UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994.
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7040
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes_ No_
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
The registrant has 13,353,440 common shares, par value $1.00,
outstanding at March 31, 1994.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Air Group, Inc. (the Company or
Air Group) unaudited financial statements: (i) consolidated
balance sheet as of March 31, 1994 and December 31, 1993; (ii)
consolidated statements of income for the quarters ended March
31, 1994 and 1993; (iii) consolidated statement of shareholders'
equity for the three months ended March 31, 1994; and, (iv)
consolidated statements of cash flows for the quarters ended
March 31, 1994 and 1993. Also attached are the accompanying
notes to Air Group's consolidated financial statements that have
changed significantly during the three months ended March 31,
1994. These statements include all adjustments which are, in the
opinion of management, necessary for a fair statement of the
results for the interim periods. The adjustments made were of a
normal recurring nature.
Air Group is a holding company incorporated in Delaware in 1985.
Its principal subsidiaries are Alaska Airlines, Inc. (Alaska) and
Horizon Air Industries, Inc. (Horizon).
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
First Quarter 1994 Compared with First Quarter 1993
The consolidated net loss for the first quarter of 1994 was $6.3
million, or $.47 per share. This compares with 1993's first
quarter loss of $15.0 million, or $1.25 per share. The operating
loss for the first quarter of 1994 was $2.9 million, compared to
$16.8 million loss for the first quarter of 1993.
Operating Revenues
Operating revenues increased 12% to $280.4 million from $250.2
million. Passenger revenues increased 10% on a 49% increase in
passenger traffic. Traffic gains were due to a 25% increase in
system capacity (including new service to Reno and Las Vegas),
lower fares that stimulated traffic throughout most of the
system, and improvements in market share. Load factor increased
from 50.4% in 1993 to 60.1% in 1994. Passenger yields decreased
26% reflecting fare reductions. Average revenue per passenger
mile (yield) decreased 5.2 cents, from 20.0 cents in the first
quarter of 1993 to 14.8 cents in the first quarter of 1994.
Currently, a 1 cent change in yield affects annual revenues by
about $70 million.
Freight, and mail revenues increased $3.7 million (22%) due to a
military charter contract in Alaska, increased freight volumes
and increased freight and mail rates. Other-net revenues were up
$3.0 million (34%) due to increased revenues from Alaska's
frequent flyer program, maintenance contracts, and inflight
liquor sales.
Operating Expenses
While capacity increased 25%, operating expenses increased only
6% to $283.3 million, compared to $267.1 million in the first
quarter of last year. Operating expenses per available seat mile
(ASM) declined 15%, from 11.95 cents in the first quarter of 1993
to 10.15 cents for the current quarter. The lower unit costs
were due to an intensive cost reduction effort and better
utilization of Alaska's fleet. Alaska's daily aircraft
utilization increased 35% from 7.2 hours to 9.7 hours. In
addition, lower fuel prices reduced operating expenses by $5.3
million in the first quarter 1994. The table below shows the
major operating expense elements on a unit cost basis for the
quarters ended March 31, 1994 and 1993.
Operating Expenses Per ASM (In Cents)
Increase %
1994 1993 (Decrease) Change
Wages and benefits 3.32 3.96 (.64) (16)
Aircraft fuel 1.18 1.42 (.24) (17)
Aircraft maintenance .60 .85 (.25) (29)
Aircraft rent 1.41 1.64 (.23) (14)
Commissions .72 .84 (.12) (14)
Depreciation & amortization .46 .64 (.18) (28)
Other 2.46 2.60 (.14) (5)
Total 10.15 11.95 (1.80) (15)
Wages and benefits per ASM decreased 16% primarily due to
improved productivity at Alaska. The number of Alaska employees
decreased 1% while Alaska's capacity increased 27% and traffic
increased 52%. During March 1994, the Company and the
Association of Flight Attendants concluded a new five-year
contract, which is effective May 1, 1994. The contract is
modeled after the one used at Southwest Airlines and provides
flight attendants the opportunity to earn increased wages through
increased flying. It also provides a lower starting rate of pay,
more flexible work rules, and reduced pension expenses.
Fuel expense per ASM decreased 17% primarily due to a 14%
decrease in the cost of fuel. The average cost per gallon was
60.2 cents in the first quarter of 1994, down 9.7 cents from the
first quarter of 1993 price of 69.9 cents. Currently, a 1 cent
change in fuel prices affects annual fuel costs by about $2.2
million.
Maintenance expense per ASM decreased 29% due to the replacement
of older aircraft with new aircraft during the past year as well
as significant improvements in programs, techniques and
efficiencies. Aircraft rent per ASM decreased 14% primarily due
to a substantial increase in Alaska's average fleet utilization,
offset by higher rents for new aircraft acquired during the past
year.
Depreciation and amortization expense per ASM decreased 28% due
to the retirement of essentially all of Alaska's Boeing 727-200
aircraft during 1993, and increased average fleet utilization.
Other expense per ASM decreased 5% due to lower unit costs for
food, advertising, promotion, and personnel expenses.
Income Tax Expense (Credit)
The Company estimates an effective annual tax rate of 43% for
1994.
Outlook
The Company expects that the higher traffic and lower yield
trends seen in the first quarter of 1994, will continue into the
second quarter of 1994. The Company is continuing its efforts to
reduce operating expenses and expects the trend toward lower
operating unit costs seen in the first quarter 1994 to continue
in 1994. In June 1994, Southwest Airlines is expected to begin
service in the Pacific Northwest and between the Pacific
Northwest and northern California. Most of the new service
replaces service provided by Morris Air, which was acquired by
Southwest Airlines in December 1993.
Liquidity and Capital Resources
The table below shows the major indicators of financial condition
and liquidity at March 31, 1994 and December 31, 1993 and the
changes during the three months ended March 31, 1994.
March 31,1994 December 31, 1993 Change
(In millions, except ratios and per share)
Cash and marketable $ 97.2 $ 101.1 $ (3.9)
securities
Working capital (deficit) (84.4) (61.3) (23.1)
Total assets 1,191.6 1,135.0 56.6
Long-term debt 593.4 525.4 68.0
Shareholders' equity 160.9 166.8 (5.9)
Book value per common $ 12.05 $ 12.51 $ (.46)
share
Debt/equity ratio 79%:21% 76%:24% N/A
The Company's cash and marketable securities portfolio decreased
by $3.9 million during the first quarter of 1994. Operating
activities provided $36 million of cash in the first quarter
1994. Additional cash was provided by $78 million in new long-
term debt. Cash was used for the purchase of three MD-80
aircraft and other capital expenditures ($89.6 million),
repayment of short-term borrowings ($20 million), debt payments
($8.2 million) and restricted deposits ($2.7 million).
Financing Arrangements
In March 1994, three MD-80 aircraft were financed with $78
million of interim debt. The Company plans to refinance this
debt with a ten-year loan at a variable interest rate based on
LIBOR.
At March 31, 1994, Alaska had $70 million in lines of credit.
$20 million of the lines are available and the balance were being
used as part of the above interim financing of three MD-80
aircraft.
Commitments
During the first quarter of 1994, Alaska took delivery of two new
B737-400 aircraft under eight-year operating leases. In April
1994, Alaska further restructured its aircraft orders with
McDonnell Douglas and replaced the order for ten MD-90s plus
options with an order for four MD-80s. Two MD-80s will be
delivered in 1996 and two in 1997. The net effect will reduce
future capital spending by approximately $360 million.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In December 1992, the U.S. Department of Justice filed suit
against most major domestic airlines, including the Company,
alleging that they have violated the antitrust laws by conspiring
to fix prices for domestic airline tickets in violation of
Section 1 of the Sherman Act. During March 1994, six of the
airlines, including the Company, entered into consent decrees
with the U.S. Department of Justice. The agreement requires no
refunds or monetary cost to the Company and is expected to be
approved by the court in second quarter 1994.
ITEM 6. Exhibits and Reports on Form 8-K
(a)Exhibit 11 - Statement regarding computation of per-share
earnings.
(b)No reports on Form 8-K were filed during the first quarter
1994.
Signatures
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ALASKA AIR GROUP, INC.
Registrant
Date: April 29, 1994
Raymond J. Vecci
Chairman, President and Chief Executive Officer
J. Ray Vingo
Vice President/Finance, Chief Financial
Officer, Treasurer and Director
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
March 31, December 31,
(In Thousands) 1994 1993
Current Assets
Cash and cash equivalents $27,555 $27,179
Marketable securities 69,606 73,970
Receivables - net 77,337 75,274
Inventories and supplies 42,245 41,269
Prepaid expenses and other assets 39,250 56,498
Total Current Assets 255,993 274,190
Property and Equipment
Flight equipment 705,610 614,717
Other property and equipment 216,933 217,967
Deposits for future flight equipment 63,674 79,765
986,217 912,449
Less accumulated depreciation and amortization 249,112 247,145
737,105 665,304
Capital leases
Flight and other equipment 44,381 44,381
Less accumulated amortization 19,606 19,079
24,775 25,302
Total Property and Equipment - Net 761,880 690,606
Intangible Assets - Subsidiaries 67,201 67,711
Other Assets 106,513 102,447
Total Assets $1,191,587 $1,134,954
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
(In Thousands) 1994 1993
Current Liabilities
Accounts payable $47,280 $45,582
Accrued aircraft rent 32,364 39,119
Other accrued liabilities 44,532 46,679
Accrued wages, vacation pay and payroll tax 41,900 40,192
Short-term borrowings - 20,000
Air traffic liability 134,431 108,360
Current portion of long-term debt and
capital lease obligations 39,897 35,575
Total Current Liabilities 340,404 335,507
Long-Term Debt and Capital Lease
Obligations 593,405 525,418
Other Liabilities and Credits
Deferred income taxes 15,826 20,998
Deferred income 24,882 25,827
Other liabilities 56,151 60,371
96,859 107,196
Shareholders' Equity
Common stock, $1 par value
Authorized: 30,000,000 shares
Issued: 1994 - 16,507,031 shares
1993 - 16,495,210 shares 16,507 16,495
Capital in excess of par value 152,146 152,017
Treasury stock, at cost: 1994 - 3,153,591
1993 - 3,153,589 (71,807) (71,807)
Deferred compensation (5,555) (5,813)
Retained earnings 69,628 75,941
160,919 166,833
Total Liabilities and Shareholders' Equity $1,191,587 $1,134,954
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Quarter Ended March 31 (In Thousands) 1994 1993
Operating Revenues
Passenger $248,221 $224,757
Freight and mail 20,236 16,568
Other - net 11,925 8,917
Total Operating Revenues 280,382 250,242
Operating Expenses
Wages and benefits 92,795 88,699
Aircraft fuel 32,927 31,731
Aircraft maintenance 16,801 19,026
Aircraft rent 39,408 36,691
Commissions 19,997 18,715
Depreciation and amortization 12,927 14,420
Other 68,455 57,806
Total Operating Expenses 283,310 267,088
Operating Loss (2,928) (16,846)
Other Income (Expense)
Interest income 1,424 1,776
Interest expense (9,877) (9,863)
Interest capitalized 103 -
Gain (loss) on sale of assets (175) 178
Other - net 441 892
(8,084) (7,017)
Loss before income tax credit (11,012) (23,863)
Income tax credit (4,699) (8,830)
Net Loss $(6,313) $(15,033)
Net Loss Per Common Share:
Primary -
Net loss $(6,313) $(15,033)
Preferred stock dividends - (1,645)
Net loss applicable to common shares $(6,313) $(16,678)
Average shares outstanding (000) 13,349 13,334
Net loss per common share $(0.47) $(1.25)
The dilutive effect of the Company's common stock equivalents and
convertible securities was anti-dilutive for 1994 and 1993.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Alaska Air Group, Inc.
-------- Common Stock--------
Capital in Treasury Deferred
$1 Par Excess of Stock Compen- Retained
(In Thousands) Value Par Value at Cost sation Earnings
Balances at December 31, 1993 $16,495 $152,017 ($71,807) ($5,813) $75,941
Net loss for the three month
ended March 31, 1994 (6,313)
Stock issued under stock plans 12 129
Employee Stock Ownership Plan
shares allocated 258
Balances at March 31, 1994 $16,507 $152,146 ($71,807) ($5,555) $69,628
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Quarter Ended March 31 (In Thousands) 1994 1993
Cash and cash equivalents at beginning of quarter $27,179 $6,880
Cash flows from operating activities:
Net loss (6,313) (15,033)
Adjustments to reconcile net loss to cash:
Depreciation and amortization 12,927 14,420
Amortization of airframe and engine overhauls 4,976 7,277
Loss (gain) on disposal of assets and debt retirement 175 (504)
Deferred income taxes (5,172) (11,162)
Increase in accounts receivable (2,063) (5,025)
Decrease in other current assets 16,272 8,035
Increase in air traffic liability 26,071 11,497
Decrease in other current liabilities (5,496) (4,241)
Interest on zero coupon notes 2,522 2,350
Leased aircraft return payments and other-net (7,904) (2,957)
Net cash provided by operating activities 35,995 4,657
Cash flows from investing activities:
Proceeds from disposition of assets 1,727 232
Purchases of marketable securities (132,500) (77,950)
Sales and maturities of marketable securities 136,864 97,072
Restricted deposits (2,674) (3,997)
Future flight equipment deposits returned 610 -
Additions to future flight equipment deposits (672) -
Additions to property and equipment (88,902) (8,924)
Net cash provided by (used in) investing activities (85,547) 6,433
Cash flows from financing activities:
Repayment of short-term borrowings (20,000) -
Proceeds from issuance of long-term debt 78,000 -
Long-term debt and capital lease payments (8,213) (8,146)
Proceeds from issuance of common stock 141 124
Cash dividends - (1,573)
Gain on debt retirement - 326
Net cash provided by (used in) financing activities 49,928 (9,269)
Net increase in cash and cash equivalents 376 1,821
Cash and cash equivalents at end of quarter 27,555 8,701
Supplemental disclosure of cash paid during the quarter for:
Interest (net of amount capitalized) 7,122 6,767
Income taxes - -
Noncash investing and financing activities None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE THREE MONTHS ENDED MARCH 31, 1994
Alaska Air Group, Inc.
Note 1. Long-Term Debt (See Note 3 to Consolidated Financial
Statements at December 31, 1993)
In March 1994, three MD-80 aircraft were financed with $78
million of interim debt with a term of up to ten years and
variable interest rate based on LIBOR. The Company plans to
refinance this debt with a new ten-year loan at a variable
interest rate based on LIBOR.
At March 31, 1994, Alaska had $70 million in lines of credit.
$20 million of the lines are available and the balance were being
used as part of the above interim financing of three MD-80
aircraft.
At March 31, 1994, under the most restrictive loan provisions,
Alaska had $23.8 million of excess net worth and its cash
dividend payments to Air Group were limited to $17.7 million.
Note 2. Commitments (See Note 5 to Consolidated Financial
Statements at December 31, 1993)
During the first quarter of 1994, Alaska took delivery of two new
B737-400 aircraft under eight-year operating leases. In April
1994, Alaska further restructured its aircraft orders with
McDonnell Douglas and replaced the order for ten MD-90s plus
options with an order for four MD-80s. Two MD-80s will be
delivered in 1996 and two in 1997. The net effect will reduce
future capital spending by approximately $360 million.
Alaska Air Group, Inc. EXHIBIT 11
Computation of Earnings Per Common Share
(In thousands, except per share)
Three Months Ended
March 31,
-------------------
1994 1993
------ ------
Primary -
Income before accounting change ($6,313) ($15,033)
Deduct dividends on preferred shares - (1,573)
Deduct preferred stock accretion - (72)
------ ------
Income applicable to common shares ($6,313) ($16,678)
====== ======
Average number of shares outstanding 13,349 13,334
Assumed exercise of stock options - -
------ ------
Average shares as adjusted 13,349 13,334
====== ======
Earnings per common share ($0.47) ($1.25)
====== ======
Fully Diluted -
Net income ($6,313) ($15,033)
After tax interest on convertible securities 2,428 2,317
------ ------
Income applicable to common shares ($3,885) ($12,716)
====== ======
Average number of shares outstanding 13,349 13,334
Common stock equivalents 18 36
Common stock reserved for conversion 8,901 9,093
------ ------
Average shares as adjusted 22,268 22,463
====== ======
Earnings per Common Share ($0.17) ($0.57)
====== ======
* *
* Anti-dilutive
