ALK 10-Q1 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
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.
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| | |
Delaware | | 91-1292054 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
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19300 International Boulevard, Seattle, Washington 98188 |
Telephone: (206) 392-5040 |
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 T No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
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| | | |
Large accelerated filer T | Accelerated filer £ | Non-accelerated filer £ | Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes £ No T
The registrant has 129,635,498 common shares, par value $0.01, outstanding at April 30, 2015.
ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015
TABLE OF CONTENTS
As used in this Form 10-Q, the terms “Air Group,” the "Company," “our,” “we” and "us," refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause our actual results to differ from our expectations are:
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• | the competitive environment in our industry; |
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• | changes in our operating costs, primarily fuel, which can be volatile; |
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• | general economic conditions, including the impact of those conditions on customer travel behavior; |
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• | our ability to meet our cost reduction goals; |
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• | operational disruptions; |
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• | an aircraft accident or incident; |
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• | labor disputes and our ability to attract and retain qualified personnel; |
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• | the concentration of our revenue from a few key markets; |
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• | actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities; |
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• | our reliance on automated systems and the risks associated with changes made to those systems; |
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• | changes in laws and regulations. |
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2014, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.
PART I
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
ALASKA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
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| | | | | | | |
(in millions) | March 31, 2015 | | December 31, 2014 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 51 |
| | $ | 107 |
|
Marketable securities | 1,261 |
| | 1,110 |
|
Total cash and marketable securities | 1,312 |
| | 1,217 |
|
Receivables - net | 187 |
| | 259 |
|
Inventories and supplies - net | 52 |
| | 58 |
|
Deferred income taxes | 123 |
| | 117 |
|
Prepaid expenses and other current assets | 102 |
| | 105 |
|
Total Current Assets | 1,776 |
| | 1,756 |
|
| | | |
Property and Equipment | |
| | |
|
Aircraft and other flight equipment | 5,204 |
| | 5,165 |
|
Other property and equipment | 899 |
| | 896 |
|
Deposits for future flight equipment | 778 |
| | 555 |
|
| 6,881 |
| | 6,616 |
|
Less accumulated depreciation and amortization | 2,384 |
| | 2,317 |
|
Total Property and Equipment - Net | 4,497 |
| | 4,299 |
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| | | |
Other Assets | 137 |
| | 126 |
|
| | | |
Total Assets | $ | 6,410 |
| | $ | 6,181 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
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| | | | | | | |
(in millions, except share amounts) | March 31, 2015 | | December 31, 2014 |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current Liabilities | | | |
Accounts payable | $ | 57 |
| | $ | 62 |
|
Accrued wages, vacation and payroll taxes | 160 |
| | 232 |
|
Other accrued liabilities | 731 |
| | 629 |
|
Air traffic liability | 814 |
| | 631 |
|
Current portion of long-term debt | 118 |
| | 117 |
|
Total Current Liabilities | 1,880 |
| | 1,671 |
|
| | | |
Long-Term Debt, Net of Current Portion | 650 |
| | 686 |
|
Other Liabilities and Credits | |
| | |
|
Deferred income taxes | 753 |
| | 750 |
|
Deferred revenue | 382 |
| | 374 |
|
Obligation for pension and postretirement medical benefits | 247 |
| | 246 |
|
Other liabilities | 332 |
| | 327 |
|
| 1,714 |
| | 1,697 |
|
Commitments and Contingencies |
|
| |
|
|
Shareholders' Equity | |
| | |
|
Preferred stock, $0.01 par value Authorized: 5,000,000 shares, none issued or outstanding | — |
| | — |
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Common stock, $0.01 par value, Authorized: 200,000,000 shares, Issued: 2015 - 130,551,503 shares; 2014 - 131,556,573 shares, Outstanding: 2015 - 130,444,006 shares; 2014 - 131,481,473 | 1 |
| | 1 |
|
Capital in excess of par value | 211 |
| | 296 |
|
Treasury stock (common), at cost: 2015 - 107,497 shares; 2014 - 75,100 shares | (7 | ) | | (4 | ) |
Accumulated other comprehensive loss | (305 | ) | | (310 | ) |
Retained earnings | 2,266 |
| | 2,144 |
|
| 2,166 |
| | 2,127 |
|
Total Liabilities and Shareholders' Equity | $ | 6,410 |
| | $ | 6,181 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
(in millions, except per share amounts) | 2015 | | 2014 |
Operating Revenues | | | |
Passenger | | | |
Mainline | $ | 901 |
| | $ | 854 |
|
Regional | 186 |
| | 186 |
|
Total passenger revenue | 1,087 |
| | 1,040 |
|
Freight and mail | 23 |
| | 24 |
|
Other - net | 159 |
| | 158 |
|
Total Operating Revenues | 1,269 |
| | 1,222 |
|
| | | |
Operating Expenses | | | |
Wages and benefits | 306 |
| | 272 |
|
Variable incentive pay | 26 |
| | 25 |
|
Aircraft fuel, including hedging gains and losses | 235 |
| | 358 |
|
Aircraft maintenance | 63 |
| | 51 |
|
Aircraft rent | 26 |
| | 28 |
|
Landing fees and other rentals | 71 |
| | 69 |
|
Contracted services | 67 |
| | 60 |
|
Selling expenses | 53 |
| | 46 |
|
Depreciation and amortization | 76 |
| | 70 |
|
Food and beverage service | 25 |
| | 21 |
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Other | 83 |
| | 81 |
|
Total Operating Expenses | 1,031 |
| | 1,081 |
|
Operating Income | 238 |
| | 141 |
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| | | |
Nonoperating Income (Expense) | | | |
Interest income | 5 |
| | 5 |
|
Interest expense | (11 | ) | | (12 | ) |
Interest capitalized | 8 |
| | 5 |
|
Other - net | — |
| | 13 |
|
| 2 |
| | 11 |
|
Income before income tax | 240 |
| | 152 |
|
Income tax expense | 91 |
| | 58 |
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Net Income | $ | 149 |
| | $ | 94 |
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| | | |
Basic Earnings Per Share: | $ | 1.13 |
| | $ | 0.69 |
|
Diluted Earnings Per Share: | $ | 1.12 |
| | $ | 0.68 |
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| | | |
Shares used for computation: | | | |
Basic | 131.120 |
| | 137.334 |
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Diluted | 132.230 |
| | 138.822 |
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| | | |
Cash dividend declared per share: | $ | 0.20 |
| | $ | 0.125 |
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See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2015 | | 2014 |
| | | |
Net Income | $ | 149 |
| | $ | 94 |
|
| | | |
Other Comprehensive Income (Loss): | | | |
Related to marketable securities: | | | |
Unrealized holding gains (losses) arising during the period | 7 |
| | 3 |
|
Income tax effect | (3 | ) | | (1 | ) |
Total | 4 |
| | 2 |
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| | | |
Related to employee benefit plans: | | | |
Reclassification of net pension expense into Wages and benefits | 3 |
| | 2 |
|
Income tax effect | (1 | ) | | (1 | ) |
Total | 2 |
| | 1 |
|
| | | |
Related to interest rate derivative instruments: | | | |
Unrealized holding gains (losses) arising during the period | (4 | ) | | (3 | ) |
Reclassification of (gains) losses into Aircraft rent | 2 |
| | 2 |
|
Income tax effect | 1 |
| | — |
|
Total | (1 | ) | | (1 | ) |
| | | |
Other Comprehensive Income | 5 |
| | 2 |
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| | | |
Comprehensive Income | $ | 154 |
| | $ | 96 |
|
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2015 | | 2014 |
Cash flows from operating activities: | | | |
Net income | $ | 149 |
| | $ | 94 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 76 |
| | 70 |
|
Stock-based compensation and other | 9 |
| | 4 |
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Changes in certain assets and liabilities: | | | |
Changes in deferred income taxes | (6 | ) | | 9 |
|
Increase in air traffic liability | 183 |
| | 185 |
|
Increase (decrease) in deferred revenue | 8 |
| | (1 | ) |
Other - net | 95 |
| | (119 | ) |
Net cash provided by operating activities | 514 |
| | 242 |
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| | | |
Cash flows from investing activities: | |
| | |
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Property and equipment additions: | |
| | |
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Aircraft and aircraft purchase deposits | (245 | ) | | (65 | ) |
Other flight equipment | (21 | ) | | (17 | ) |
Other property and equipment | (13 | ) | | (11 | ) |
Total property and equipment additions | (279 | ) | | (93 | ) |
Purchases of marketable securities | (403 | ) | | (305 | ) |
Sales and maturities of marketable securities | 259 |
| | 227 |
|
Proceeds from disposition of assets and changes in restricted deposits | 2 |
| | 7 |
|
Net cash used in investing activities | (421 | ) | | (164 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Long-term debt payments | (35 | ) | | (37 | ) |
Common stock repurchases | (102 | ) | | (30 | ) |
Dividends paid | (26 | ) | | (17 | ) |
Other financing activities | 14 |
| | 16 |
|
Net cash used in financing activities | (149 | ) | | (68 | ) |
Net increase (decrease) in cash and cash equivalents | (56 | ) | | 10 |
|
Cash and cash equivalents at beginning of year | 107 |
| | 80 |
|
Cash and cash equivalents at end of the period | $ | 51 |
| | $ | 90 |
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| | | |
Supplemental disclosure: | |
| | |
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Cash paid during the period for: | | | |
Interest (net of amount capitalized) | $ | 7 |
| | $ | 11 |
|
Income taxes paid (received) | (65 | ) | | 6 |
|
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The interim condensed consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in the Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of March 31, 2015, as well as the results of operations for the three months ended March 31, 2015 and 2014. The adjustments made were of a normal recurring nature.
In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment, and other factors, operating results for the three months ended March 31, 2015, are not necessarily indicative of operating results for the entire year.
Certain reclassifications, such as changes in our equity structure, have been made to prior year financial statements to conform with classifications used in the current year.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standard Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In April 2015, the FASB proposed to defer the effective date one year, and now allows early adoption one year prior to the effective date. The proposed standard would be effective for the Company on January 1, 2018, and early adoption is allowed on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined whether it will early adopt the standard or not.
NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Components for cash, cash equivalents and marketable securities (in millions):
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| | | | | | | | | | | | | | | |
March 31, 2015 | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
Cash equivalents | 46 |
| | — |
| | — |
| | 46 |
|
Cash and cash equivalents | 51 |
| | — |
| | — |
| | 51 |
|
U.S. government and agency securities | 200 |
| | 1 |
| | — |
| | 201 |
|
Foreign government bonds | 31 |
| | — |
| | — |
| | 31 |
|
Asset-backed securities | 151 |
| | — |
| | — |
| | 151 |
|
Mortgage-backed securities | 127 |
| | 1 |
| | (1 | ) | | 127 |
|
Corporate notes and bonds | 721 |
| | 6 |
| | — |
| | 727 |
|
Municipal securities | 24 |
| | — |
| | — |
| | 24 |
|
Marketable securities | 1,254 |
| | 8 |
| | (1 | ) | | 1,261 |
|
Total | $ | 1,305 |
| | $ | 8 |
| | $ | (1 | ) | | $ | 1,312 |
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| | | | | | | | | | | | | | | |
December 31, 2014 | Cost Basis | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Cash | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
Cash equivalents | 103 |
| | — |
| | — |
| | 103 |
|
Cash and cash equivalents | 107 |
| | — |
| | — |
| | 107 |
|
U.S. government and agency securities | 166 |
| | — |
| | — |
| | 166 |
|
Foreign government bonds | 25 |
| | — |
| | — |
| | 25 |
|
Asset-backed securities | 130 |
| | — |
| | — |
| | 130 |
|
Mortgage-backed securities | 127 |
| | — |
| | (1 | ) | | 126 |
|
Corporate notes and bonds | 644 |
| | 3 |
| | (2 | ) | | 645 |
|
Municipal securities | 18 |
| | — |
| | — |
| | 18 |
|
Marketable securities | 1,110 |
| | 3 |
| | (3 | ) | | 1,110 |
|
Total | $ | 1,217 |
| | $ | 3 |
| | $ | (3 | ) | | $ | 1,217 |
|
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of March 31, 2015.
Activity for marketable securities (in millions):
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| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Proceeds from sales and maturities | $ | 259 |
| | $ | 227 |
|
Gross realized gains | 1 |
| | 1 |
|
Gross realized losses | (1 | ) | | (1 | ) |
Maturities for marketable securities (in millions):
|
| | | | | | | |
March 31, 2015 | Cost Basis | | Fair Value |
Due in one year or less | $ | 152 |
| | $ | 151 |
|
Due after one year through five years | 1,099 |
| | 1,106 |
|
Due after five years through 10 years | 3 |
| | 4 |
|
Due after 10 years | — |
| | — |
|
Total | $ | 1,254 |
| | $ | 1,261 |
|
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.
As of March 31, 2015, the Company had outstanding fuel hedge contracts covering 256 million gallons of crude oil that will be settled from April 2015 to September 2016. Refer to the contractual obligations and commitments section of Item 2 for further information.
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 Boeing 737-800 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 February 2020 through March 2021 to coincide with the lease termination dates.
Fair Values of Derivative Instruments
Fair values of derivative instruments on the consolidated balance sheet (in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Derivative Instruments Not Designated as Hedges | | | |
Fuel hedge contracts | | | |
Fuel hedge contracts, current assets | $ | 3 |
| | $ | 3 |
|
Fuel hedge contracts, noncurrent assets | 2 |
| | 4 |
|
| | | |
Derivative Instruments Designated as Hedges | | | |
Interest rate swaps | | | |
Other accrued liabilities | (6 | ) | | (6 | ) |
Other liabilities | (15 | ) | | (13 | ) |
Losses in accumulated other comprehensive loss (AOCL) | (21 | ) | | (19 | ) |
The net cash received (paid) for new positions and settlements was ($4) million and ($7) million during the three months ended March 31, 2015 and 2014, respectively.
Pretax effect of derivative instruments on earnings (in millions):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Derivative Instruments Not Designated as Hedges | | | |
Fuel hedge contracts | | | |
Gains (losses) recognized in aircraft fuel expense | $ | (6 | ) | | $ | (10 | ) |
| | | |
Derivative Instruments Designated as Hedges | | | |
Interest rate swaps | | | |
Losses recognized in aircraft rent | (2 | ) | | (2 | ) |
Gains (losses) recognized in other comprehensive income (OCI) | (4 | ) | | (3 | ) |
The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent. The amounts shown as recognized in OCI are prior to the losses recognized in the income statement as aircraft rent during the period. The Company expects $6 million to be reclassified from AOCL to aircraft rent within the next twelve months.
Credit Risk and Collateral
The Company is exposed to credit losses in the event of nonperformance by counterparties to these derivative instruments. To mitigate exposure, the Company periodically evaluates the counterparties' potential risk of nonperformance by monitoring the absolute exposure levels and credit ratings. The Company maintains security agreements with a number of its counterparties which may require the Company to post collateral if the fair value of the selected derivative instruments fall below specified mark-to-market thresholds. The posted collateral does not offset the fair value of the derivative instruments and is included in "Prepaid expenses and other current assets" on the consolidated balance sheet.
The Company posted collateral of $5 million and $3 million as of March 31, 2015 and December 31, 2014, respectively. The collateral was provided to one counterparty associated with the net liability position of the interest rate swap agreements, offset by the net asset position of the fuel hedge contracts under a master netting arrangement.
NOTE 4. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments on a Recurring Basis
Fair values of financial instruments on the consolidated balance sheet (in millions):
|
| | | | | | | | | | | |
March 31, 2015 | Level 1 | | Level 2 | | Total |
Assets | | | | | |
Marketable securities | | | | | |
U.S. government and agency securities | $ | 201 |
| | $ | — |
| | $ | 201 |
|
Foreign government bonds | — |
| | 31 |
| | 31 |
|
Asset-backed securities | — |
| | 151 |
| | 151 |
|
Mortgage-backed securities | — |
| | 127 |
| | 127 |
|
Corporate notes and bonds | — |
| | 727 |
| | 727 |
|
Municipal securities | — |
| | 24 |
| | 24 |
|
Derivative instruments | | | | | |
Fuel hedge call options | — |
| | 5 |
| | 5 |
|
| | | | | |
Liabilities | | | | | |
Derivative instruments | | | | | |
Interest rate swap agreements | — |
| | (21 | ) | | (21 | ) |
|
| | | | | | | | | | | |
December 31, 2014 | Level 1 | | Level 2 | | Total |
Assets | | | | | |
Marketable securities | | | | | |
U.S. government and agency securities | $ | 166 |
| | $ | — |
| | $ | 166 |
|
Foreign government bonds | — |
| | 25 |
| | 25 |
|
Asset-backed securities | — |
| | 130 |
| | 130 |
|
Mortgage-backed securities | — |
| | 126 |
| | 126 |
|
Corporate notes and bonds | — |
| | 645 |
| | 645 |
|
Municipal securities | — |
| | 18 |
| | 18 |
|
Derivative instruments | | | | | |
Fuel hedge call options | — |
| | 7 |
| | 7 |
|
| | | | | |
Liabilities | | | | | |
Derivative instruments | | | | | |
Interest rate swap agreements | — |
| | (19 | ) | | (19 | ) |
The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on industry standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts that are not traded on a public exchange are Level 2 as the fair value is primarily based on inputs which are readily available in active markets or can be derived from information available in active markets. The fair value for call options is determined utilizing an option pricing model based on inputs that are readily available in active markets, or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of nonperformance by counterparties. Interest rate swap agreements are Level 2 as 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 forward interest rates at period end, multiplied by the total notional value.
The Company has no financial assets that are measured at fair value on a nonrecurring basis at March 31, 2015.
Fair Value of Other Financial Instruments
The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.
Cash and Cash Equivalents: Carried at amortized cost, which approximates fair value.
Debt: The carrying amount of the Company's variable-rate debt approximates fair values. For fixed-rate debt, the Company uses the income approach to determine the estimated fair value, by using discounted cash flows using borrowing rates for comparable debt over the weighted life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.
Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Carrying amount | $ | 587 |
| | $ | 614 |
|
Fair value | 640 |
| | 666 |
|
NOTE 5. MILEAGE PLAN
Alaska's Mileage Plan liabilities and deferrals on the consolidated balance sheets (in millions): |
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Current Liabilities: | | | |
Other accrued liabilities | $ | 360 |
| | $ | 343 |
|
Other Liabilities and Credits: | | | |
Deferred revenue | 375 |
| | 367 |
|
Other liabilities | 19 |
| | 20 |
|
Total | $ | 754 |
| | $ | 730 |
|
Alaska's Mileage Plan revenue included in the consolidated statements of operations (in millions):
|
| | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
Passenger revenues | $ | 64 |
| | $ | 55 |
|
Other - net revenues | 76 |
| | 73 |
|
Total | $ | 140 |
| | $ | 128 |
|
NOTE 6. LONG-TERM DEBT
Long-term debt obligations on the consolidated balance sheet (in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Fixed-rate notes payable due through 2024 | $ | 587 |
| | $ | 614 |
|
Variable-rate notes payable due through 2025 | 181 |
| | 189 |
|
Total debt | 768 |
| | 803 |
|
Less current portion | 118 |
| | 117 |
|
Long-term debt, less current portion | $ | 650 |
| | $ | 686 |
|
| | | |
Weighted-average fixed-interest rate | 5.7 | % | | 5.7 | % |
Weighted-average variable-interest rate | 1.6 | % | | 1.6 | % |
During the three months ended March 31, 2015, the Company made debt payments of $35 million.
At March 31, 2015, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
|
| | | |
| Total |
Remainder of 2015 | $ | 83 |
|
2016 | 115 |
|
2017 | 120 |
|
2018 | 151 |
|
2019 | 114 |
|
Thereafter | 185 |
|
Total | $ | 768 |
|
Bank Lines of Credit
The Company has two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in September 2017, is secured by aircraft. The other $100 million facility, which expires in March 2017, is 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 March 31, 2015.
NOTE 7. EMPLOYEE BENEFIT PLANS
Net periodic benefit costs recognized included the following components for the three months ended March 31, 2015 (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| Qualified | | Postretirement Medical |
| 2015 | | 2014 | | 2015 | | 2014 |
Service cost | $ | 10 |
| | $ | 8 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost | 21 |
| | 20 |
| | 1 |
| | 1 |
|
Expected return on assets | (31 | ) | | (29 | ) | | — |
| | — |
|
Recognized actuarial loss (gain) | 7 |
| | 3 |
| | (3 | ) | | (1 | ) |
Total | $ | 7 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 1 |
|
NOTE 8. COMMITMENTS
Future minimum fixed payments for commitments (in millions):
|
| | | | | | | | | | | | | | | |
March 31, 2015 | Aircraft Leases | | Facility Leases | | Aircraft Commitments | | Capacity Purchase Agreements |
Remainder of 2015 | $ | 39 |
| | $ | 70 |
| | $ | 385 |
| | $ | 39 |
|
2016 | 105 |
| | 92 |
| | 585 |
| | 58 |
|
2017 | 72 |
| | 87 |
| | 530 |
| | 61 |
|
2018 | 57 |
| | 39 |
| | 428 |
| | 42 |
|
2019 | 46 |
| | 37 |
| | 372 |
| | 30 |
|
Thereafter | 164 |
| | 194 |
| | 650 |
| | 245 |
|
Total | $ | 483 |
| | $ | 519 |
| | $ | 2,950 |
| | $ | 475 |
|
Lease Commitments
At March 31, 2015, the Company had lease contracts for 64 aircraft, which have remaining noncancelable lease terms ranging from 2015 to 2028. Of these aircraft, 14 are non-operating (i.e. not in the Company's fleet) and seven aircraft are E-175 regional jets, which will begin operations under a CPA with SkyWest in 2015. The majority of airport and terminal facilities are also leased. Rent expense for aircraft and facility leases was $73 million and $75 million for the three months ended March 31, 2015 and 2014, respectively.
Aircraft Commitments
As of March 31, 2015, the Company is committed to purchasing 79 B737 aircraft (42 737-900ER aircraft and 37 737 MAX aircraft) and two Q400 aircraft, with deliveries in 2015 through 2022. In addition, the Company has options to purchase 46 B737 aircraft and five Q400 aircraft, and options to increase capacity with 16 E-175 aircraft through our CPA with SkyWest.
Capacity Purchase Agreements (CPAs)
At March 31, 2015, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest Airlines, Inc. (SkyWest) to fly certain routes and Peninsula Airways, Inc. (PenAir) to fly one route in the state of Alaska. Under these agreements, Alaska pays the third-party carriers an amount which is based on a determination of their cost of operating those flights and other factors. The costs paid by Alaska to Horizon are based on similar data and are intended to approximate market rates for those services. Future payments (excluding those due to Horizon) are based on contractually required minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights, such as fuel.
NOTE 9. SHAREHOLDERS' EQUITY
Dividends
During the three months ended March 31, 2015, the Company declared and paid cash dividends of $0.20 per share, or $26 million.
Common Stock Repurchase
In September 2012, the Board of Directors authorized a $250 million share repurchase program, which was completed in July 2014. In May 2014, the Board of Directors authorized a $650 million share repurchase program.
Share repurchase activity (in millions, except share amounts):
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
| Shares | | Amount | | Shares | | Amount |
2014 Repurchase Program - $650 million | 1,580,747 |
| | $ | 102 |
| | — |
| | $ | — |
|
2012 Repurchase Program - $250 million | — |
| | $ | — |
| | 705,702 |
| | $ | 30 |
|
Total | 1,580,747 |
| | $ | 102 |
| | 705,702 |
| | $ | 30 |
|
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive income (loss), net of tax (in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Marketable securities | $ | 4 |
| | $ | — |
|
Employee benefit plans | (296 | ) | | (298 | ) |
Interest rate derivatives | (13 | ) | | (12 | ) |
Total | $ | (305 | ) | | $ | (310 | ) |
Earnings Per Share (EPS)
Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of 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. For the three months ended March 31, 2015 and 2014, anti-dilutive shares excluded from the calculation of EPS were not material.
NOTE 10. OPERATING SEGMENT INFORMATION
Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest to fly certain routes and PenAir to fly one route in the state of Alaska. The Company attributes revenue between Mainline and Regional based on the coupon fare in effect on the date of issuance relative to the origin and destination of each flight segment. To manage the two operating airlines and the revenues and expenses associated with the CPAs, management views the business in three operating segments.
Alaska Mainline - Flying Boeing 737 jets and all associated revenues and costs.
Alaska Regional - Alaska's CPAs with Horizon, SkyWest and PenAir. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective CPAs. Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska on behalf of Horizon.
Horizon - Horizon operates turboprop Q400 aircraft. All of Horizon's capacity is sold to Alaska under a CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs, and maintenance costs. The results of Horizon's operations are eliminated upon consolidation.
Additionally, the following table reports “Air Group adjusted,” which is not a measure determined in accordance with GAAP. The Company's chief operating decision-makers and others in management use this measure to evaluate operational performance and determine resource allocations. Adjustments are further explained below in reconciliation to consolidated GAAP results. Operating segment information is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2015 |
| Alaska | | | | | | | | | | |
| Mainline | | Regional | | Horizon | | Consolidating | | Air Group Adjusted(a) | | Special Items(b) | | Consolidated |
Operating revenues | | | | | | | | | | | | | |
Passenger | | | | | | | | | | | | | |
Mainline | $ | 901 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 901 |
| | $ | — |
| | $ | 901 |
|
Regional | — |
| | 186 |
| | — |
| | — |
| | 186 |
| | — |
| | 186 |
|
Total passenger revenues | 901 |
| | 186 |
| | — |
| | — |
| | 1,087 |
| | — |
| | 1,087 |
|
CPA revenues | — |
| | — |
| | 99 |
| | (99 | ) | | — |
| | — |
| | — |
|
Freight and mail | 22 |
| | 1 |
| | — |
| | — |
| | 23 |
| | — |
| | 23 |
|
Other - net | 142 |
| | 16 |
| | 1 |
| | — |
| | 159 |
| | — |
| | 159 |
|
Total operating revenues | 1,065 |
| | 203 |
| | 100 |
| | (99 | ) | | 1,269 |
| | — |
| | 1,269 |
|
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 639 |
| | 164 |
| | 91 |
| | (98 | ) | | 796 |
| | — |
| | 796 |
|
Economic fuel | 203 |
| | 32 |
| | — |
| | — |
| | 235 |
| | — |
| | 235 |
|
Total operating expenses | 842 |
| | 196 |
| | 91 |
| | (98 | ) | | 1,031 |
| | — |
| | 1,031 |
|
| | | | | | | | | | | | | |
Nonoperating income (expense) | | | | | | | | | | | | | |
Interest income | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Interest expense | (7 | ) | | — |
| | (4 | ) | | — |
| | (11 | ) | | — |
| | (11 | ) |
Other | 7 |
| | — |
| | 1 |
| | — |
| | 8 |
| | — |
| | 8 |
|
| 5 |
| | — |
| | (3 | ) | | — |
| | 2 |
| | — |
| | 2 |
|
Income (loss) before income tax | $ | 228 |
| | $ | 7 |
| | $ | 6 |
| | $ | (1 | ) | | $ | 240 |
| | $ | — |
| | $ | 240 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2014 |
| Alaska | | | | | | | | | | |
| Mainline | | Regional | | Horizon | | Consolidating | | Air Group Adjusted(a) | | Special Items(b) | | Consolidated |
Operating revenues | | | | | | | | | | | | | |
Passenger | | | | | | | | | | | | | |
Mainline | $ | 854 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 854 |
| | $ | — |
| | $ | 854 |
|
Regional | — |
| | 186 |
| | — |
| | — |
| | 186 |
| | — |
| | 186 |
|
Total passenger revenues | 854 |
| | 186 |
| | — |
| | — |
| | 1,040 |
| | — |
| | 1,040 |
|
CPA revenues | — |
| | — |
| | 91 |
| | (91 | ) | | — |
| | — |
| | — |
|
Freight and mail | 23 |
| | 1 |
| | — |
| | — |
| | 24 |
| | — |
| | 24 |
|
Other - net | 140 |
| | 17 |
| | 1 |
| | — |
| | 158 |
| | — |
| | 158 |
|
Total operating revenues | 1,017 |
| | 204 |
| | 92 |
| | (91 | ) | | 1,222 |
| | — |
| | 1,222 |
|
| | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | |
Operating expenses, excluding fuel | 576 |
| | 151 |
| | 86 |
| | (90 | ) | | 723 |
| | — |
| | 723 |
|
Economic fuel | 318 |
| | 48 |
| | — |
| | — |
| | 366 |
| | (8 | ) | | 358 |
|
Total operating expenses | 894 |
| | 199 |
| | 86 |
| | (90 | ) | | 1,089 |
| | (8 | ) | | 1,081 |
|
| | | | | | | | | | | | | |
Nonoperating income (expense) | | | | | | | | | | | | | |
Interest income | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Interest expense | (8 | ) | | — |
| | (4 | ) | | — |
| | (12 | ) | | — |
| | (12 | ) |
Other | 18 |
| | (1 | ) | | 1 |
| | — |
| | 18 |
| | — |
| | 18 |
|
| 15 |
| | (1 | ) | | (3 | ) | | — |
| | 11 |
| | — |
| | 11 |
|
Income (loss) before income tax | $ | 138 |
| | $ | 4 |
| | $ | 3 |
| | $ | (1 | ) | | $ | 144 |
| | $ | 8 |
| | $ | 152 |
|
| |
(a) | The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain charges. |
| |
(b) | Includes mark-to-market fuel-hedge accounting charges. |
Total assets were as follows (in millions):
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
Alaska(a) | $ | 7,153 |
| | $ | 6,772 |
|
Horizon | 821 |
| | 818 |
|
Parent company | 3,638 |
| | 3,552 |
|
Elimination of inter-company accounts | (5,202 | ) | | (4,961 | ) |
Consolidated | $ | 6,410 |
| | $ | 6,181 |
|
| |
(a) | There are no assets associated with purchased capacity flying at Alaska. |
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company, our segment operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Item 1A. "Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014. This overview summarizes the MD&A, which includes the following sections:
| |
• | First Quarter Review—highlights from the first quarter of 2015 outlining some of the major events that happened during the period and how they affected our financial performance. |
| |
• | Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three months ended March 31, 2015. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2015. |
| |
• | Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments. |
FIRST QUARTER REVIEW
Our consolidated pretax income was $240 million during the first quarter of 2015, compared to $152 million in the first quarter of 2014. The increase of $88 million was mainly due to increased revenues of $47 million and lower aircraft fuel expense of $123 million, partially offset by an increase in non-fuel expenses of $73 million. Also, in the prior-year quarter, we recognized gains from the sale of certain equity securities of $11 million. The increase in revenues was due to an increase in capacity of 10.8%, while the average price of raw fuel decreased 38.9% per gallon, and non-fuel unit expenses decreased 0.6%.
See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure.
Operations Performance
During the first quarter, both Alaska and Horizon continued their strong on-time performance, reporting that 85.0% and 86.2% of their flights arrived on time, respectively. For the twelve months ended February 2015, Alaska maintained its ranking as the top carrier among the eight largest U.S. airlines for on-time performance, according to the U.S. Department of Transportation.
New Markets
New routes launched and announced are as follows:
|
| |
New Non-Stop Routes Launched in Q1 | New Non-Stop Routes Announced (Launch Dates) |
Las Vegas to Mammoth Lakes, California | Seattle to JFK, New York (9/16/15) |
San Diego to Kona, Hawaii | Orange County, California to Cabo San Lucas, Mexico (10/8/15) |
Seattle to Washington, D.C. Dulles | Orange County, California to Puerto Vallarta, Mexico (10/9/15) |
| Boise to Spokane, Washington (8/24/15) |
| Los Angeles to Baltimore, Maryland (9/10/15) |
| Seattle to Nashville, Tennessee (9/23/15) |
| Seattle to Raleigh, North Carolina (10/1/15) |
| Seattle to Charleston, South Carolina (11/16/15) |
| Los Angeles to San Jose, Costa Rica (10/31/15) |
| Los Angeles to Liberia, Costa Rica (11/1/15) |
Capital Allocation
During the first quarter of 2015, we paid cash dividends of $26 million and we repurchased 1,580,747 shares of our common stock for $102 million under the $650 million repurchase program authorized by our Board of Directors in May 2014. Since 2007, we have repurchased 50,669,998 shares of common stock under such programs for $930 million for an average price of $18 per share. During the month of April, we repurchased 829,873 shares of our common stock for $53 million, resulting in 129,635,498 shares outstanding at April 30, 2015. For 2015, we expect to deploy at least $550 million to shareholders through a combination of dividends and share repurchases.
Outlook
Currently, we see strong demand for the summer travel season. Because of our low cost structure, low fuel costs, and our strong balance sheet we are able to offer lower fares, while maintaining our return and capital allocation objectives. We believe this offers our customers an outstanding value proposition when coupled with the improvements we've made in our in-flight experience with Alaska BeyondTM, including upgraded food and beverage offerings, new streaming in-flight entertainment, comfortable Recaro seats with power at every seat, and our award winning service. We also launched a promotion beginning February 1, 2015 to offer a free checked bag to all Alaska Airlines Visa Signature credit cardholders to further enhance the value of our Mileage Plan program, which we expect to continue.
We expect our capacity to increase approximately 10.5% in the second quarter. In addition to our own capacity growth, competitive capacity is expected to be up approximately 15% in the second quarter (weighted by the concentration of our own capacity in competitive markets), which will put pressure on our yields and load factors. We currently expect our unit costs to be flat in the second quarter compared to 2014, and are targeting an approximate 0.5% decrease in unit costs for the full year of 2015 compared to 2014.
Our current expectations for capacity and CASM excluding fuel and special items are summarized below:
|
| | | | | | | |
| Forecast Q2 2015 | | Change Y-O-Y | | Forecast Full Year 2015 | | Change Y-O-Y |
Consolidated: | | | | | | | |
ASMs (000,000) "capacity" | 9,900 - 9,950 | | ~ 10.5% | | 39,500 - 39,900 | | ~ 10.0% |
CASM excluding fuel (cents) | 8.33¢ - 8.38¢ | | ~ flat | | 8.30¢ - 8.35¢ | | ~ (0.5)% |
| | | | | | | |
Mainline: | | | | | | | |
ASMs (000,000) "capacity" | 8,925 - 8,975 | | ~ 10.5% | | 35,600 - 36,000 | | ~ 10.0% |
CASM excluding fuel (cents) | 7.43¢ - 7.48¢ | | ~ flat | | 7.40¢ - 7.45¢ | | ~ (0.5)% |
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2015 COMPARED TO THREE MONTHS ENDED MARCH 31, 2014
Our consolidated net income for the first quarter of 2015 was $149 million, or $1.12 per diluted share, compared to net income of $94 million, or $0.68 per diluted share, in the first quarter of 2014. Significant items impacting the comparability between the periods are as follows:
| |
• | In the first quarter of 2014 there were adjustments to reflect the timing of unrealized mark-to-market gains of $8 million ($5 million after tax, or $0.04 per diluted share) related to our fuel hedge positions. |
ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS
We believe disclosure of earnings excluding the impact of mark-to-market gains or losses or other individual revenues or expenses is useful information to investors because:
| |
• | CASM excluding fuel and certain special items is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance; |
| |
• | By eliminating fuel expense and certain special items from our unit metrics, we believe that we have better visibility into the results of our non-fuel continuing operations. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management; |
| |
• | Our results excluding fuel expense and certain special items serve as the basis for our various employee incentive plans, thus the information allows investors to better understand the changes in variable incentive pay expense in our consolidated statements of operations; and |
| |
• | We believe it is the basis by which we are evaluated by industry analysts; and |
| |
• | It is useful to monitor performance without these items as it improves a reader’s ability to compare our results to those of other airlines. |
Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude these amounts are non-recurring, infrequent, or unusual in nature.
Excluding the impact of mark-to-market fuel hedge adjustments, our adjusted consolidated net income for the first quarter of 2015 was $149 million, or $1.12 per diluted share, compared to an adjusted consolidated net income of $89 million, or $0.64 per diluted share, in the first quarter of 2014.
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
(in millions, except per share amounts) | Dollars | | Diluted EPS | | Dollars | | Diluted EPS |
Net income and diluted EPS as reported | $ | 149 |
| | $ | 1.12 |
| | $ | 94 |
| | $ | 0.68 |
|
Mark-to-market fuel hedge adjustments, net of tax | — |
| | — |
| | (5 | ) | | (0.04 | ) |
Non-GAAP adjusted income and per-share amounts | $ | 149 |
| | $ | 1.12 |
| | $ | 89 |
| | $ | 0.64 |
|
Our operating costs per ASM are summarized below:
|
| | | | | | | | | | |
| Three Months Ended March 31, |
(in cents) | 2015 | | 2014 | | % Change |
Consolidated: | | | | | |
CASM |
| 11.14 | ¢ | |
| 12.94 | ¢ | | (13.9 | ) |
Less the following components: | | | |
| | |
|
Aircraft fuel, including hedging gains and losses | 2.53 |
| | 4.28 |
| | (40.9 | ) |
CASM excluding fuel |
| 8.61 | ¢ | |
| 8.66 | ¢ | | (0.6 | ) |
| | | | | |
Mainline: | | | | | |
CASM |
| 10.09 | ¢ | |
| 11.82 | ¢ | | (14.6 | ) |
Less the following components: | | | |
| | |
|
Aircraft fuel, including hedging gains and losses | 2.43 |
| | 4.14 |
| | (41.3 | ) |
CASM excluding fuel |
| 7.66 | ¢ | |
| 7.68 | ¢ | | (0.3 | ) |
OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
|
| | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 | | Change |
Consolidated Operating Statistics:(a) | | | | | |
Revenue passengers (000) | 7,316 | | 6,649 | | 10.0% |
Revenue passenger miles (RPM) (000,000) "traffic" | 7,723 | | 7,078 | | 9.1% |
Available seat miles (ASM) (000,000) "capacity" | 9,257 | | 8,352 | | 10.8% |
Load factor | 83.4% | | 84.7% | | (1.3) pts |
Yield | 14.08¢ | | 14.70¢ | | (4.2%) |
Passenger revenue per ASM (PRASM) | 11.74¢ | | 12.45¢ | | (5.7%) |
Revenue per ASM (RASM)(b) | 13.71¢ | | 14.64¢ | | (6.4%) |
Operating expense per ASM (CASM) excluding fuel(b) | 8.61¢ | | 8.66¢ | | (0.6%) |
Economic fuel cost per gallon(b) | $1.98 | | $3.32 | | (40.4%) |
Fuel gallons (000,000) | 119 | | 110 | | 8.2% |
ASMs per fuel gallon | 77.8 | | 75.9 | | 2.5% |
Average full-time equivalent employees (FTEs) | 13,274 | | 12,386 | | 7.2% |
| | | | | |
Mainline Operating Statistics: | | | | | |
Revenue passengers (000) | 5,236 | | 4,737 | | 10.5% |
RPMs (000,000) "traffic" | 6,994 | | 6,402 | | 9.2% |
ASMs (000,000) "capacity" | 8,347 | | 7,495 | | 11.4% |
Load factor | 83.8% | | 85.4% | | (1.6) pts |
Yield | 12.88¢ | | 13.34¢ | | (3.4%) |
PRASM | 10.79¢ | | 11.40¢ | | (5.4%) |
RASM | 12.75¢ | | 13.57¢ | | (6.0%) |
CASM excluding fuel(b) | 7.66¢ | | 7.68¢ | | (0.3%) |
Economic fuel cost per gallon(b) | $1.97 | | $3.32 | | (40.7%) |
Fuel gallons (000,000) | 103 | | 96 | | 7.3% |
ASMs per fuel gallon | 81.0 | | 78.1 | | 3.7% |
Average FTEs | 10,380 | | 9,591 | | 8.2% |
Aircraft utilization | 10.6 | | 10.2 | | 3.9% |
Average aircraft stage length | 1,199 | | 1,201 | | (0.2%) |
Mainline operating fleet at period-end | 137 | | 133 | | 4 a/c |
| | | | | |
Regional Operating Statistics:(c) | | | | | |
Revenue passengers (000) | 2,080 | | 1,912 | | 8.8% |
RPMs (000,000) "traffic" | 728 | | 675 | | 7.9% |
ASMs (000,000) "capacity" | 910 | | 857 | | 6.2% |
Load factor | 80.0% | | 78.8% | | 1.2 pts |
Yield | 25.58¢ | | 27.53¢ | | (7.1%) |
PRASM | 20.46¢ | | 21.69¢ | | (5.7%) |
Regional operating fleet at period-end (Horizon and dedicated Skywest aircraft) | 60 | | 59 | | 1 a/c |
| |
(a) | Except for FTEs, data includes information related to third-party Regional CPA arrangements. |
| |
(b) | See reconciliation of this measure to the most directly related GAAP measure in the "Results of Operations" section. |
| |
(c) | Data presented includes information related to Regional CPAs. |
OPERATING REVENUES
Total operating revenues increased $47 million, or 4%, during the first quarter of 2015 compared to the same period in 2014. The changes are summarized in the following table:
|
| | | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2015 | | 2014 | | % Change |
Passenger | | | | | |
Mainline | $ | 901 |
| | $ | 854 |
| | 6 |
|
Regional | 186 |
| | 186 |
| | — |
|
Total passenger revenue | 1,087 |
| | 1,040 |
| | 5 |
|
Freight and mail | 23 |
| | 24 |
| | (4 | ) |
Other - net | 159 |
| | 158 |
| | 1 |
|
Total operating revenues | $ | 1,269 |
| | $ | 1,222 |
| | 4 |
|
Passenger Revenue – Mainline
Mainline passenger revenue for the first quarter of 2015 increased by 6% due to an 11.4% increase in capacity, partially offset by a decrease of 5.4% in PRASM compared to the first quarter of 2014. The increase in capacity was driven by adding larger aircraft to our fleet and the annualization of new routes added to expand our service from Seattle, Anchorage, Portland, and Salt Lake City. The decrease in PRASM was driven by a 3.4% decline in ticket yield and a 1.6-point reduction in load factor compared to the prior-year quarter. The decrease in yield and load factor was primarily due to increased competitive capacity in our markets and, to a lessor extent, new markets that have not yet fully matured. Additionally, interline revenue decreased approximately 25% due to a reduction in revenue from one of our codeshare partners, and due to a favorable impact to revenue in the prior year from storm-related rebookings on us by other carriers.
Passenger Revenue – Regional
Regional passenger revenue was flat compared to the first quarter of 2014. The 6.2% increase in capacity was offset by a 5.7% decrease in PRASM. The increase in capacity was driven by additional frequencies and the annualization of new routes in the prior year. The decrease in PRASM is due to a 7.1% decline in yield, partially offset by an increase in load factor of 1.2 points. The decrease in yield is due to an increase in competitive capacity in our regional markets and our own growth as we strengthen our network utility in the Pacific Northwest.
Other – Net
Other - net revenue increased $1 million from the first quarter of 2014, due to slight increases in Mileage Plan revenue, change fee revenue and buy-on-board revenue. Largely offsetting these increases was a $6 million decline in bag fee revenue connected to promotions to offer a free checked bag to all Mileage Plan members in January, and to our Alaska Airlines Visa Signature credit cardholders in February and March.
OPERATING EXPENSES
Total operating expenses decreased $50 million, or 5%, compared to the first quarter of 2014. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
|
| | | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2015 | | 2014 | | % Change |
Fuel expense | $ | 235 |
| | $ | 358 |
| | (34 | ) |
Non-fuel expenses | 796 |
| | 723 |
| | 10 |
|
Total Operating Expenses | $ | 1,031 |
| | $ | 1,081 |
| | (5 | ) |
Significant operating expense variances from 2014 are more fully described below.
Wages and Benefits
Wages and benefits increased during the first quarter of 2015 by $34 million. The primary components of wages and benefits are shown in the following table:
|
| | | | | | | | | |
| Three Months Ended March 31, |
(in millions) | 2015 | | 2014 | | % Change |
Wages | $ | 230 |
| | $ | 209 |
| | 10 |
Pension - Defined benefit plans | 7 |
| | 2 |
| | 250 |
Defined contribution plans | 15 |
| | 13 |
| | 15 |
Medical and other benefits | 38 |
| | 33 |
| | 15 |
Payroll taxes | 16 |
| | 15 |
| | 7 |
Total wages and benefits | $ | 306 |
| | $ | 272 |
| | 13 |
Wages increased 10% with a 7.2% increase in FTEs. The primary driver of the increase in wages is the new Alaska Flight Attendant contract that was was signed in the fourth quarter of 2014. FTEs increased across most work groups compared to the prior year due to the growth in departures.
Pension expense increased $5 million, compared to the same period in the prior year. The increase is due to revaluing the pension obligation at December 31, 2014 with higher mortality assumptions, and a lower discount rate that increased the pension obligation. The resulting unrealized loss is amortized over the expected service period.
Medical and other benefits increased 15% compared to the same period in the prior year. The increase is primarily due to increases in medical insurance expense and workers' compensation expense, due to higher volumes of medical claims and a workers' compensation claim.
Aircraft Fuel
Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our consolidated statement of operations as the value of that portfolio increases and decreases. Our aircraft fuel expense is very volatile, even between quarters, because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.
Aircraft fuel expense decreased $123 million, or 34% compared to 2014. The elements of the change are illustrated in the following table:
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 |
(in millions, except for per gallon amounts) | Dollars | | Cost/Gal | | Dollars | | Cost/Gal |
Raw or "into-plane" fuel cost | $ | 229 |
| | $ | 1.93 |
| | $ | 348 |
| | $ | 3.16 |
|
Losses on settled hedges | 6 |
| | 0.05 |
| | 18 |
| | 0.16 |
|
Consolidated economic fuel expense | 235 |
| | 1.98 |
| | 366 |
| | 3.32 |
|
Mark-to-market fuel hedge adjustments | — |
| | — |
| | (8 | ) | | (0.07 | ) |
GAAP fuel expense | $ | 235 |
| | $ | 1.98 |
| | $ | 358 |
| | $ | 3.25 |
|
Fuel gallons | 119 |
| | | | 110 |
| | |
Fuel expense was lower than in the first quarter of 2014 as the raw fuel price per gallon decreased 39% on an 8% increase in fuel gallons. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during the first quarter of 2015 was due to lower crude oil prices of 51% with stable refining margins.
We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business because it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.
We recognized losses of $6 million for hedges that settled during the first quarter of 2015, compared to losses of $18 million in the first quarter of 2014. These amounts represent the net cash paid including the premium expense recognized for those hedges. Additionally, in the prior year we recorded an unrealized gain of $8 million.
Aircraft Maintenance
Aircraft maintenance expense increased by $12 million, or 24%, compared to the first quarter of 2014. For both fleets, the increase is due to more scheduled engine events that were more expensive due to replacing life-limited parts. Additionally, there were more airframe checks for the B737 fleet compared to the first quarter of 2014.
We expect full-year aircraft maintenance expense to be 10% to 15% higher than full-year 2014 due to an increase in engine maintenance expense for both fleet types.
Contracted Services
Contracted services expense increased $7 million, or 12%, compared to the first quarter of 2014. The increase is primarily due to increased flying at stations where we use vendors to assist us with passenger and ramp handling. Additionally, payments to our CPA partners increased approximately $2 million compared to the same period in the prior year because of increased flying.
Selling Expenses
Selling expenses increased $7 million, or 15%, compared to the first quarter of 2014. The increase is directly due to the advertising and promotional activity related to the launch of our Alaska Beyond service.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $6 million, or 9%, compared to the first quarter of 2014. The increase is due to seven additional aircraft in the fleet, the completion of our cabin improvement project, and capitalization of non-aircraft assets.
Food and Beverage Expense
Food and beverage expense increased $4 million, or 19%, compared to the first quarter of 2014. The increase is due to increased buy-on-board sales and changes in the menu offering higher quality food and beverage products.
Nonoperating Income
Net nonoperating income decreased $9 million, compared to the first quarter of 2014. In the prior year, we recognized a gain from the sale of certain equity securities.
Operating Expenses Compared to Capacity Growth
We are presenting our line-item expenses below both in absolute dollars and on an ASM basis to highlight areas in which costs have increased or decreased either more or less than capacity.
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2015 | | 2014 | | 2015 | | 2014 | | Change |
(in millions, except CASM) | Amount | | Amount | | CASM | | CASM | | CASM |
Wages and benefits | $ | 306 |
| | $ | 272 |
| |
| 3.31 | ¢ | |
| 3.26 | ¢ | | 1.5 | % |
Variable incentive pay | 26 |
| | 25 |
| | 0.28 |
| | 0.30 |
| | (6.7 | )% |
Aircraft maintenance | 63 |
| | 51 |
| | 0.68 |
| | 0.61 |
| | 11.5 | % |
Aircraft rent | 26 |
| | 28 |
| | 0.28 |
| | 0.34 |
| | (17.6 | )% |
Landing fees and other rentals | 71 |
| | 69 |
| | 0.77 |
| | 0.83 |
| | (7.2 | )% |
Contracted services | 67 |
| | 60 |
| | 0.72 |
| | 0.72 |
| | — | % |
Selling expenses | 53 |
| | 46 |
| | 0.57 |
| | 0.55 |
| | 3.6 | % |
Depreciation and amortization | 76 |
| | 70 |
| | 0.83 |
| | 0.84 |
| | (1.2 | )% |
Food and beverage service | 25 |
| | 21 |
| | 0.27 |
| | 0.25 |
| | 8.0 | % |
Other | 83 |
| | 81 |
| | 0.90 |
| | 0.96 |
| | (6.3 | )% |
Non-fuel Expenses | $ | 796 |
| | $ | 723 |
| |
| 8.61 | ¢ | |
| 8.66 | ¢ | | (0.6 | )% |
Additional Segment Information
Refer to the Notes of the Condensed Consolidated Financial Statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Alaska Mainline
Pretax profit for Alaska Mainline was $228 million in the first quarter of 2015 compared to $138 million in the first quarter of 2014. The $47 million increase in Mainline passenger revenue is described above. Mainline operating expense excluding fuel increased by $63 million to $639 million in 2015 due to higher maintenance rates and volumes, higher ramp and passenger handling, higher advertising and promotional spend on the launch of Alaska Beyond, increased costs with higher quality food and beverage products, and higher depreciation related to our fleet growth. Economic fuel cost decreased due to lower raw fuel costs, partially offset by a 7.3% increase in consumption.
Alaska Regional
Pretax profit for Alaska Regional was $7 million in the first quarter of 2015 compared to $4 million the first quarter of 2014. The increase is due to lower economic fuel expense, partially offset by higher expenses to support additional capacity.
Horizon
Pretax profit for Horizon was $6 million in the first quarter of 2015 compared to $3 million in the first quarter of 2014. CPA Revenues (100% of which are from Alaska and eliminated in consolidation) increased due to additional departures and rates in the CPA contract. The $5 million increase in Horizon's non-fuel operating expenses was largely driven by increased engine maintenance and increased wages to support additional flying.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are:
| |
• | Our existing cash and marketable securities balance of $1.3 billion; |
| |
• | Our expected cash from operations; |
| |
• | Our 77 unencumbered aircraft in our operating fleet that could be financed, if necessary; |
| |
• | Our combined $200 million bank line-of-credit facilities, with no outstanding borrowings. |
During the first three months of 2015, we purchased one Q400 aircraft with cash on hand and made debt payments totaling $35 million. In addition, we continued to return capital to our shareholders by paying $26 million in quarterly dividends and repurchasing $102 million of our common stock.
In 2014, we were rated BBB- by Fitch Ratings and Standard & Poor's, and are now one of only two U.S. airlines with investment-grade credit ratings.
In our cash and marketable securities portfolio, we invest only in securities that meet our overall investment policy of maintaining and securing investment principal. Our investment portfolio is managed by reputable firms that adhere to our investment policy that sets forth certain objectives, approved and prohibited investments, and duration and credit quality guidelines. Our policy and the portfolio managers are continually reviewed to ensure that the investments align 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) | March 31, 2015 | | December 31, 2014 | | Change |
Cash and marketable securities | $ | 1,312 |
| | $ | 1,217 |
| | 7.8 | % |
Cash, marketable securities, and unused lines of credit as a percentage of trailing twelve months revenue | 28 | % | | 26 | % | | 2 pts |
|
Long-term debt, net of current portion | $ | 650 |
| | $ | 686 |
| | (5.2) | % |
Shareholders’ equity | $ | 2,166 |
| | $ | 2,127 |
| | 1.8 | % |
Long-term debt-to-capital including net present value of aircraft operating lease payments(a) | 29%:71% |
| | 31%:69% |
| | (2) pts |
|
| |
(a) | Calculated using the present value of remaining aircraft lease payments. |
Given our strong financial condition, we will continue to evaluate our cash flows from operations, reinvest in the business, and return capital to our shareholders, while maintaining a strong liquidity position.
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
For the first three months of 2015, net cash provided by operating activities was $514 million, compared to $242 million during the same period in 2014. The $272 million increase was primarily attributable to a decrease in the price of jet fuel, the collection of a $65 million income tax receivable from 2014, and an increase in passenger revenues.
We typically generate positive cash flows from operations and expect to use that cash flow to buy aircraft and capital equipment, make normal debt payments, and to return capital to shareholders through share repurchases and dividends.
Cash Used in Investing Activities
Cash used in investing activities was $421 million during the first three months of 2015, compared to $164 million during the same period of 2014. Our capital expenditures were $279 million in the first three months of 2015, primarily due to purchase deposits related to 34 aircraft deliveries over the next 24 months.
The table below reflects our full-year expectation for capital expenditures and the additional expenditures if options were exercised. These options will be exercised only if we believe return on invested capital targets can be met.
|
| | | | | | | | | | | | | | | |
(in millions) | 2015 | | 2016 | | 2017 | | 2018 |
Aircraft and aircraft purchase deposits - firm | $ | 580 |
| | $ | 530 |
| | $ | 500 |
| | $ | 400 |
|
Other flight equipment | 55 |
| | 55 |
| | 30 |
| | 25 |
|
Other property and equipment | 100 |
| | 80 |
| | 80 |
| | 80 |
|
Total property and equipment additions | $ | 735 |
| | $ | 665 |
| | $ | 610 |
| | $ | 505 |
|
Option aircraft and aircraft deposits, if exercised(a) | $ | — |
| | $ | 60 |
| | $ | 140 |
| | $ | 290 |
|
| |
(a) | Alaska has options to acquire 46 B737 aircraft with deliveries from 2018 through 2024. Horizon has options to acquire five Q400 aircraft with deliveries from 2018 through 2019. |
Cash Used by Financing Activities
Net cash used by financing activities was $149 million during the first three months of 2015 compared to $68 million during the same period in 2014. During the first three months of 2015 we made debt payments of $35 million, stock repurchases of $102 million, and dividend payments totaling $26 million.
Bank Line-of-Credit Facilities
We have two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in September 2017, is secured by aircraft. The other $100 million facility, which expires in March 2017, is secured by certain accounts receivable, spare engines, spare parts and ground service equipment.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Purchase Commitments
As of March 31, 2015, we have firm orders to purchase 81 aircraft. We also have options to acquire 46 B737 aircraft with deliveries from 2018 through 2024 and have options to acquire five Q400 aircraft with deliveries from 2018 through 2019. In addition, we have options to add regional capacity by having SkyWest operate up to 16 more E-175 aircraft.
The following table summarizes expected fleet activity by year:
|
| | | | | | | | | | | | | | |
| Actual Fleet | | Expected Fleet Activity(a) |
Aircraft | Dec 31, 2014 | | 2015 Changes | | Dec 31, 2015 | | 2016-2017 Changes | | Dec 31, 2017 |
737 Freighters & Combis | 6 |
| | — |
| | 6 |
| | (3 | ) | | 3 |
|
737 Passenger Aircraft | 131 |
| | 10 |
| | 141 |
| | 9 |
| | 150 |
|
Total Mainline Fleet | 137 |
| | 10 |
| | 147 |
| | 6 |
| | 153 |
|
Q400 | 51 |
| | 1 |
| | 52 |
| | 2 |
| | 54 |
|
E-175 | — |
| | 5 |
| | 5 |
| | 2 |
| | 7 |
|
CRJ700 | 8 |
| | — |
| | 8 |
| | — |
| | 8 |
|
Total Regional Fleet | 59 |
| | 6 |
| | 65 |
| | 4 |
| | 69 |
|
Total | 196 |
| | 16 |
| | 212 |
| | 10 |
| | 222 |
|
| |
(a) | Expected fleet activity includes aircraft deliveries, net of planned retirements and lease returns. |
For future firm orders and if we exercise our options for additional deliveries, we may finance the aircraft through internally generated cash, long-term debt, or lease arrangements.
Fuel Hedge Positions
All of our current oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we benefit from a decline in crude oil prices, as there is no cash outlay other than the premiums we pay to enter into the contracts. Our crude oil positions are as follows:
|
| | | | | | |
| Approximate % of Expected Fuel Requirements | | Weighted-Average Crude Oil Price per Barrel | | Average Premium Cost per Barrel |
Second Quarter 2015 | 50 | % | | $97 | | $3 |
Third Quarter 2015 | 50 | % | | $90 | | $3 |
Fourth Quarter 2015 | 40 | % | | $86 | | $3 |
Remainder 2015 | 47 | % | | $95 | | $3 |
First Quarter 2016 | 30 | % | | $82 | | $3 |
Second Quarter 2016 | 20 | % | | $72 | | $3 |
Third Quarter 2016 | 10 | % | | $72 | | $3 |
Full Year 2016 | 15 | % | | $77 | | $3 |
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 March 31, 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Remainder of 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Beyond 2019 | | Total |
Current and long-term debt obligations | $ | 83 |
| | $ | 115 |
| | $ | 120 |
| | $ | 151 |
| | $ | 114 |
| | $ | 185 |
| | $ | 768 |
|
Operating lease commitments(a) | 109 |
| | 197 |
| | 159 |
| | 96 |
| | 83 |
| | 358 |
| | 1,002 |
|
Aircraft purchase commitments | 385 |
| | 585 |
| | 530 |
| | 428 |
| | 372 |
| | 650 |
| | 2,950 |
|
Interest obligations(b) | 24 |
| | 32 |
| | 27 |
| | 21 |
| | 13 |
| | 13 |
| | 130 |
|
Other obligations(c) | 47 |
| | 58 |
| | 61 |
| | 42 |
| | 30 |
| | 245 |
| | 483 |
|
Total | $ | 648 |
| | $ | 987 |
| | $ | 897 |
| | $ | 738 |
| | $ | 612 |
| | $ | 1,451 |
| | $ | 5,333 |
|
| |
(a) | Operating lease commitments generally include aircraft operating leases, airport property and hangar leases, office space, and other equipment leases. Included here are seven E-175 aircraft that will be operated by SkyWest under a capacity |
purchase agreement beginning in 2015.
| |
(b) | For variable-rate debt, future obligations are shown above using interest rates in effect as of March 31, 2015. |
| |
(c) | Includes minimum obligations under our long-term PBH maintenance agreement and obligations associated with third-party CPAs with SkyWest and PenAir. Refer to the "Commitments" note in the condensed consolidated financial statements for further information. |
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 or our cash and marketable securities balance falls below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance falls below $500 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.
Deferred Income Taxes
For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 20 years to an estimated salvage value using the straight-line basis. This difference, along with other deferred liabilities and offset by deferred assets, have created a significant deferred tax liability. At some point in the future the depreciation basis will reverse, potentially resulting in an increase in income taxes paid.
Taxable income and cash taxes payable in the short term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue and fuel prices), availability of "bonus depreciation", and other legislative changes that are out of our control. We believe that we have the liquidity to make our future tax payments.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates for the three months ended March 31, 2015. For
information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2014.
|
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2014.
|
|
ITEM 4. CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of March 31, 2015, 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 required to be disclosed by us in our 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 includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of March 31, 2015.
Changes in Internal Control over Financial Reporting
We made no changes in our internal control over financial reporting during the quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our internal control over financial reporting is based on the 2013 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
PART II
|
|
ITEM 1. LEGAL PROCEEDINGS |
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our 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 judges and juries.
There have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. However, you should carefully consider the factors discussed in such section of our Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
|
|
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
This table provides certain information with respect to our purchases of shares of our common stock during the first quarter of 2015. |
| | | | | | | | | | | | | |
| Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum remaining dollar value of shares that can be purchased under the plan (in millions) |
January 1, 2015 - January 31, 2015 | 197,081 |
| | $ | 61.39 |
| | 197,081 |
| | |
February 1, 2015 - February 28, 2015 | 565,916 |
| | 63.73 |
| | 565,916 |
| | |
March 1, 2015 - March 31, 2015 | 817,750 |
| | 66.10 |
| | 817,750 |
| | |
Total | 1,580,747 |
| | $ | 64.53 |
| | 1,580,747 |
| | $ | 282 |
|
The shares were purchased pursuant to a $650 million repurchase plan authorized by the Board of Directors in May 2014.
|
|
ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
None
|
|
ITEM 4. MINE SAFETY DISCLOSURES |
None
|
|
ITEM 5. OTHER INFORMATION |
None
The following documents are filed as part of this report:
| |
1. | 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. | |
| |
/s/ CHRISTOPHER M. BERRY | |
Christopher M. Berry | |
Controller, Alaska Airlines Managing Director, Accounting | |
(Principal Accounting Officer) | |
| |
May 7, 2015 | |
EXHIBIT INDEX
|
| |
Exhibit Number | Exhibit Description |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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 |
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 |
10.1# | Boeing Supplemental Agreement No. 39 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
# | 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. |
ALK 10-Q1 2015 EX 31.1
EXHIBIT 31.1
CERTIFICATIONS
I, Bradley D. Tilden, certify that:
| |
1. | I have reviewed this annual report on Form 10-Q of Alaska Air Group, Inc. for the period ended March 31, 2015; |
| |
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; |
| |
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; |
| |
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: |
| |
a) | Designed such disclosure 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; |
| |
b) | Designed such internal control over financial 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; |
| |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and 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 |
| |
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 reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| |
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: |
| |
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 |
| |
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. |
May 7, 2015
|
| |
By | /s/ BRADLEY D. TILDEN |
| Bradley D. Tilden |
| Chairman, President and Chief Executive Officer |
ALK 10-Q1 2015 EX 31.2
EXHIBIT 31.2
CERTIFICATIONS
I, Brandon S. Pedersen, certify that:
| |
1. | I have reviewed this annual report on Form 10-Q of Alaska Air Group, Inc. for the period ended March 31, 2015; |
| |
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; |
| |
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; |
| |
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: |
| |
a) | Designed such disclosure 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; |
| |
b) | Designed such internal control over financial 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; |
| |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and 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 |
| |
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 reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| |
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: |
| |
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 |
| |
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. |
May 7, 2015
|
| |
By | /s/ BRANDON S. PEDERSEN |
| Brandon S. Pedersen |
| Executive Vice President/Finance and Chief Financial Officer |
ALK 10-Q1 2015 EX 32.1
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-Q for the period ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley D. Tilden, 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:
| |
(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 |
| |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
May 7, 2015
|
| |
By | /s/ BRADLEY D. TILDEN |
| Bradley D. Tilden |
| Chairman, President and Chief Executive Officer |
ALK 10-Q1 2015 EX 32.2
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-Q for the period ended March 31, 2015 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:
| |
(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 |
| |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
May 7, 2015
|
| |
By | /s/ BRANDON S. PEDERSEN |
| Brandon S. Pedersen |
| Executive Vice President/Finance and Chief Financial Officer |
boeingsupplemental
P.A. 2497 ASA SA-39-1 FOIA CONFIDENTIAL TREATMENT REQUESTED Supplemental Agreement No. 39 to Purchase Agreement No. 2497 between The Boeing Company and Alaska Airlines, Inc. Relating to Boeing Models 737-800 and 737-900ER Aircraft THIS SUPPLEMENTAL AGREEMENT, entered into as of February 12, 2015, by and between THE BOEING COMPANY (Boeing) and ALASKA AIRLINES, INC. (Customer). WHEREAS, the parties hereto entered into Purchase Agreement No. 2497 dated June 15, 2005 (Purchase Agreement), as amended and supplemented, relating to Boeing Model 737- 890 aircraft and 737-990ER aircraft (737-990ER Aircraft); WHEREAS, Boeing offered and Customer agrees to purchase two (2) Boeing Model 737-900ER aircraft as set forth below (Incremental Aircraft): Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Supplemental Agreement No. 39 to Purchase Agreement No. 2497 P.A. 2497 ASA SA-39-2 WHEREAS, Boeing offered and Customer agrees to purchase two (2) Boeing Model 737-900ER aircraft as set forth below (Incremental Quarterly Aircraft): Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] ; WHEREAS, Customer agrees to exercise its option to purchase two (2) Option Aircraft described in Letter Agreement 2497-1R21 and concurrently substitute such Option Aircraft to 737-900ER aircraft (Exercised Option Aircraft): Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] ; WHEREAS, Boeing and Customer acknowledge that the reference to Letter Agreement ASA-PA-2497-LA-1209641R2 entitled “Special Matters” in the preamble of SA-38 under “Letter Agreements”, is erroneous and agree to disregard such reference. Boeing and Customer agree the correct reference is the following: “Letter Agreement ASA-PA-2497-LA-1209641R3 entitled “Special Matters”, is hereby deleted in its entirety and replaced with a revised Letter Agreement ASA-PA-2497-LA-1209641R4, attached hereto, to identify the applicable Aircraft for such Letter Agreement.”; and WHEREAS, Boeing and Customer agree to update Letter Agreement ASA-PA-2497- LA-1404217 entitled [***] to identify the applicable Aircraft for such Letter Agreement. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to amend the Purchase Agreement as follows: * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Supplemental Agreement No. 39 to Purchase Agreement No. 2497 P.A. 2497 ASA SA-39-3 1. Purchase Agreement Table of Contents and Tables. 1.1 Remove and replace, in its entirety, the Purchase Agreement “Table of Contents”, with the revised Table of Contents, attached hereto, to reflect the changes made in this Supplemental Agreement No. 39. 1.2 “Table 1C to Purchase Agreement 2497”, is deleted in its entirety and replaced with a revised Table 1C to Purchase Agreement 2497, attached hereto, to reflect the addition of the Incremental Aircraft and the Exercised Option Aircraft. 1.3 “Table 1D to Purchase Agreement 2497”, attached hereto, is hereby added to the Purchase Agreement to reflect the addition of the Incremental Quarterly Aircraft. The month of delivery has not yet been identified for the Incremental Quarterly Aircraft. Boeing will, at its sole discretion, identify the specific delivery months for the Incremental Quarterly Aircraft, and will notify Customer of the delivery months no later than July 31, 2015. 2. Supplemental Exhibits. Supplemental Exhibit BFE1 entitled “Buyer Furnished Equipment Variables”, is deleted in its entirely and replaced with a revised Supplemental Exhibit BFE1 attached hereto, to reflect the addition of the Incremental Aircraft and the Exercised Option Aircraft. The Supplemental Exhibit BFE1 reflects [***] on-dock dates for the Incremental Quarterly Aircraft. As soon as the delivery months are identified for the Incremental Quarterly Aircraft, Boeing and Customer agree to revise the Supplemental Exhibit BFE1 accordingly. 3. Letter Agreements. 3.1 Attachment 3 to Letter Agreement 2497-1R21 entitled “Option Aircraft”, is hereby deleted in its entirety and replaced with a revised Attachment 3, attached hereto, to reflect the removal of the Exercised Option Aircraft, pursuant to this Supplemental Agreement No. 39. 3.2 Letter Agreement ASA-PA-2497-1208492R6 entitled “Aircraft Performance Guarantees”, is hereby deleted in its entirety and replaced with a revised Letter Agreement ASA- PA-2497-1208492R7, attached hereto, to incorporate the Incremental Aircraft, Incremental Quarterly Aircraft, and Exercised Option Aircraft. 3.3 Letter Agreement ASA-PA-2497-LA-1403488 entitled “Special Matters – SA- 37”, is hereby deleted in its entirety and replaced with a revised Letter Agreement ASA-PA-2497- LA-1403488R1 entitled “Special Matters – SA-37 and SA-39”, attached hereto, to incorporate the Incremental Aircraft, Incremental Quarterly Aircraft, and the Exercised Option Aircraft. 3.4 Letter Agreement ASA-PA-2497-LA-1404217 entitled [***], is hereby deleted its entirely and replaced with a revised Letter Agreement ASA-PA-2497-LA-1404217R1, attached hereto, to identify the applicable Aircraft for such Letter Agreement. * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Supplemental Agreement No. 39 to Purchase Agreement No. 2497 P.A. 2497 ASA SA-39-4 3.5 Letter Agreement 6-1162-LLL-0130R3 entitled “Boeing Proposal relating to Space Bins”, is hereby added to the Purchase Agreement. 4. Advance Payments. The sum of [***] is the amount due in advance payments, as a result of (i) purchasing the Incremental Aircraft and Incremental Quarterly Aircraft; and (ii) exercising and converting the Option Aircraft. The Agreement will be deemed to be supplemented to the extent provided herein as of the date hereof and as so supplemented will continue in full force and effect. EXECUTED IN DUPLICATE as of the day and year first written above. THE BOEING COMPANY ALASKA AIRLINES, INC. By: /s/ Lanine Lange By: /s/ Mark Eliasen Its: Attorney-In-Fact Its:__Vice President, Finance & Treasurer_ * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
P.A. No. 2497 i SA-39 BOEING PROPRIETARY TABLE OF CONTENTS SA ARTICLES NUMBER 1. Quantity, Model and Description 23 2. Delivery Schedule 3. Price 4. Payment 5. Miscellaneous TABLE 1A. Aircraft Information Table – 737-990ER Aircraft 34 1B. Aircraft Information Table – 737-990ER Aircraft 37 1C. Aircraft Information Table – 737-990ER Aircraft 39 1D. Aircraft Information Table – 737-990ER Aircraft 39 EXHIBIT A3. Aircraft Configuration – 737-990ER Aircraft 29 A4. Aircraft Configuration – 737-890 Aircraft (BSI) 27 A5. Aircraft Configuration – 737-990ER Aircraft 29 A6. Aircraft Configuration – 737-990ER Aircraft 37 B. Aircraft Delivery Requirements and Responsibilities 23 SUPPLEMENTAL EXHIBITS AE1. Escalation Adjustment/Airframe and Optional Features 23 BFE1. BFE Variables 39 CS1. Customer Support Variables: 737-890 Aircraft 23 CS2. Customer Support Variables: 737-990ER Aircraft 23 EE1. Engine Escalation/Engine Warranty and Patent Indemnity 23 SLP1. Service Life Policy Components
P.A. No. 2497 ii SA-39 BOEING PROPRIETARY SA LETTER AGREEMENT NUMBER 2497-1R21 Option Aircraft ............................................................... 37 Attachment 1 .................................................................. 37 Attachment 2 .................................................................. 37 Attachment 3 .................................................................. 39 2497-2R4 Aircraft Model Substitution ........................................... 37 2497-3R1 Seller Purchased Equipment .......................................... 23 2497-4R1 Demonstration Flight Waiver ......................................... 23 2497-5R1 Customer Software ......................................................... 23 SA RESTRICTED LETTER AGREEMENT NUMBER 6-1162-MSA-588 Aircraft Performance Guarantees - ............................. Model 737-800 ............................................................ 6-1162-MSA-589 [***] ............................................................................ [***] ............................................................................ 6-1162-MSA-592R1 Special Purchase Agreement Provisions ..................... 23 6-1162-SCR-112R3 Aircraft Performance Guarantees ............................... 34 Model 737-990ER 6-1162-SCR-111R3 [***] ............................................................................ 33 [***] ............................................................................ 6-1162-SCR-124R3 [***] ............................................................................ 29 Attachment A .............................................................. 29 Attachment B .............................................................. 29 ASA-PA-2497-LA-1106553R2 Promotional Support – 737-990ER Aircraft .. 34 ASA-PA-2497-LA-1208492R7 Aircraft Performance Guarantees .................. 39 Model 737-990ER ASA-PA-2497-LA-1209641R4 Special Matters .............................................. 38 * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
P.A. No. 2497 iii SA-39 BOEING PROPRIETARY ASA-PA-2497-LA-1209478 737 Production Adjustments ......................... 29 6-1162-LLL-0140 Special Business Consideration – MSN 41735 .............. 36 ASA-PA-2497-LA-1403488R1 Special Matters – SA-37 and SA-39 ............. 39 RESTRICTED LETTER AGREEMENT NUMBER 6-1162-LLL-0130R3 Boeing Proposal Relating to Space Bins .................... 39 ASA-PA-2497-LA-1404217R1 [***] ........................................................................... 39 [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
P.A. No. 2497 iv SA-39 BOEING PROPRIETARY SUPPLEMENTAL AGREEMENTS ......................................................... DATED AS OF: Supplemental Agreement No. 1 ................................................................ December 20, 2005 Supplemental Agreement No. 2 .................................................................... January 31, 2006 Supplemental Agreement No. 3 .................................................................. February 28, 2006 Supplemental Agreement No. 4 ...................................................................... March 31, 2006 Supplemental Agreement No. 5 ......................................................................... May 31, 2006 Supplemental Agreement No. 6 ......................................................................... June 30, 2006 Supplemental Agreement No. 7 .......................................................................... July 31, 2006 Supplemental Agreement No. 8………………………………………….. . October 31, 2006 Supplemental Agreement No. 9……………………………………….. . November 30, 2006 Supplemental Agreement No. 10……………………………………… .. December 20, 2006 Supplemental Agreement No. 11………………………...………………. .. January 31, 2007 Supplemental Agreement No. 12…………………………………………… .. April 26, 2007 Supplemental Agreement No. 13……………………………………………. .. .July 31, 2007 Supplemental Agreement No. 14……………………………………… . September 24, 2007 Supplemental Agreement No. 15…………………………………………. October 31, 2007 Supplemental Agreement No. 16…………………………………………… January 5, 2009 Supplemental Agreement No. 17………………………………………… February 11, 2009 Supplemental Agreement No. 18…………………………………………… .. April 22, 2009 Supplemental Agreement No. 19……………………………………….. .. December 9, 2009 Supplemental Agreement No. 20……………………………… .................... March 15, 2010 Supplemental Agreement No. 21……………………………… ....................... June 18, 2010 Supplemental Agreement No. 22……………………………… ....................... June 30, 2010 Supplemental Agreement No. 23 .................................................................. January 24, 2011 Supplemental Agreement No. 24 ........................................................................ July 27, 2011 Supplemental Agreement No. 25 ................................................................... October 7, 2011 Supplemental Agreement No. 26 ............................................................. November 30, 2011 Supplemental Agreement No. 27 .............................................................. December 23, 2011 Supplemental Agreement No. 28 ....................................................................... June 11, 2012 Supplemental Agreement No. 29 ................................................................. October 10, 2012
P.A. No. 2497 v SA-39 BOEING PROPRIETARY SUPPLEMENTAL AGREEMENTS ......................................................... DATED AS OF: Supplemental Agreement No. 30 ................................................................ February 22, 2013 Supplemental Agreement No. 31 ....................................................................... May 16, 2013 Supplemental Agreement No. 32 ............................................................. September 25, 2013 Supplemental Agreement No. 33 .................................................................... January 2, 2014 Supplemental Agreement No. 34 ................................................................ February 28, 2014 Supplemental Agreement No. 35 ....................................................................... May 30, 2014 Supplemental Agreement No. 36 ....................................................................... June 26, 2014 Supplemental Agreement No. 37 ................................................................... October 6, 2014 Supplemental Agreement No. 38 .................................................................... January 8, 2015 Supplemental Agreement No. 39............................................................ February 12, 2015
P.A. No. 2497 vi SA-39 BOEING PROPRIETARY INACTIVE / DELETED TABLES, EXHIBITS, AND LETTER AGREEMENTS TABLE Table Title Last Updated under SA Current Status 1, pages 1 through 12 and 14 Table 1 to Purchase Agreement No. PA- 02497 Various SAs Inactive 1, page 13 Table 1 to Purchase Agreement No. PA- 02497 SA 27 Deleted under SA 29 1, pages 15.1 through 17 Table 1 to Purchase Agreement No. PA- 02497 SA 28 Deleted under SA 29 EXHIBITS Exhibit Title Last Updated under SA Current Status A Aircraft Configuration – 737-890 Aircraft SA-6 Inactive A-1 Aircraft Configuration – 737-890 Aircraft SA-20 Deleted under SA- 20 A-2 Aircraft Configuration – 737-890 Aircraft SA-20 Inactive LETTER AGREEMENTS Letter Agreement Title Last Updated under SA Current Status 6-1162-IRS-118 Special Matters - Economic Impact SA-18 Deleted under SA- 19 6-1162-SCR-025R2 “Special Matters” – Economic Impact Aircraft - Rescheduled delivery dates SA-22 Inactive 6-1162-SCR-028 Notice of Exercise by SA-19 Inactive
P.A. No. 2497 vii SA-39 BOEING PROPRIETARY Letter Agreement Title Last Updated under SA Current Status Boeing of its Right to Reschedule Economic Impact Aircraft 2497-6R6 Promotion Support (737-890 Aircraft) SA-16 Inactive 6-1162-SCR-027 Promotion Support - [***] (737-890 Aircraft) SA 19 Inactive 6-1162-LLL-004 Promotion Support [***] (737-890 Aircraft) SA 28 Inactive 6-1162-SCR-106R1 737-990ER Model Open Configuration Matters SA 24 Inactive 6-1162-MSA-691R5 [***] SA-23 Inactive Attachment A of 6- 1162-MSA-691R5 [***] SA-25 Inactive Attachments 1A, 1B, and 2 of 6-1162-MSA- 597 [***] SA 17 Deleted under SA 25 6-1162-MSA-597R23 Special Matters SA 29 Inactive * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Table 1C To Purchase Agreement No. PA-02497 Aircraft Delivery, Description, Price and Advance Payments Page 1 of 2 ASA-PA-02497 70842-1F.TXT Boeing Proprietary SA 39 [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Table 1C To Purchase Agreement No. PA-02497 Aircraft Delivery, Description, Price and Advance Payments Page 2 of 2 ASA-PA-02497 70842-1F.TXT Boeing Proprietary SA 39 [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Table 1D To Purchase Agreement No. PA-02497 Aircraft Delivery, Description, Price and Advance Payments Delivery Positions Identified by Quarter Page 1 of 1 ASA-PA-02497 70842-1F.TXT Boeing Proprietary SA 39 [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA P.A. No. 2497 BFE1 SA-39 BOEING PROPRIETARY BUYER FURNISHED EQUIPMENT VARIABLES between THE BOEING COMPANY and ALASKA AIRLINES, INC. Supplemental Exhibit BFE1 to Purchase Agreement Number 2497
ASA P.A. No. 2497 BFE1-1 SA-39 BOEING PROPRIETARY BUYER FURNISHED EQUIPMENT VARIABLES relating to BOEING MODEL 737-990ER AIRCRAFT This Supplemental Exhibit BFE1 contains vendor selection dates, on-dock dates and other variables applicable to the 737-990ER Aircraft. 1. Supplier Selection. Customer will: 1.1 For 737-990ER Aircraft, select and notify Boeing of the suppliers and part numbers of the following BFE items by the following dates: Galley System [***] Galley Inserts [***] Seats (passenger) [***] Overhead & Audio System [***] In-Seat Video System [***] Miscellaneous Emergency [***] Equipment Cargo Handling Systems [***] 2. On-dock Dates On or before January 2012, Boeing will provide to Customer the BFE Requirements electronically in My Boeing Fleet (MBF), through My Boeing Configuration (MBC). These requirements may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions and other requirements relating to the in-sequence installation of BFE. For planning purposes, preliminary BFE on-dock dates are set forth below for 737-990ER Aircraft: * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA P.A. No. 2497 BFE1-2 SA-39 BOEING PROPRIETARY Item Preliminary On-Dock Dates Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Item Preliminary On-Dock Dates Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA P.A. No. 2497 BFE1-3 SA-39 BOEING PROPRIETARY Item Preliminary On-Dock Dates Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Item Preliminary On-Dock Dates Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA P.A. No. 2497 BFE1-4 SA-39 BOEING PROPRIETARY Item Preliminary On-Dock Dates Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Item Preliminary On-Dock Dates Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA P.A. No. 2497 BFE1-5 SA-39 BOEING PROPRIETARY Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Delivery Date [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA P.A. No. 2497 BFE1-6 SA-39 BOEING PROPRIETARY 3. Additional Delivery Requirements - Import. Customer will be the “importer of record” (as defined by the U.S. Customs and Border Protection) for all BFE imported into the United States, and as such, it has the responsibility to ensure all of Customer’s BFE shipments comply with U.S. Customs Service regulations. In the event Customer requests Boeing, in writing, to act as importer of record for Customer’s BFE, and Boeing agrees to such request, Customer is responsible for ensuring Boeing can comply with all U.S. Customs Import Regulations by making certain that, at the time of shipment, all BFE shipments comply with the requirements in the “International Shipment Routing Instructions”, including the Customs Trade Partnership Against Terrorism (C-TPAT), as set out on the Boeing website referenced below. Customer agrees to include the International Shipment Routing Instructions, including C-TPAT requirements, in each contract between Customer and BFE supplier. http://www.boeing.com/companyoffices/doingbiz/supplier_portal/index_general.html
Attachment 3 to Option Aircraft Letter Agreement 2497-1R21 737-800Options Aircraft Delivery, Description, Price and Advance Payments (1) ASA Page 1 68072 Boeing Proprietary SA-39 [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
ASA-PA-2497-LA-1208492R7 Performance Guarantees Page 1 SA-39 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207 * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. ASA-PA-2497-LA-1208492R7 Alaska Airlines, Inc. 19300 International Blvd. Seattle, Washington, 98188 Subject: Aircraft Performance Guarantees Reference: Purchase Agreement No. PA-2497 (Purchase Agreement) between The Boeing Company (Boeing) and Alaska Airlines, Inc. (Customer) relating to Model 737-990ER aircraft This letter agreement (Letter Agreement) cancels and supersedes Letter Agreement ASA-PA-2497-LA-1208492R6 and amends and supplements the Purchase Agreement. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement. For the purposes of this Letter Agreement, Aircraft is defined to be the following: Delivery Date Manufacturer Serial Number [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
ASA-PA-2497-LA-1208492R7 Performance Guarantees Page 2 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
ASA-PA-2497-LA-1208492R7 Performance Guarantees Page 3 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
ASA-PA-2497-LA-1208492R7 Performance Guarantees Page 4 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [***] [***] *Note: The month of delivery has not yet been identified for such Aircraft. Boeing will identify the specific delivery months no later than July 31, 2015 and will revise this Letter Agreement accordingly. Boeing agrees to provide Customer with the performance guarantees in the Attachment to this Letter Agreement. These guarantees are exclusive and expire upon delivery of the Aircraft (as defined below) to Customer. Customer agrees to limit the remedy for non-compliance of any performance guarantee to the terms in Letter Agreement No. 6- 1162-SCR-111R3, as amended. 1. Assignment. Notwithstanding any other provisions of the Purchase Agreement, the rights and obligations described in this Letter Agreement are provided to Customer in consideration of Customer’s becoming the operator of the Aircraft and cannot be assigned in whole or, in part. 2. Confidential Treatment. The information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer will limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
ASA-PA-2497-LA-1208492R7 Performance Guarantees Page 5 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Very truly yours, THE BOEING COMPANY By /s/ Lanine Lange Its Attorney-In-Fact ACCEPTED AND AGREED TO this Date: February 12, 2015 ALASKA AIRLINES, INC. By /s/ Mark Eliasen Its VP/Finance & Treasurer
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 1 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY MODEL 737-900ER WITH WINGLETS PERFORMANCE GUARANTEES FOR ALASKA AIRLINES, INC. SECTION CONTENTS 1 AIRCRAFT MODEL APPLICABILITY 2 FLIGHT PERFORMANCE 3 MANUFACTURER'S EMPTY WEIGHT 4 SOUND LEVELS 5 AIRCRAFT CONFIGURATION 6 GUARANTEE CONDITIONS 7 GUARANTEE COMPLIANCE 8 EXCLUSIVE GUARANTEES
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 2 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY 1. AIRCRAFT MODEL APPLICABILITY The guarantees contained in this Attachment (the "Performance Guarantees") are applicable to the 737-900ER Aircraft with winglets and a maximum takeoff weight of [***] pounds, a maximum landing weight of [***] pounds, and a maximum zero fuel weight of [***] pounds, and equipped with Boeing furnished CFM56-7B27E engines. 2. FLIGHT PERFORMANCE 2.1 [***] 2.2 [***] 2.3 Mission 2.3.1 [***] 2.3.2 Operational Empty Weight Basis The Operational Empty Weight (OEW) derived in Paragraph 2.3.3 is the basis for the mission guarantee of Paragraph 2.3.1. 2.3.3 737-900ER Weight Summary - Alaska Airlines Pounds Standard Model Specification MEW [***] Configuration Specification D019A001, Rev. N, Dated January 29, 2010 204 Tourist Class Passengers CFM56-7 Engines 164,500 lb (74,615 kg) Maximum Taxi Weight 6,875 U.S. Gallons (26,024 liters) Fuel Capacity * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 3 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY Changes for Alaska Airlines Interior Change to 181 Passengers (16 FC / 165 EC) [***] (Ref: LOPA - 379-0595 Rev. K) Boeing Sky Interior 188,200 lb (85,366 kg) Maximum Taxi Weight [***] Mid-Cabin Exit Door Plug With Full-Sized Passenger Window [***] Extended Operations (ETOPS) [***] Heads-Up Display (HUD) [***] Standby Power - 60-Minute Capability [***] Heavy Duty Cargo Compartment Linings/Panels [***] Centerline Overhead Stowage Compartments (5) [***] Winglets [***] Customer Options Allowance [***] Alaska Airlines Manufacturer's Empty Weight (MEW) [***] Standard and Operational Items Allowance (Paragraph 2.3.4) [***] Alaska Airlines Operational Empty Weight (OEW) [***] Quantity Pounds Pounds * Seat Weight Included: [***] First Class Double [***] [***] Economy Class Triple w/3 In-Arm Food Trays [***] [***] Economy Class Triple [***] [***] 2.3.4 Standard and Operational Items Allowance Qty Pounds Pounds Pounds Standard Items Allowance [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 4 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY Unusable Fuel [***] Oil [***] Oxygen Equipment [***] Passenger Portable [***] [***] Crew Masks [***] [***] Miscellaneous Equipment [***] Crash Axe [***] [***] Megaphones [***] [***] Flashlights [***] [***] Smoke Hoods [***] [***] Seat Belt Extensions [***] [***] Galley Structure & Fixed Inserts [***] Operational Items Allowance [***] Crew and Crew Baggage [***] Flight Crew [***] [***] Cabin Crew [***] [***] Baggage [***] [***] Catering Allowance & Removable Inserts [***] First Class [***] [***] Economy Class [***] [***] Passenger Service Equipment [***] [***] Potable Water - 60 USG [***] Waste Tank Disinfectant [***] Emergency Equipment [***] Escape Slides - Forward [***] [***] Escape Slides - Aft [***] [***] Life Vests - Crew and Passengers [***] [***] Life Rafts [***] [***] Auto Radio Beacon (ELT) [***] [***] Total Standard and Operational Items Allowance [***] * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 5 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY 3. MANUFACTURER'S EMPTY WEIGHT The Manufacturer's Empty Weight (MEW) is guaranteed not to exceed the value in Section 03-60-00 of Detail Specification D019A001ASA39E-1 plus one percent. 4. SOUND LEVELS 4.1 Community Sound Levels 4.1.1 Certification The Aircraft shall be certified in accordance with the requirements of 14CFR Part 36, Stage 4 and ICAO Annex 16, Volume 1, Chapter 4. 5. AIRCRAFT CONFIGURATION 5.1 The guarantees contained in this Attachment are based on the Aircraft configuration as defined in the original release of Detail Specification D019A001ASA39E-1 (hereinafter referred to as the Detail Specification). Appropriate adjustment shall be made for changes in such Detail Specification approved by the Customer and Boeing or otherwise allowed by the Purchase Agreement which cause changes to the flight performance, sound levels, and/or weight and balance of the Aircraft. Such adjustment shall be accounted for by Boeing in its evidence of compliance with the guarantees. 5.2 [***] (1) Changes to the Detail Specification or any other changes mutually agreed upon between the Customer and Boeing or otherwise allowed by the Purchase Agreement. (2) The difference between the component weight allowances given in Appendix IV of the Detail Specification and the actual weights. 6. GUARANTEE CONDITIONS * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 6 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY 6.1 All guaranteed performance data are based on the International Standard Atmosphere (ISA) and specified variations therefrom; altitudes are pressure altitudes. 6.2 The Federal Aviation Administration (FAA) regulations referred to in this Attachment are, unless otherwise specified, the 737-900ER Certification Basis regulations specified in the Type Certificate Data Sheet A16WE, Revision 40, dated April 27, 2007. 6.3 In the event a change is made to any law, governmental regulation or requirement, or in the interpretation of any such law, governmental regulation or requirement that affects the certification basis for the Aircraft as described in Paragraphs 4.1 or 6.2, and as a result thereof, a change is made to the configuration and/or the performance of the Aircraft in order to obtain certification, the guarantees set forth in this Attachment shall be appropriately modified to reflect any such change. 6.4 [***] 6.5 [***] 6.6 [***] 6.7 [***] 7. GUARANTEE COMPLIANCE 7.1 Compliance with the guarantees of Sections 2, 3 and 4 shall be based on the conditions specified in those sections, the Aircraft configuration of Section 5 and the guarantee conditions of Section 6. 7.2 [***] 7.3 Compliance with the climb, cruise and descent portions of the mission guarantee shall be established by calculations based on flight test data obtained from an aircraft in a configuration similar to that defined by the Detail Specification. * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
Attachment to Letter Agreement No. ASA-PA-2497-LA-1208492R7 CFM56-7B27E Engines Page 7 P.A. No. 2497 AERO-B-BBA4-M12-0475B SS12-0231 BOEING PROPRIETARY 7.4 The OEW used for compliance with the mission guarantee shall be the actual MEW plus the Standard and Operational Items Allowance in Paragraph 03-60-00 of the Detail Specification. 7.5 Compliance with the Manufacturer's Empty Weight guarantee shall be based on information in the "Weight and Balance Control and Loading Manual - Aircraft Report." 7.6 The data derived from tests shall be adjusted as required by conventional methods of correction, interpolation or extrapolation in accordance with established engineering practices to show compliance with these guarantees. 7.7 Compliance shall be based on the performance of the airframe and engines in combination, and shall not be contingent on the engine meeting its manufacturer's performance specification 8. EXCLUSIVE GUARANTEES The only performance guarantees applicable to the Aircraft are those set forth in this Attachment.
ASA-PA-2497-LA-1403488R1 Page 1 Special Matters – SA-37 and SA-39 SA-39 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207 * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. ASA-PA-2497-LA-1403488R1 Alaska Airlines, Inc. P.O. Box 68900 Seattle, WA 98168-0900 Subject: Special Matters – SA-37 and SA-39 Reference: Purchase Agreement No. 2497 (Purchase Agreement) between The Boeing Company (Boeing) and Alaska Airlines, Inc. (Customer) relating to Boeing Models 737-800 aircraft (737-890 Aircraft) and 737-900ER aircraft (737-990ER Aircraft) This letter agreement (Letter Agreement) amends and supplements the Purchase Agreement. This Letter Agreement applies to the 737-990ER Aircraft listed below (collectively, Aircraft), Option Aircraft, and Substitute Aircraft, unless otherwise specified in this Letter Agreement. For the purposes of this Letter Agreement, the Option Aircraft will mean Aircraft after Customer exercises the Option Aircraft and the Substitute Aircraft will mean Aircraft after Customer elects to substitute the purchase of the 737-990ER aircraft in lieu of the 737-890 Aircraft. All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement. Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
ASA-PA-2497-LA-1403488R1 Page 2 Special Matters – SA-37 and SA-39 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] *Note: The month of delivery has not yet been identified for such Aircraft. Boeing will identify the specific delivery months no later than July 31, 2015 and will revise this Letter Agreement accordingly. 1. Credit Memoranda. 1.1 Basic Credit Memorandum. Concurrent with the delivery of each Aircraft, Boeing will provide a Basic Credit Memorandum in an amount determined by multiplying the Airframe Price by a factor of [***]. 1.2 [***] Concurrent with the delivery of each Aircraft, Boeing will provide a [***] in an amount determined by multiplying the Airframe Price by a factor of [***]. 1.3 [***] Credit Memoranda. 1.3.1 [***] Credit Memorandum #1. Concurrent with the delivery of each Aircraft, Boeing will provide a [***] Credit Memorandum #1 in an amount determined by multiplying the Airframe Price by a factor of [***].
ASA-PA-2497-LA-1403488R1 Page 3 Special Matters – SA-37 and SA-39 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 1.3.2 [***] Credit Memorandum #2. Concurrent with the delivery of each 737-890 Aircraft, Boeing will issue to Customer a [***] Credit Memorandum #2 in an amount of [***]. 1.3.3 [***] Credit Memorandum #2. Concurrent with the delivery of each 737-990ER Aircraft, Boeing will issue to Customer a [***] Credit Memorandum #2 in an amount of [***]. 1.3.4 [***] Credit Memorandum #3. Concurrent with the delivery of each 737-890 Aircraft, Boeing will issue to Customer a [***] Credit Memorandum #3 in an amount of [***]. 1.3.5 [***] Credit Memorandum #3. Concurrent with the delivery of each 737-990ER Aircraft, Boeing will issue to Customer a [***] Credit Memorandum #3 in an amount of [***]. 1.3.6 [***] Credit Memorandum #4. Concurrent with the delivery of each 737-890 Aircraft, Boeing will issue to Customer a [***] Credit Memorandum #4 in an amount of [***]. 1.3.7 [***] Credit Memorandum #4. Concurrent with the delivery of each 737-990ER Aircraft, Boeing will issue to Customer a [***] Credit Memorandum #4 in an amount of [***]. 1.3.8 [***] 1.4 [***] Credit Memorandum. 1.4.1 [***] Credit Memorandum. Concurrent with the delivery of each 737- 890 Aircraft, Boeing will provide a [***] Credit Memorandum in an amount [***]. 1.4.2 [***] Credit Memorandum. Concurrent with the delivery of each 737- 990ER Aircraft, Boeing will provide a [***] Credit Memorandum in an amount [***]. 2. Escalation of Credit Memoranda. Unless otherwise noted, the amounts of the Credit Memoranda stated in paragraphs 1.1 through 1.4 are in [***]. The Credit Memoranda will be escalated to the scheduled month of the respective Aircraft delivery pursuant to the Airframe Escalation formula set forth in the Purchase Agreement applicable to the Aircraft. [***]
ASA-PA-2497-LA-1403488R1 Page 4 Special Matters – SA-37 and SA-39 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3. Option Aircraft. Pursuant to the Option Aircraft Letter Agreement 2497-1, as amended, of the Purchase Agreement (Option Aircraft Letter Agreement), Customer may exercise its rights to purchase certain Option Aircraft. [***] 4. Substitute Aircraft. Pursuant to the Aircraft Model Substitution Letter Agreement 2497-2 of the Purchase Agreement, as amended (Substitute Aircraft Letter Agreement), Customer may substitute the purchase of Boeing Model 737-900ER aircraft in lieu of 737-890 Aircraft. [***] 5. Assignment. Unless otherwise noted herein, the Credit Memoranda described in this Letter Agreement are provided as a financial accommodation to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing. 6. Confidentiality. Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
ASA-PA-2497-LA-1403488R1 Page 5 Special Matters – SA-37 and SA-39 SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Very truly yours, THE BOEING COMPANY By /s/ Lanine Lange Its Attorney-In-Fact ACCEPTED AND AGREED TO this Date: February 12, 2015 ALASKA AIRLINES, INC. By /s/ Mark Eliasen Its VP/Finance & Treasurer
ASA-PA-2497-LA-1404217R1 Page 1 [***] SA-39 BOEING PROPRIETARY The Boeing Company P.O. Box 3707 Seattle, WA 98124-2207 * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. ASA-PA-2497-LA-1404217R1 Alaska Airlines, Inc. P.O. Box 68900 Seattle, WA 98168-0900 Subject: [***] Reference: (a) Purchase Agreement No. 2497 (Purchase Agreement) between The Boeing Company (Boeing) and Alaska Airlines, Inc. (Customer) relating to Boeing Models 737-800 aircraft and 737- 900ER aircraft (b) Master Change No. 2500E364F54 dated October 13, 2014, entitled “MP – Interior Arrangement – Revision – Forward LH Closet with Fold Down Table – SFE Full Height in lieu of BFE Underbin – Drissen – BFE” (Master Change) (c) Proposal No. ASA-MO-1401866, “Interior Retrofit Services Order – Space Bins”, as amended (Retrofit Proposal) This letter agreement (Letter Agreement) cancels and supersedes Letter Agreement ASA-PA-2497-LA-1404217 and amends and supplements the Purchase Agreement. This Letter Agreement applies to the 737-990ER Aircraft listed below (collectively, Full Closet Eligible Aircraft). All terms used but not defined in this Letter Agreement shall have the same meaning as in the Purchase Agreement. Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
ASA-PA-2497-LA-1404217R1 Page 2 [***] SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
ASA-PA-2497-LA-1404217R1 Page 3 [***] SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Contract Delivery Month Manufacturer Serial Number [***] [***] [***] [***] [***] [***] [***] [***] 1. [***] Boeing Model [***] 737-900ER [***] 1.2 [***] and will be escalated to the scheduled month of the respective Full Closet Eligible Aircraft delivery pursuant to the Airframe Escalation formula set forth in the Purchase Agreement applicable to the Full Closet Eligible Aircraft. [***] 2. Assignment. The [***] described in this Letter Agreement is provided as a [***] to Customer and in consideration of Customer’s taking title to the Aircraft at time of delivery and becoming the operator of the Aircraft. This Letter Agreement cannot be assigned, in whole or in part, without the prior written consent of Boeing. 3. Confidentiality. Customer understands and agrees that the information contained herein represents confidential business information and has value precisely because it is not available generally or to other parties. Customer agrees to limit the disclosure of its contents to employees of Customer with a need to know the contents for purposes of helping Customer perform its obligations under the Purchase Agreement and who understand they are not to disclose its contents to any other person or entity without the prior written consent of Boeing.
ASA-PA-2497-LA-1404217R1 Page 4 [***] SA-39 BOEING PROPRIETARY * Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Very truly yours, THE BOEING COMPANY By Its Attorney-In-Fact ACCEPTED AND AGREED TO this Date: ______________________________ ALASKA AIRLINES, INC. By Its VP/Finance & Treasurer