cost | 6.7 | | | 7.8 | |
Plan amendments | — | | | 4.1 | |
Actuarial (gain) loss | 4.9 | | | (6.7 | ) |
Transfer to pilot long-term disability plan | — | | | (0.6 | ) |
Benefits paid | (1.7 | ) | | (2.8 | ) |
End of year | $ | 132.5 | | | $ | 117.3 | |
| |
| |
Plan assets at fair value | | | | | |
Beginning of year | $ | — | | | $ | — | |
Employer contributions | 1.7 | | | 2.8 | |
Benefits paid | (1.7 | ) | | (2.8 | ) |
End of year | $ | — | | | $ | — | |
Funded status (unfunded) | $ | (132.5 | ) | | $ | (117.3 | ) |
The plan amendment and the transfer to the pilot long-term disability plan in 2010 were the result of plan changes in the new pilot collective bargaining agreement ratified during the year. See further discussion under "Pilot Long-term Disability Benefits" below.
As of December 31, 2010 and 2009, the amounts recognized in the consolidated balance sheets were as follows (in millions):
| | | | | | | |
| 2010 | | 2009 |
Accrued benefit liability-current | $ | 4.
9 | | | $ | 4.2 | |
Accrued benefit liability-long term | 127.6 | | | 113.1 | |
Total liability recognized | $ | 132.5 | | | $ | 117.3 | |
AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN AOCI:
| | | | | | | |
(in millions) | 2010 | | 2009 |
Prior service cost | $ | 2.5 | | | $ | 2.6 | |
Net loss | 20.3 | | | 15.7 | |
Amount recognized in AOCI (pretax) | $ | 22.8 | | | $ | 18.3 | |
The expected combined amortization of prior service cost and net loss from AOCI in 2011 is $1.5 million.
The Company uses a December 31 measurement date to assess obligations associated with the subsidy of retiree medical costs. Net periodic benefit cost for the postretirement medical plans included the following components for 2010, 2009 and 2008 (in millions):
| | | | | | | | | | | |
| 2010 | | 200
9 | | 2008 |
Service cost | $ | 5.3 | | | $ | 5.6 | | | $ | 4.2 | |
Interest cost | 6.7 | | | 7.8 | | | 5.6 | |
Amortization of prior service cost | — | | | 2.9 | | | (0.3 | ) |
Recognized actuarial loss | 0.3 | | | 0.8 | | | 0.5 | |
Net perio
dic benefit cost | $ | 12.3 | | | $ | 17.1 | | | $ | 10.0 | |
This is an unfunded plan. The Company expects to contribute approximately $4.9 million to the postretirement medical benefits plan in
2011, which is equal to the expected benefit payments.
Future benefits expected to be paid over the next ten years under the postretirement medical benefits plan as of December 31, 2010 are as follows (in millions):
| | | |
2011 | $ | 4.9 | |
2012 | 5.5 | |
2013 | 6.2 | |
2014 |
7.1 | |
2015 | 8.2 | |
2016 - 2020 | 56.1 | |
The assumed health care cost trend rates to determine the expected 2011 benefits cost are 8.9%, 8.9%, 5.0% and 4.0% for medical, prescription drugs, dental and vision costs, respectively. The assumed trend ra
te declines steadily through 2028 where the ultimate assumed trend rates are 4.7% for medical, prescription drugs and dental, and 4.0% for vision.
A 1% higher or lower trend rate in health care costs has the following effect on the Company’s postretirement medical plans during 2010, 2009 and 2008 (in millions):
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Change in service and interest cost | | | | | |
1% higher trend rate | $ | 1.8 | | | $ | 2.1 | | | $ | 1.4 | |
1% lower trend rate | (1.5 | ) | | (1.7 | ) | | (1.2 | ) |
Change in year-end postretirement benefit obligation | | | | | | | | |
1% higher trend rate | $ | 16.0 | | | $ | 14.4 | | | $ | 13.3 | |
1% lower trend rate | (13.8 | ) | | (12.4 | ) | | (11.5 <
/td> | ) |
Defined-Contribution Plans
The defined-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code. All of these plans require Company contributions. Total expense for the defined-contribution plans was $40
.0 million, $28.6 million, and $27.5 million in 2010, 2009, and 2008, respectively. The increase in 2010 is due to pilots that elected to freeze or reduce their service credits in the defined-benefit pension plan receiving a higher Company contribution under the new collective bargaining agreement.
The Company also
has a noncontributory, unfunded defined-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined-benefit pension plan. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheet at December 31, 2010 and 2009.
Pilot Long-term Disability Benefits
The collective bargaining agreement with Alaska’s pilots calls for the removal of long-term disability benefits from the defined-benefit plan for any pilot that was not already receiving long-term disability payments prior to January 1, 2010. As a result of this plan change, the PBO of $32.6 million associated with assumed future disability payments was removed from the overall defined-benefit pension plan liability in 2009, $29.6 million of which was recorded through AOCI. Furthermore, the removal of the plan from the defined-benefit pension plan reduced the accumulated postretirement benefit obligation for medical costs as the new plan no longer considers long-term disability to be “retirement” from the Company.
The new long-term disability plan removes the service requirement that was in place under the former defined-benefit plan. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long-term basis as of December 31, 2010 and does not include any assumptions for future disability. The liability includes the discounted expected future benefit payments and medical costs. The total liability at December 31, 2010 is $5.0 million, which is recorded net of a prefunded trust account of $0.5 million, and is included in long-term other liabilities on the c
onsolidated balance sheets.
Employee Incentive-Pay Plans
Alaska and Horizon have employee incentive plans that pay employees based on certain financial and operational metrics. The aggregate expense under these plans in 2010, 2009 and 2008 was $92.0 million, $76.0 million, and $21.4 million, respectively.
The plans are summarized below:
| |
• | Performance-Based Pay (PBP) is a program that rewards virtually all employees. The program is based on four separate metrics related to: (1) Air Group profitability, (2) safety, (3) achievement of unit-cost goals, and (4) employ
ee engagement as measured by customer satisfaction. |
| |
• | The Operational Performance Rewards Program entitles all Air Group employees to quarterly payouts of up to $300 per person if certain operational and customer service objectives are met. |
NOTE 7. RESTRUCTURING AND FLEET TRANSITION
Horizon Restructuring and Fleet Transition
Horizon Restructuring Charges
During the third quarter of 2010, the Company announced its decision to
outsource the remaining heavy maintenance functions for Horizon aircraft. As a result of this decision, Horizon eliminated approximately 100 positions in the maintenance division through either early-out packages or voluntary furloughs. These actions resulted in a charge of $2.9 million for separation pay, all of which was paid during the third quarter of 2010.
Horizon Transition to All-Q400 Fleet
Horizon is transitioning to an all-Q400 fleet. As of December 31, 2010, Horizon operated 13 CRJ-700 aircraft, which the Company has agreements in place to remove from its fleet in 2011. During 2010, the Company removed five CRJ-700 aircra
ft through either a sublease or lease assignment to third parties. The total charge associated with removing these aircraft from operations was $10.3 million in 2010.
The Company has signed a letter of intent to deliver the remaining CRJ-700 aircraft to a third-party carrier through either sublease or lease assignment during 2011. As a result, the Company has accelerated the delivery of eight new Bombardier Q-400 aircraft from 2012 and 2013 into the first half of 2011. Depending on the ultimate disposition of the thirteen remaining CRJ-700 aircraft in the operating fleet, there will likely be further fleet transition charges up to $3 million per aircraft at cease-use date.
During 2009 and 2008, Horizon had either terminated its Q200 leases or subleased Q200 aircraft to a third party. The total charge associated with removing these aircraft from operations in 2009 and 2008 was $8.8 million and $10.2 million, respectively.
Horizon has 16 Q200 aircraft that are subleased to a third-party carrier, for which an accrual for the estimated sublease loss has been recorded. The Company is evaluating alternatives to the existing sublease arrangements for these aircraft. The Company may be required to record a charge if the original lease or sublease arrangements are modified in the future. However, the nature, t
iming or amount of any such charge cannot be reasonably estimated at this time.
Alaska Restructuring Charges
In 2008, Alaska announced reductions in work force among union and non-union employees and recorded a $12.9 million charge representing the severance payments and estimated medical coverage obligation for the affected employees.
The following table displays the activity and balance of the severance and related cost components of the Company’s restructuring accrual as of and for the years ended December 31, 2009 and 2008 (in millions):
| | | | | | | |
Accrual for Severance and Related Costs | 2009 | | 2008 |
Balance at beginning of year | $ | 7.2 | | | $ | 0.7 | |
Restructuring charges and adjustments | — | | | 12.9 | |
Cash payments | (7.2 | ) | | (6.4 | ) |
Balance at end of year | $ | — | | | $ | 7.2 | |
Alaska Transition to All-Boeing 737 Fleet
In March 2006, the Company's Board of Directors approved a plan to accelerate the retirement of its MD-80 fleet (15 owned and 11 leased aircraft at the time) and remove those aircraft from service by the end of 2008. As a result, the Company recorded a $47
.5 million charge in 2008 reflecting the remaining discounted future lease payments and other contract-related costs associated with the removal of the remaining MD-80 aircraft from operations. All MD-80 lease arrangements have been terminated and the Company no longer has any related obligation.
NOTE 8. NEW PILOT CONTRACT TRANSITION COSTS
On May 19, 2009, Alaska announced that its pilots, represented by the
Air Line Pilots Association, ratified a new four-year contract. Among other items, the contract has a provision that allows for pilots to receive, at retirement, a cash payment equal to 25% of their accrued sick leave balance multiplied by their hourly rate. The transition expense associated with establishing this sick-leave payout program was $15.5 million. Pilots also received a one-time cash bonus following ratification of the contract of $20.3 million in the aggregate. These items have been combined and reported as “New pilot contract transition costs” in the consolidated statements of operations.
NOTE 9. DETAIL OF OTHER FINANCIAL STATEMENT CAPTIONS
<
font style="font-family:inherit;font-size:10pt;">
Receivables
Receivables consisted of the following at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Airline traffic receivables | $ | 53.6 | | | $ | 55.2 | |
Mileage Plan receivables | 37.9 | | | 31.9 | |
Receivables from fuel-hedging counterparties | 5.5 | | | 1.1 | |
Other receivables | 24.0 | | | 25.1 | |
Allowance for doubtful accounts | (0.9
| ) | | (1.5 | ) |
| $ | 120.1 | | | $ | 111.8 | |
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009<
/font> |
Prepaid aircraft rent | $ | 42.5 | | | $ | 47.9 | |
Prepaid fuel | 12.6 | | | 10.8 | |
Prepaid engine maintenance | 28.7 | | | 13.3 | |
Other | 22.9 | | | 26.1 | |
| $ | 106.7 | | | $ | 98.1 | |
Other Assets
Other assets consisted of the fo
llowing at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Restricted deposits (primarily restricted investments) | $ | 83.6 | | | $ | 86.7 | |
Long-term asset related to Terminal 6 at LAX airport | 31.3 | | | — | |
Deferred costs and other* | 52.7 | | | 56.5 | |
$ | 167.6 | | | $ | 143.2 | |
* Deferred costs and other includes deferred financing costs, long-term prepaid ren
t, lease deposits and other items.
In 2009, the Company announced plans to move from Terminal 3 to Terminal 6 at Los Angeles International Airport (LAX). As part of this move, the Company has agreed to manage and fund up to $175 million of the project during the design and construction phase. The project is estimated to cost approximately $250 million and is expected to be completed in 2012. The Company expects Los Angeles World Airports and the Transportation Security Administration to reimburse the Company for the majority of the construction costs either during the course of, or upon the completion of, construction. The Company is currently working with the City of Los Angeles and Los Angeles World Airports on a funding agreement and expects to have
it finalized in the near future. The Company expects that its proprietary share will be approximately $25 million of the total cost of the project. As of December 31, 2010, we capitalized $34 million associated with this project, which represents total project costs to date.
At December 31, 2010, the Company’s restricted deposits were primarily restricted investments used to guarantee various letters of credit and workers compensation self-insurance programs. The restricted investments consist of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates
fair value.
Other Accrued Liabilities (current)
Other accrued liabilities consisted of the following at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Mileage Plan current liabilities | $ | 278.0 | | | $ | 267.9 | |
Pension liability (nonqualified plans) | 2.3 | | | 2.5 | |
Postretirement medical benefits liability | 4.9 | | | 4.2 | |
Other* | 216.0 |
| | 199.9 | |
| $ | 501.2 | | | $ | 474.5 | |
* Other consists of property and transportation taxes collected but not yet remitted and accruals for ground operations, facilities rent, maintenance, and fuel, among other items.
Other Liabilities (noncurrent)
Other liabilities consisted of the following at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Mileage Plan liability | $ | 13.8 | | | $ | 13.2 | |
Uncertain tax position liability (see Not
e 11) | 1.5 | | | 1.3 | |
Aircraft rent-related | 36.2 | | | 63.2 | |
Other* | 71.5 | | | 70.5 | |
| $ | 123.0 | | | $
td> | 148.2 | |
* Other consists of accrued workers' compensation and deferred credits on aircraft purchases, among other items.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following at December 31 (in millions, net of tax):
| | | | | | | |
| 2010 | | 2009 |
Unrealized loss (gain) on marketable securities considered available-for-sale | $ | (8.0 | ) | | $ | (8.7 | ) |
Related to pensi
on plans | 255.4 | | | 238.8 | |
Related to postretirement medical benefits | 14.3 | | | 11.4 | |
Related to interest rate derivatives | 5.5 | | | (1.5 | ) |
| $ | 267.2 | | | $ | 240.0 | |
NOTE 10. STOCK-BASED COMPENSATION PLANS
The Company has stock awards outstanding under a number of long-term incentive equity plans, one of which (the 2008 Long-Term Incentive Equity Plan) continues to provide for the granting of stock awards to directors, officers and employees of the Company and its subsidiaries. Compensation expense is recorded over the shorter of the vesting period or the period between grant date and the date the employee becomes retirement-eligible as defined in the applicable plan. All stock-based compensation expense is recorded in wages and benefits in the consolidated statements of operations.
Stock Options
Under the various plans, options for 8,429,228 shares have been granted and, at December 31, 2010, 796,192 shares were available for future grant of either options or stock awards. Under all plans, the stock options granted have terms of up to ten years. For all plans except the 1997 Long-term Incentive Equity Plan (1997 Plan), when options are exercised, new common shares are issued. When options granted under the 1997 Plan are exercised, shares are issued from the Company’s treasury shares. The total number of outstanding options from the 1997 Plan as of December 31, 2010 is 8,500. Substantially all
grantees are 25% veste
d after one year, 50% after two years, 75% after three years, and 100% after four years.
The tables below summarize stock option activity for the year ended December 31, 2010:
| | | | | | | | | | | | | |
| Shares | | Weighted- Average Exercise Price Per Share | &nb
sp; | Weighted- Average Contractual Life (Years) | | Aggregate Intrinsic Value (in millions) |
Outstanding, December 31, 2009 | 2,318,823 | | | $ | 29.54 | | | | | |
Granted | 129,970 | | | 33.26 | | | | | |
Exercised | (1,276,469 | ) | | 29.26 | | | | | |
Forfeited or expired | (25,804 | ) | | 29.85 | | | | | |
Outstanding, December 31, 2010 | 1,146,520 | | | $ | 30.27 | | | 6.4 | | | $ |
30.3 | |
| | | | | | | |
Exercisable at December 31, 2010 | 507,012 | | | $ | 32.16 | | | 4.9 | | | $ | 12.4 | |
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2010, 2009, and 2008:
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Expected volatility | 55 | % | | 52 | % | | 42 | % |
Expected term | 6 years | | | 6 years | | 5.8 years |
Risk-free interest rate | 2.78 | % | | 2.01 | % | | 2.96 | % |
Expected dividend yield | — | | | — | | | — | |
Weighted-average fair value of options granted | $ | 18.05 | &nb
sp; | | $ | 14.00 | | | $ | 11.12 | |
The expected market price volatility of the common stock is
based on the historical volatility over a time period commensurate with the expected term of the awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the term nearest the expected term of the option at the time of grant. The dividend yield is zero as the Company does not pay dividends and has no plans to do so in the immediate future. The expected term of the options and the expected forfeiture rates are based on historical experience for various homogenous employee groups.
The Company recorded stock-based compensation expense related to stock options of $4.0 million, $4.3 million, and $5.1 million in 2010, 2009, and 2008, respectively. The total intrinsic value of options exercised during 2010 was $22.8 million. Cash received by the Company from option exercises during 2010 totaled $37.4 million. A total of 263,525 options vested during 2010 with an aggregate fair value of $3.9 million. As of December 31, 2010, $2.6 million of compensation cost associated with unvested stock option awards attributable to future service had not yet been recognized. This amount will be recognized as expense over a weighted-average period of 1.8 years.
The following table summarizes stock options outstanding and exercisable at December 31, 2010 with their weighted-average exercise prices and remaining contractual lives:
| | | | | | |
Range of Exercise prices | Remaining Life (years) | Shares | Price Per Share |
Outstanding: | | | |
$10 to $20 | 6.4 | 61,383 | | $ | 19.05 | |
$21 to
$28 | 6.6 | 638,234 | | 27.31 | |
$29 to $34 | 6.7 | 248,205 | | 32.67 | |
$35 to $45 | 5.5 | 198,698 | | 40.24 | |
Options outstanding | 6.4 | 1,146,520 | | $ | 30.27 | |
| | | | | |
Range of Exercise prices | Shares | Price Per Share | |
Exercisable: | | |
$10 to $20 | 19,191 | | $ | 18.82 | |
$21 to $28 | 198,104 | | 27.02 | |
$29 to $34 | 121,150 | | 32.06 | |
$35 to $45 | 168,567 | | 39.78 | |
Options exercisable | 507,012 | | $ | 32.16 | |
Restricted Stock Awards
The Company has restricted stock units (RSUs) outstanding under the 2004 and 2008 Long-term Incentive Equity Plans. As of December 31, 2010, 1,301,985 total RSUs have been granted under these plans. The RSUs are non-voting and are not eligible for dividends. The fair value of the RSU awards is based on the closing price of the Company’s common stock on the date of grant. Compensation cost for RSUs is generally recognized over the shorter of three years from the date of grant as the awards “cliff vest” after three years, or the period f
rom the date of grant to the employee’s retirement eligibility. The Company recorded stock-based compensation expense related to RSUs of $6.2 million, $5.8 million, and $6.8 million in 2010, 2009, and 2008, respectively. These amounts are included in wages and benefits in the consolidated statements of operations.
The following table summarizes information about outstanding RSUs:
| | | | | | |
| Number of Units | | Weighted- Average Grant Date Fair Value |
Non-vested at December 31, 2009 | 602,694 | |
div> | $ | 26.21 | |
Granted | 1
76,194 | | | 37.75 | |
Vested | (84,069 | ) | | 34.73 | |
Forfeited | (33,195 | ) | | 25.07 | |
Non-vested at December 31, 2010 | 661,624 | | | $ | 28.27 | |
As of December 31, 2010, $5.0 million of compensation cost associated with unvested restricted stock awards attributable to future service had not yet been recognized. This amount will be recognized as expense over a weighted-average period of 1.7 years.
Performance Stock Awards
From time to time, the Company issues Performance Share Unit awards (PSUs) to certain executives. PSUs are similar to RSUs, but vesting is based on performance or market conditions.
Currently outstanding PSUs were granted in 2008 and in 2010. There are several tranches of PSUs that vest based on differing performance conditions including achieving a specified pretax margin, a market condition tied to the Company's total shareholder return relative to an airline
peer group, and based on certain performance goals established by the Compensation Committee of the Board of Directors. The total grant-date fair value of PSUs issued in 2010 was $3.6 million.
The Company recorded $2.6 million of compensation expense related to PSUs in 2010. No compensation expense was recorded in 2009 and a $0.4 million credit was recorded in 2008.
Deferred Stock Awards
In 2010, the Company awarded 6,753 Deferred Stock Unit awards (DSUs) to members of its Board of Directors as part of their retainers. The underlying common shares are issued upon retirement from the Board, but require no future service period. As a result, the entire intrinsic value of the
awards on the date of grant was expensed in 2010. The total amount of compensation expense recorded in each of 2010, 2009 and 2008 was $0.3 million.
Employee Stock Purchase Plan
The Company sponsors an ESPP, which qualifies under Section 423 of the Internal Revenue Code. Under the terms of the ESPP, employees can purchase Company common stock at 85% of the closing market price on the first day of the offering period or the specified purchase date, whichever is lower. Because of these att
ributes, the ESPP is considered compensatory under accounting standards and as such, compensation cost is recognized. This plan was discontinued in February 2010 and a new Employee Stock Purchase Plan was approved by the shareholders at the Company's 2010 annual meeting and began in October 2010. Compensation cost for the Company’s ESPP was $0.6 million, $1.5 million and $1.6 million in 2010, 2009 and 2008, respectively. The grant date fair value is calculated using the Black-Scholes model in the same manner as the Company’s option awards for 85% of the sha
re award plus the intrinsic value of the 15% discount. Proceeds received from the issuance of shares are credited to stockholders’ equity in the period in which the shares are issued. In 2010 and 2009, 15,549 shares and 184,488 shares, respectively, were purchased by Company employees under the ESPP, resulting in cash proceeds of $0.1 million and $3.1 million, respectively.
Summary of Stock-Based Compensation
The table below summarizes the components of total stock-based compensation for the years ended December 31, 2010, 2009 and 2008 (in millions):
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Stock options | $ | 4.0 | | | $ | 4.3 | | | $ | 5.1 | |
Restricted stock units | 6.2 | | | 5.8 | | | 6.8 | |
Performance share units | 2.6 | | | — | | | (0.4 | ) |
Deferred stock awards | 0.3 | | | 0.3 | | | 0.3 | |
Employee stock purchase plan | 0.6 | | | 1.5 | | | 1.6 | |
Total stock-based compensation | $ | 13.7 | | | $ | 11.9 | | | $ | 13.4 | |
NOTE 11. INCOME TAXES
Deferred Income Taxes
Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes.
Deferred tax (assets) and liabilities comprise the following at December 31 (in millions):
| | | | | | | |
| 2010 | | 2009 |
Excess of tax over book depreciation | $ | 660.0 | | | $ | 603.9<
/div> | |
Fuel hedge contracts | 8.7 | | | 10.8 | |
Other—net | 16.9 | | | 11.3 | |
Gross deferred tax liabiliti
es | 685.6 | | | 626.0 | |
| | | |
Mileage Plan | (237.2 | ) | &
nbsp; | (252.6 | ) |
AMT and other tax credits | (57.5 | ) | | (56.8 | ) |
Inventory obsolescence | (16.5 | ) | | (16.9 | )
Deferred gains | (15.9 | ) | | (17.8 | ) |
Employee benefits | (179.1 | ) | | (197.7 | ) |
Loss carryforwards* | (4.1 | ) | | (30.2 | ) |
Other—net | (15.9 | ) | | (23.2 | ) |
Gross deferred tax assets | (526.2 | ) | | (595.2 | ) |
Net deferred tax (assets) liabilities | $ | 159.4 | | | $ | 30.8 | |
| | | |
Current deferred tax asset | $ | (120.5 | ) | | $ | (120.3 | ) |
Noncurrent deferred tax liability | 279.9 | | | 151.1 | |
Net deferred tax (asset) liability | $ | 159.4 | | | $ | 30.8 | &n
bsp; |
* State loss carryforwards of $79.8 million ($4.1 million tax effected) expire beginning in 2013 and ending in 2030.
The Company has concluded that it is more likely than not that its deferred tax assets will be realizable and thus no valuation allowance has been recorded as of December 31, 2010. This conclusion is based on the expected future reversals of existing taxable temporary differences, anticipated future taxable income, and the potential for future tax planning strategies to generate taxable income, if needed. The Company will continue to reassess the need for a valuation allowance during each future reporting period.
Components of Income Tax Expense (Benefit)
The components of income tax expense (benefit) were as follows (in millions):
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Current tax expense (benefit): | <
div style="text-align:left;font-size:9pt;"> | | | |
div> |
Federal | $ | 7.4 | | | $ | (3.4 | ) |
| $ | (13.4 | ) |
State | 2.7 | | | (1.3 | ) | | — | |
Total current | 10.1 | | | (4.7 | ) | | (13.4 | ) |
| | | | | |
Deferred tax expense (benefit): | | | | | | | | |
Federal | 131.5 | | | 76.7 | | | (56.1 | ) |
State | 13.2 | | | 9.3 | | | (7.8 | ) |
Total deferred | 144.7 | | | 86.0 | | | (63.9 | ) |
Total tax expense (benefit) related to income (loss) | $ | 154
.8 | | | $ | 81.3 | | | $ | (77.3 | ) |
Income Tax Rate Reconciliation
Income tax expense (benefit) reconciles to the amount computed by applying the U.S. federal rate of 35% to income (loss) before income tax and accounting change as follows (in millions):
| | | | | | | | | | | |
| 2010 | | 2009 | | 2008 |
Income (loss) before income tax | $ | 405.9 | | | $ | 202.9 | | | $ | (213.2 | ) |
| | | | | |
Expected tax expense (benefit) | 142.1 | |  
; | 71.0 | | | (74.6 | ) |
Nondeductible expenses | 1.8 | | | 3.1 | | | 3.4 | |
State income taxes | 10.7 | | | 5.5 | | | (5.1 | ) |
Other—net | 0.2 | | | 1.7 | | | (1.0 | ) |
Actual tax expense (benefit) | $ | 154.8 | | | $ | 81.3 | | | $ | (77.3 | ) |
| | | | | |
Effective tax rate | 38.1 | % | | 40.1 | % | | 36.3 | % |
Uncertain Tax Positions
The Company has identified its federal tax return and its state tax returns in Alaska, Oregon, and California as “major” tax jurisdictions. The periods subject to examination for the Company's federal and Alaska income tax returns are the 2003 to 2009 tax years; however, the 2003 to 2006 tax returns are subject to examination only to a limited extent due to net operating losses carried forward from and carried back to those periods. In Oregon, the income tax years 2002 to 2009 remain open to examination. The 2002 to 2006 Oregon tax returns are subject to examination only to the extent of net operating loss carryforwards from those years that were utilized in 2007 and later years. In California, the income tax years 2002 to 2009 remain open to examination. The 2002 to 2005 tax returns are subject to examination only to the extent of the net operating loss carryforwards from those years that were utilized in 2006 and later years.
At December 31, 2010, the total amount of unrecognized tax benefits of $1.5 million is recorded as a liability, all of which would impact the effective tax rate.
No interest or penalties related to these tax positions were accrued as of December 31, 2010.
Changes in the liability for unrecognized tax benefits during 2009 and 2010 are as follows (in millions):
| | | |
Balance at December 31, 2008 | $ | 23.7 | |
Gross decreases—tax positions in prior period | (22.5 | ) |
Gross increases—current-period tax positions | 0.1 | |
| | |
Balance at December 31, 2009 | $ | <
div style="text-align:right;font-size:9pt;">1.3 | |
Gross increases—current-period tax positions | 0.2 | |
| | |
Balance at December 31, 2010 | $ | 1.5 | |
NOTE 12. OPERATING SEGMENT INFORMATION
Accounting standards require that a public company report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Historically, the Company has had two primary operating and reporting segments, consisting of Alaska and Horizon, for which financial information is presented below. These segments are more fully described in Note 1.
| | | | | | | | | | | |
(in millions) | 2010 | | 2009 | | 2008 |
Operating revenues: | | | | | |
Alaska—mainline (1) | $ | 3,094.1 | | | $ | 2,717.6 | | | $ | 2,920.5 | |
Alaska—purchased capacity (1) | 332.5 | | | 288.4 | | | 300.8 | |
Total Alaska | $ | 3,426.6 | | | $ | 3,006.0 | | | $ | 3,221.3 | |
Horizon – brand flying | 405.6 | | | 392.7 | | | 440.2 | |
Horizon –capacity purchase arrangement with Alaska | 274.4 | | | 261.7 | | | 293.7 | |
Total Horizon | $ | 680.0 | | | $ | 654.4 | | | $ | 733.9 | |
Other (2) | 1.1 | | | 1.1 | | | 1.1 | |
Elimination of inter-company revenues | (275.4 | ) | | (261.7 | ) | | (293.7 | ) |
Consolidated | $ | 3,832.3 | | | $ | 3,399.8 | | | $ | 3,662.6 | |
| | | | | |
Depreciation and amortization expense: | | | | | | | | |
Alaska (3) | $ | 188.5 | | | $ | 178.5 | | | $ | 165.9 | |
Horizon | 41.0 | | | 39.5 | | | 37.5 | |
Other (2) | 1.0 | | | 1.2 | | | 1.2 | |
Consolidated | $ | 230.5 | | | $ | 219.2 | | | $ | 204.6 | |
| | | | | |
Interest income: | | | | | |
Alaska (3) | $ | 34.8 | | | $ | 38.6 | | | $ | 51.3 | |
Horizon | 3.6 | |
| 2.0 | | | 5.4 | |
Other (2) | 0.1 | | |
— | | | — | |
Elimination of inter-company accounts | (9.1 | ) | | (8.0 | ) | | (14.3 | ) |
Consolidated | $ | 29.4 | | | $ | 32.6 |
| | $ | 42.4 | |
| | | | | |
Interest expense: | | | | | | | | |
Alaska (3) | $ | 96.5 | | | $ | 91.7 | | | $ | 94.8 | |
Horizon | 20.5 | | | 20.1 | | | 23.8 | |
Other (2) | 0.4 | | | 0.5 | | | 0.5 | |
Elimination of inter-company accounts | (9.1 | ) | | (8.0 | ) | | (14.3 | ) |
Consolidated | $ | 108.3 | | | $ | 104.3 | | | $ | 104.8 | |
| | | | | | | | | | | |
Income (loss) before income tax and accounting change: | | | | | | | | |
Alaska—mainline | $ | 368.0 | | | $ | 176.9 | | | $ | (140.4 | ) |
Alaska—purchased capacity | 33.6 | | | 6.9 | | | (12.9 | ) |
Total Alaska | $ | 401.6 | | | $ | 183.8 | | | $ | (153.3 | ) |
Horizon | 7.6 | | | 22.8 | | | (55.8 | ) |
Other (2) | (3.3 | )
| | (3.7 | ) | | (4.1 | ) |
Consolidated | $ | 405.9 | | | $ | 202.9 | | | $ | (213.2 | ) |
| | | | | |
Capital expenditures (4): | | | | | |
Alaska (3) | $ | 163.9 |
| | $ | 357.5 | | | $ | 323.8 | |
Horizon | 19.1 | | | 80.9 | | | 89.0 | |
Consolidated | $ | 183.0 | | | $ | 438.4 | | | $ | 412.8 | |
| | | | | |
Total assets at end of period: | | | | | | | | |
Alaska (3) | $ | 4,610.2 | | | $ |
4,541.3 | | | |
Horizon
td> | 747.2 | | | 735.3 | | | |
Other (2) | 1,375.6 | | | 1,052.4 | | | |
Elimination of inter-company accounts | (1,716.4 | ) | | (1,332.8 | ) | | |
Consolidated | $ | 5,016.6 | | | $ | 4,996.2 | |
|
| |
(1) | Alaska mainline revenue represents revenue from passengers aboard Alaska jets, freight and mail revenue, and all other revenue. Purchased capacity revenue represents that revenue earned by Alaska on capacity provided by Horizon and a small third party under a capacity purchase arrangement. |
| |
(2) | Includes the parent company, Alaska Air Group, Inc., including its investments in Alaska and Horizon, which are eliminated in consolidation. |
| |
(3) | There are no interest or depreciation expenses associated with purchased capacity flying at Alaska, nor are there any associated assets or capital expenditures. |
| |
(4) | Capital expenditures
include aircraft deposits, net of deposits returned. |
NOTE 13. SHAREHOLDER’S EQUITY
Common Stock Repurchase
In March 2008, the Board of Directors authorized the Company to repurchase
up to $50 million of its common stock. Under the plan, the Company repurchased 605,700 shares for approximately $11.7 million. No further repurchases were made under this program. This program expired in March 2009.
In June 2009, the Board of Directors authorized the Company to repurchase up to $50 million of its common stock. Under the program, the Company repurchased 1,970,326 shares of its common stock, of which 645,748 shares were purchased for $26.3 million during 2010. This program expired in June 2010.
In June 2010, the Board of Directors author
ized the Company to repurchase up to an additional $50 million of its common stock. Under this program, the Company has repurchased 355,000 shares of its common stock for $18.8 million through December 31, 2010. This program expires in June 2011.
Delisting of Common Shares
In October 2009, the Company retired 7,900,000 common shares that had been held in treasury. This action did not impact the total number of common shares outstanding.
NOTE 14. EARNINGS (LOSS) PER SHARE (EPS)
Diluted EPS is calculated by dividing net income (loss) by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. In 2010 and 2009, 0.1 million and 2.1 million stock options, respectively, were excluded from the calculation of diluted EPS because they were antidilutive. As the Company reported a net loss in 2008, no outstanding stock options or restricted stock units were used in the calculation of diluted weighted average shares as the effect would have been antidilutive.
NOTE 15. CONTINGENCIES
Grievance with International Association of Machinists
In June 2005, the International Association of Machinists (IAM) filed a grievance under its Collective Bargaining Agreement (CBA) with Alaska alleging that Alaska violated the CBA by, among other things, subcontracting the ramp service operation in Seattle. The dispute was referred to an arbitrator and hearings on the grievance commenced in January 2007, with a final hearing date in August 2007. In July 2008, the arb
itrator issued a final decision regarding basic liability in the matter. In that ruling, the arbitrator found that Alaska had violated the CBA and instructed Alaska and the IAM to negotiate a remedy. In February 2010, the arbitrator issued a final decision. The decision does not require Alaska to alter the existing subcontracting arrangements for ramp service in Seattle. The award sustains the right to subcontract other operations in the future so long as the requirements of the CBA are met. The award imposed monetary remedies which were not significant.
Other items
<
/font>
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Management believes the ultimate disposition of the matters discussed above is not likely to materially affect the Company's financial position or results of operations. This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of arbitrators, judges and juries.
The Securities and Exchange Commission is conducting an inquiry into tradin
g in the securities of Puget Energy, Inc. ("PSE") by Donald Smith & Co., an investment firm. William Ayer, our Chief Executive Officer serves on the board of PSE. Mr. Ayer and the Company are cooperating voluntarily in that inquiry. Mr. Ayer has stated that he never provided any non-public information about PSE to Donald Smith & Co.
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
|
ITEM 9A. CONTROLS AND PROCEDURES |
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2010, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information requir
ed to be disclosed by us in our current and periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is accumulated and communicated to our management, including our certifying officers, on a timely basis. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of December 31, 2010.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to the Company's internal control over financial reporting identified in management's evaluation during the year ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Based on our evaluation, our management concluded that our inte
rnal control over financial reporting was effective as of December 31, 2010.
We intend to regularly review and evaluate the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and to improve these controls and procedures over time and to correct any deficiencies that we may discover in the future. While we believe the present design of our disclosure controls and procedures and internal control over financial reporting are effective, future events affecting our business may cause us to modify our controls and procedures.
The Company's independent registered public accounting firm has issued an attestation report regarding its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2010.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Alaska Air Group, Inc.:
We have audited Alaska Air Group, Inc.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Alaska Air Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting (included in Item 9A). Our responsibility
is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3
) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Alaska Air Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December
31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alaska Air Group, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated February 22, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Seattle, Washington
February 22, 2011
|
ITEM 9B. OTHER INFORMATION |
None
PART III
|
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
See “Executive Officers of the Registrant” under Item 1, “Our Business,” in Part I of this Form 10-K for information on the executive officers of Air Group and its subsidiaries. Except as provided herein, the remainder of the information required by this item is incorporated
herein by reference from the definitive Proxy Statement for Air Group's 2011 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2010 (hereinafter referred to as our “2011 Proxy Statement”).
|
ITEM 11. EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by reference from our 2011 Proxy Statement.
|
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated herein by reference from our 2011 Proxy Statement.
|
ITEM 13. CERTAIN RELATIONSHIPS AND RE
LATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item is incorporated herein by reference from our 2011 Proxy Statement.
|
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated herein by reference from our 2011 Proxy Statement.
PART IV
|
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of this report:
| |
1. | Financial Statement Schedules: Financial Statement Schedule II, Valuation and Qualifying Accounts, for the years ended
font>December 31, 2010, 2009 and 2008. |
| |
2. | Exhibits: See Exhibit Index. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | | | |
| | | | |
By: | /s/ WILLIAM S. AYER | | Date: | February 23, 2011 |
| William S. Ayer, | | | |
| Chairman and Chief Executive O
fficer | | | |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on February 23, 2011 on behalf of the registrant and in the capacities indicated.
| |
| |
| |
/S/ WILLIAM S. AYER William S. Ayer | Chairman, Chief Executive Officer and Director (Principal Executive Officer) |
| |
/S/ BRANDON S. PEDERSEN Brandon S. Pedersen | Vice President/Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
| |
/S/ PATRICIA M. BEDIENT Patricia M. Bedient | Director |
| |
/S/ MARION C. BLAKEY Marion C. Blakey | Director |
| |
/S/ PHYLLIS J. CAMPBELL Phyllis J. Campbell | Director |
| |
/S/ JESSIE J. KNIGHT, JR. Jessie J. Knight, Jr. | Director |
| |
/S/ R. MARC LANGLAND R. Marc Langland | Director |
| |
/S/ DENNI
S F. MADSEN Dennis F. Madsen | Director |
| |
/S/ BYRON I. MALLOTT Byron I. Mallott | Director |
| |
/S/ J. KENNETH THOMPSON J. Kenneth Thompson | Director |
| |
/S/ BRADLEY D. TILDEN Bradley D. Tilden | Director |
EXHIBIT INDEX
Certain of the following
exhibits have heretofore been filed with the Securities and Exchange Commission and are incorporated by reference from the documents described in parentheses. Certain others are filed herewith. The exhibits are numbered in accordance with Item 601 of Regulation S-K.
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3.1 | <
font style="font-family:inherit;font-size:9pt;">Amended and Restated Certificate of Incorporation of Registrant (Filed as Exhibit 3(i) to Registrants Quarterly Report on Form 10-Q for the period ended June 30, 2006, filed on August 8, 2006 and incorporated herein by reference.) |
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3.2 | Bylaws of Registrant, as amended April 30, 2010 (Filed as Exhibit 3.2 to Registrant’s Current Report on Form 8-K, filed on May 3, 2010 and incorporated herein by reference.) |
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10.1# | Credit Agreement, dated October 19, 2005, among Alaska Airlines, Inc., as borrower, HSH Nordbank AG New York Branch, as security agent, and other loan participants (Filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2005, filed on November 9, 2005 and incorporated herein by reference.) |
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10.1.1# | First Amendment to October 19, 2005 Credit Agreement, dated March 27, 2007 (Filed as Exhibit 10.2.1 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 20, 2008 and incorporated herein by reference.) |
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10.1.2# | Second Amendment to October 19, 2005 Credit Agreement, dated November 26, 2007 (Filed as Exhibit 10.2.2 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 20, 2008 and incorporated herein by reference.) |
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10.1.3# | Third Amendment to October 19, 2005 Credit Agreement, dated May 29, 2009 (Filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2009, filed on November 6, 2009 and incorporated herein by reference.) |
10.2# | Credit Agreement, dated March 31, 2010, among Alaska Airlines, Inc., as borrower, Wells Fargo Capital Finance, LLC as agent, U.S. Bank National Association as documentation agent, and other lenders (Filed as Exhibit 10.1 to Registrant’s Amendment to its Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed on August 11, 2010 and incorporated herein by reference.) |
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10.3# | Credit Agreement, dated March 31, 2010, among Alaska Airlines, Inc., as borrower, Citibank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, and other lenders (Filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2010, filed on May 5, 2010 and incorporated herein by reference.) |
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10.4# | Aircraft General Terms Agreement, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc. (Filed as Exhi
bit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed on August 5, 2005 and incorporated herein by reference.) |
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10.5# | Purchase Agreement No. 2497, dated June 15, 2005, between the Boeing Company and Alaska Airlines, Inc. (Filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2005, filed on August 5, 2005 and incorporated herein by reference.) |
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10.6# | Supplement to Master Purchase Agreement, dated October 18, 2005, between Horizon Air Industries, Inc. and Bombardier Inc. (Filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2005, filed on November 9, 2005 and incorporated herein by reference.) |
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10.7# | Lease Agreement, dated January 22, 1990, between International Lease Finance Corporation and Alaska Airlines, Inc., summaries of 19 substantially identical lease agreements and Letter Agreement #1, dated January 22, 1990 (Filed as Exhibit 10-14 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1990, filed on April 11, 1991 and incorporated herein by reference.) |
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10.8* | Alaska Air Group Performance Based Pay Plan (formerly “Management Incentive Plan”), as amended and restated December 2, 2009 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed on February 1, 2010 and incorporated herein by reference.) |
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10.9* | Alaska Air Group, Inc. 2008 Performance Incentive Plan (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed on May 22, 2008 and incorporated herein by reference.) |
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10.9.1* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Form of Nonqualified Stock Option Agreement (Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K
, filed on May 22, 2008 and incorporated herein by reference.) |
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10.9.2* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Form of Stock Unit Award Agreement (Filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K, filed on May 22, 2008 and incorporated herein by reference.) |
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10.9.3* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Form of Director Deferred Stock Unit Award Agreement (Filed as Exhibit 10.4 to Registrant’s Current Report on Form 8-K, filed on May 22, 2008 and incorporated herein by reference.) |
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10.9.4* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Nonqualified Stock Option Agreement—Incentive Award (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed on February 2, 2009 and incorporated herein by reference.) |
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10.9.5* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Stock Unit Award Agreement—Incentive Award (Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K, filed on February 2, 2009 and incorporated herein by reference.) |
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10.9.6* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Stock Unit Award Agreement (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed on February 5, 2010 and incorporated herein by reference.) |
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10.9.7* | Alaska Air Group, Inc. 2008 Performance Incentive Plan Nonqualified Stock Option Agreement (Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K, filed on February 5, 2010 and incorporated herein by reference.) |
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10.10* | Alaska Air Group, Inc. 2004 Long-Term Incentive Plan and original form of stock option and restricted stock unit agreements (Filed as Exhibit 10.2
to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on February 25, 2005 and incorporated herein by reference.) |
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10.10.1* | Alaska Air Group, Inc. 2004 Long-Term Incentive Plan Nonqualified Stock Option Agreement (Filed as Exhibit 10.8.1 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 20, 2008 and incorporated herein by reference.) |
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10.10.2* | Alaska Air Group, Inc. 2004 Long-Term Incentive Plan Stock Unit Award Agreement (Filed as Exhibit 10.8.2 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 20, 2008 and incorporated herein by reference.) |
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10.10.3* | Alaska Air Group, Inc. 2004 Long-Term Incentive Plan Performance Stock Unit Award Agreement (Filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K, filed on February 14, 2008 and incorporated herein by reference.) |
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10.11* | Alaska Air Group, Inc. 1999 Long-Term Incentive Equity Plan (Filed as Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-87563, filed on September 22, 1999 and incorporated herein by reference.) |
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10.12* | Alaska Air Group, Inc. 1997 Non Officer Long-Term Incentive Equity Plan (Filed as Exhibit 99.2 to Registrant’s Registration Statement on Form S-8, Registration No. 333-39889, filed on November 10, 1997 and incorporated herein by reference.) |
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10.13* | Alaska Air Group, Inc. 1996 Long-Term Incentive Equity Plan (Filed as Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-09547, filed on August 5, 1996 and incorporated herein by reference.) |
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10.14* | Alaska Air Group, Inc. Non Employee Director Stock Plan (Filed as Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-33727, filed on August 15, 1997 and incorporated herein by reference.) |
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10.15* | Alaska Airlines, Inc. and Alaska Air Group, Inc. Supplementary Retirement Plan for Elected Officers, as amended November 7, 1994 (Filed as Exhibit 10.15 to Registrant’s Annual Report
on Form 10-K for the year ended December 31, 1997, filed on February 10, 1998 and incorporated herein by reference.) |
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10.16* | Alaska Air Gro
up, Inc. 1995 Elected Officers Supplementary Retirement Plan, as amended by First Amendment to the Alaska Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan and Second Amendment to the Alaska Air Group, Inc. 1995 Elected Officers Supplementary Retirement Plan (Filed as Exhibit 10.13 to Amendment No. 1 to Registrant’s Registration Statement on Form S-1, Registration No. 333-107177, filed on September 23, 2003 and incorporated herein by reference.) |
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10.17* | Form of Alaska Air Group, Inc. Change of Control Agreement for named executive officers, as amended and restated November 28, 2007 (Filed as Exhibit 10.16 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 20, 2008 and incorporated herein by reference.) |
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10.18* | Alaska Air Group, Inc. Nonqualified Deferred Compensation Plan, as amended and restated on December 1, 2005 (Filed as Exhibit 10.17 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on February 20, 2008 and incorporated herein by reference.) |
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10.19* | Agreement between Jeff Pinneo and Horizon Air Industries, Inc. dated June 9, 2010 (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed on June 14, 2010 and incorporated herein by reference.) |
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10.2 | Agreement dated as of July 30, 2010, between Alaska Air Group, Inc. and Glenn Johnson (filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 5, 2010 and incorporated herein by reference. |
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12.1† | Statement of Computation of Ratio of Earnings to Fixed Charges |
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21† | Subsidiaries of Registrant |
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23.1† | Consent of Independent Registered Public Accounting Firm (KPMG LLP) |
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31.1† | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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font style="font-family:inherit;font-size:9pt;"> |
31.2† | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1† | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2† | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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† | Filed herewith. |
* | Indicates management contract or compensatory plan or arrangement. |
# | Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission. |
Schedule II
ALASKA AIR GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
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(in millions) | Beginning Balance | | Additions Charged to Expense | | Deductions | | Ending Balance |
Year Ended December 31, 2008 | | | | | | | |
Reserve deducted from asset to which it applies: | | | | | | | |
Allowance for doubtful accounts | $ | 1.6 | | | $ | 1.5 | | | $ | (1.6 | ) | | $ | 1.5 | |
Obsolescence allowance for flight equipment spare parts (a) | $ | 24.6 | | | $ | 5.8 | | | <
font style="font-family:inherit;font-size:9pt;">$ | (9.0 | ) | | $ | 21.4 | |
Year Ended December 31, 2009 | | | | | | | | | | | |
Reserve deducte
d from asset to which it applies: | | | | | | | | | | | |
Allowance for doubtful accounts | $ | 1.5 | | | $ | 1.4 | | <
/td> | $ | (1.4 | ) | | $ | 1.5 | |
Obsolescence allowance for flight equipment spare parts | $ | 21.4 | | | $ | 4.8 | | | $ | (0.2 | ) | | $ | 26.0 | |
Year Ended December 31, 2010 | | | | | | | | | | | |
Reserve deducted from asset to which it applies: | | | | | | | | | | | |
Allowance for doubtful accounts | $ | 1.5 | | | $ | 0.9 |
| | $ | (1.5 | ) | | $ | 0.9 | |
Obsolescence allowance for flight equipment spare parts | $ | 26.0 | | | $ | 4.8 | | | $ | (1.3 | ) | | $ | 29.5 | |
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(a) | Deductions in 2008 are primarily related to the write off of the MD-80 and B737-200 parts allowances against their respective costs bases. |
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EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Alaska Air Group, Inc.
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(in millions, except ratios) | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Earnings: | | | | | | | | | |
Income (loss) before income tax expense (benefit) and accounting change | 405.9 | | | 202.9 | | | (213.2 | ) | | 200.5 | | | (90.7 | ) |
Less: Capitalized interest | (6.2 | ) | | (7.6 | ) | | (23.2 | ) | |
(27.8 | ) | | (24.7 | ) |
Add: | | | | | | | | | |
Interest on indebtedness | 102.6 | | | 100.5 | | | 102.3 | | | 88.0 | | | 78.0 | |
Amortization of debt expense | 5.7 | | | 3.8 | | | 2.5 | | | 1.9 | | | 1.9 | |
Amortization of capitalized interest | 7.4 | | | 7.2 | | | 6.5 | | | 5.8 | | | 4.9 | |
Portion of rent under long-term operating leases representative of an interest factor | 98.2 | | | 101.0 | | | 104.5 | | | 111.2 | | | 106.9 | |
Earnings Available for Fixed Charges | 613.6 | | | 407.8 | | | (20.6 | ) | | 379.6 | | | 76.3 | |
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/td> | | | |
Fixed Charges: | | | | | | | | | |
Interest | 102.6 | | | 100.5 | | | 102.3 | | | 88.0 | | | 78.0 | |
Amortization of debt expense | 5.7 | | | 3.8 | | | 2.5 | | | 1.9 | | | 1.9 | |
Amortization of capitalized interest | 7.4 | | | 7.2 | | | 6.5 | | | 5.8 | | | 4.9 | |
Portion of rent under long-term operating leases representative of an interest factor | 98.2 | | &nb
sp; | 101.0 | | | 104.5 | | | 111.2 | | | 106.9 | |
Total Fixed Charges | 213.9 |
| | 212.5 | | | 215.8 | | | 206.9 | | | 191.7 | |
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Ratio of Earnings to Fixed Charges | 2.87 | | | 1.92 | | | (0.10 | ) | | 1.83 | | | 0.40 | |
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Coverage deficiency | — | | | — | | | 236.4 | | | — | | | 115.4 | |
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EXHIBIT 21
SUBSIDIARIES OF ALASKA AIR GROUP, INC.
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Name | State of Incorporation |
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Alaska Airlines, Inc. | Alaska |
Horizon Air Industries, Inc. | Washington |
AAG Fueling Services, Inc. | Delaware |
AAG Leasing, Inc. | Delaware |
AAGL-I | Delaware |
Air Group Leasing Equity, Inc. | Delaware |
Air Group Leasing, Inc. | Delaware |
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Alaska Air Gr
oup, Inc.:
We consent to the incorporation by reference in the Registration Statements (Nos. 333-130272, 333-152887, 333-39889, 333-87563, 333-92252, 333-117725, 333-151743 and 333-168293) on Forms S-3 and S-8 of Alaska Air Group, Inc. of our reports dated February 22, 2011, with respect to the consolidated balance sheets of Alaska Air Group, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010, and the related financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2010, which reports appear in the December 31, 2010 annual report on Form 10-K of Alaska Air Group, Inc.
/s/ KPMG LLP
Seattle, Washington
February 22, 2011
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EXHIBIT 31.1
CERTIFICATIONS
I, William S. Ayer, certify that:
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1. | I have reviewed this annual report on Form 10-K of Alaska Air Group, Inc. for the period ended December 31, 2010; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. &
nbsp; | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
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a) | Designed such disclosure controls an
d procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financial reporting, or cau
sed such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and pres
ented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is rea
sonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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e) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
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a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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February 23, 2011 | By | /s/ WILLIAM S. AYER |
| | William S. Ayer |
| | Chairman, President and Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATIONS
I, Brandon S. Pedersen, certify that:
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1. | I have reviewed this annual report on Form 10-K of Alaska Air Group, Inc. for the period ended December 31, 2010; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
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a) | Designed such d
isclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) | Designed such internal control over financ
ial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) | Evaluated the effectiveness of the registrant’s disclosure controls an
d procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materiall
y affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: |
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a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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February 23, 2011 | By | /S/ BRANDON S. PEDERSEN |
| | Brandon S. Pedersen |
| | Chief Financial Officer |
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William S. Ayer, Chairman, President & Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
div>
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(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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By | /s/ WILLIAM S. AYER |
| William S. Ayer |
| Chairman, President & Chief Executive Officer |
February 23, 2011
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Alaska Air Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brandon S. Pedersen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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By | /s/ BRANDON S. PEDERSEN |
| Brandon S. Pedersen |
| Chief Financial Officer |
February 23, 2011