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.
 
Delaware
 
91-1292054
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

 
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):
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.”
 

2




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:

the competitive environment in our industry;
changes in our operating costs, primarily fuel, which can be volatile;
general economic conditions, including the impact of those conditions on customer travel behavior;
our ability to meet our cost reduction goals;
operational disruptions;
an aircraft accident or incident;
labor disputes and our ability to attract and retain qualified personnel;
the concentration of our revenue from a few key markets;
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
our reliance on automated systems and the risks associated with changes made to those systems;
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.


3



PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(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

 
 
 
 
Other Assets
137

 
126

 
 
 
 
Total Assets
$
6,410

 
$
6,181


See accompanying notes to condensed consolidated financial statements.


4


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(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

 

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.


5


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
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

Other
83

 
81

Total Operating Expenses
1,031

 
1,081

Operating Income
238

 
141

 
 
 
 
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

Net Income
$
149

 
$
94

 
 
 
 
Basic Earnings Per Share:
$
1.13

 
$
0.69

Diluted Earnings Per Share:
$
1.12

 
$
0.68

 
 
 
 
Shares used for computation:
 
 
 
Basic
131.120

 
137.334

Diluted
132.230

 
138.822

 
 
 
 
Cash dividend declared per share:
$
0.20

 
$
0.125

See accompanying notes to condensed consolidated financial statements.

6


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
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

 
 
 
 
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

 
 
 
 
Comprehensive Income
$
154

 
$
96


See accompanying notes to condensed consolidated financial statements.


7


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
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

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

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

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

 
 
 
 
Supplemental disclosure:
 

 
 

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.

8



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):
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



9



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):  
 
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.

10




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.


11



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.


12



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



13



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



14



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.

15



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.

16



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


17



 
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.


18



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.


19



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)%




20



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



21



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
)


22



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.

23



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.


24



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