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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

January 24, 2019
(Date of earliest event reported)

ALASKA AIR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of Incorporation)

1-8957
 
91-1292054
(Commission File Number)
 
(IRS Employer Identification No.)

19300 International Boulevard, Seattle, Washington
 
98188
(Address of Principal Executive Offices)
 
(Zip Code)

(206) 392-5040
(Registrant's Telephone Number, Including Area Code)


(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2).

o  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o




ITEM 2.02. Results of Operations and Financial Condition

On January 24, 2019, Alaska Air Group, Inc. (Air Group) issued a press release reporting financial results for the fourth quarter and full year of 2018.  The press release is furnished herein as Exhibit 99.1.

ITEM 7.01.  Regulation FD Disclosure

Pursuant to 17 CFR Part 243 (“Regulation FD”), the Company is submitting information relating to its financial and operational outlook in an Investor Update. The Investor Update is furnished herein as Exhibit 99.2.

In accordance with General Instruction B.2 of Form 8-K, the information under this item and Exhibit 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.  This report will not be deemed an admission as to the materiality of any information required to be disclosed solely to satisfy the requirements of Regulation FD.

ITEM 9.01.  Financial Statements and Other Exhibits
 
Fourth Quarter and Full-Year 2018 Earnings Press Release dated January 24, 2019
 
Investor Update dated January 24, 2019

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALASKA AIR GROUP, INC.                                                                           
Registrant

Date: January 24, 2019

/s/ CHRISTOPHER M. BERRY                                                                                
Christopher M. Berry
Vice President Finance and Controller




Exhibit

Exhibit 99.1
https://cdn.kscope.io/022c52800605477fb9414d930534d509-alaskaairgrouplogoa72.jpg

January 24, 2019
Media contact:
 
Investor/analyst contact:
Media Relations
 
Matt Grady
(206) 304-0008
 
Director, Investor Relations
 
 
(206) 392-5382

Alaska Air Group Reports Fourth Quarter 2018 and Full-Year Results; Raises Dividend 9%

Dividend Increase:
•
Announced today a 9% increase in the quarterly dividend, from $0.32 per share to $0.35 per share. This is the sixth time the company has raised the dividend since initiating the quarterly dividend in July 2013, with a cumulative increase of 250% since that time. The dividend will be paid on March 7, 2019, to all shareholders of record as of February 19, 2019. Dividends are financed from operating cash flow and cash on hand.

Financial Highlights:
•
Reported net income for the fourth quarter and full year 2018 under Generally Accepted Accounting Principles (GAAP) of $23 million, or $0.19 per diluted share, and $437 million, or $3.52 per diluted share. These results compare to fourth quarter 2017 net income of $315 million, or $2.55 per diluted share, and full year 2017 net income of $960 million, or $7.75 per diluted share. The 2017 financial information has been adjusted to reflect changes associated with the implementation of new revenue recognition and retirement benefits accounting standards that became effective January 1, 2018.
•
Reported adjusted net income, excluding merger-related costs, special charges, and mark-to-market fuel hedging adjustments for the fourth quarter and full year 2018 of $93 million, or $0.75 per diluted share, and $554 million, or $4.46 per diluted share. These results compare to fourth quarter 2017 adjusted net income of $88 million, or $0.71 per diluted share, and full year 2017 adjusted net income of $791 million, or $6.38 per diluted share. This quarter's adjusted results compare to the First Call analyst consensus estimate of $0.71 per share.
•
Paid a $0.32 per-share quarterly cash dividend in the fourth quarter, bringing total dividends paid in 2018 to $158 million.
•
Repurchased a total of 776,186 shares of common stock for approximately $50 million in 2018.
•
Generated approximately $1.2 billion of operating cash flow, and used approximately $960 million for capital expenditures, resulting in approximately $240 million of free cash flow in 2018.
•
Grew passenger revenues by 6% compared to the fourth quarter of 2017, and by 5% compared to full-year 2017.
•
Generated full-year adjusted pretax margin of 8.9% in 2018.
•
Held $1.2 billion in unrestricted cash and marketable securities as of December 31, 2018.
•
Reduced debt-to-capitalization ratio to 47% as of December 31, 2018, compared to 53% as of December 31, 2017.

1

2018 Accomplishments and Highlights:

Recognition and Awards
•
Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2018 by J.D. Power for the 11th year in a row.
•
Named "Best U.S. Airline" by Condé Nast Traveler in their 2018 Readers Choice Awards.
•
Mileage Plan™ ranked first in U.S. News & World Report's list of Best Travel Rewards Programs for the fourth time.
•
Ranked among the best U.S. airlines by Consumer Reports for economy flights and overall satisfaction by passengers.
•
Ranked No. 1 for performance and quality in the Airline Quality Rating study for the second year in a row.
•
Won the "Best Rewards Program" for Mileage Plan™ for carriers in the Americas region in the annual FlyerTalk Award for the second year in a row.
•
Top-ranked airline in America for the second year in a row by The Points Guy.
•
Received 17th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training.
•
Ranked as one of only two U.S. airlines in the Top 20 safest airlines in the world for 2018 by AirlineRatings.com.
•
Rated "Best Airline Staff in North America" & "Best Regional Airline in North America" by Skytrax.
•
Won the 2018 APEX Passenger Choice Award for Best Food and Beverage in the Americas.
•
Ranked as the top U.S. airline in the Dow Jones Sustainability Index (DJSI) for the second consecutive year, receiving top scores for “corporate governance” and “efficiency.”

Our People
•
Ranked among Forbes' 2018 "America's Best Employers" for the fourth year in a row.
•
Awarded $147 million in incentive pay for 2018.
•
Reached joint agreements for all work groups except aircraft technicians.
•
Women Inc. magazine recognized Alaska's female board members as five of the Most Influential Corporate Directors.
•
Launched Flight Path, a workshop for every Alaska and Horizon Air employee that includes a mix of presentations, open-and-honest dialogue and interactive activities focused on Alaska's culture and future.

Our Guests and Product
•
Obtained a single operating certificate from the Federal Aviation Administration for Alaska Airlines and Virgin America, recognizing us as one airline.
•
Transitioned to a single Passenger Service System, enabling us to provide one reservation system, one website, and one inventory of flights to our guests.
•
Completed Premium Class rollout on our Boeing 737-800, 900 and 900ER fleets.
•
Began installation of next-generation Gogo inflight satellite-based Wi-Fi across the Mainline fleet.
•
Added partnerships with Japan Airlines, Fiji Airways, Aer Lingus and Finnair.
•
Added 8 Boeing 737-900ER aircraft and 4 Airbus A321neo aircraft in 2018, bringing the total Mainline operating fleet to 233 aircraft.
•
Added 25 Embraer 175 (E175) aircraft to the Regional operating fleet in 2018.

Our Communities
•
Donated over $17 million and contributed more than 44,000 volunteer hours to support nonprofits in our local communities, focusing on youth and education, medical (research/transportation) and community outreach.


2

SEATTLE — Alaska Air Group Inc. (NYSE: ALK) today reported fourth quarter 2018 GAAP net income of $23 million, or $0.19 per diluted share, compared to $315 million, or $2.55 per diluted share in 2017. Excluding the impact of merger-related costs, other special items, and mark-to-market fuel hedge adjustments, the company reported fourth quarter adjusted net income of $93 million, or $0.75 per diluted share, compared to adjusted net income of $88 million, or $0.71 per diluted share in the fourth quarter of 2017.
The company reported full-year 2018 GAAP net income of $437 million, compared to $960 million in the prior year. Excluding the impact of merger-related costs, other special items, and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $554 million, or $4.46 per diluted share for 2018, compared to adjusted net income of $791 million, or $6.38 per diluted share in 2017.
"In 2018, we achieved the vast majority of our integration milestones and passed through an inflection point in our financial performance," said Alaska CEO Brad Tilden. "Our employees have shown great resilience through the integration, and thanks to their skill and dedication, we have strong momentum and a lot of optimism heading into 2019."
The following tables reconcile the company's adjusted net income and earnings per diluted share (EPS) during the full year and fourth quarters of 2018 and 2017 to amounts as reported in accordance with GAAP:
 
Three Months Ended December 31,
 
2018
 
2017(a)
(in millions, except per share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Reported GAAP net income and diluted EPS
$
23

 
$
0.19

 
$
315

 
$
2.55

Mark-to-market fuel hedge adjustments
52

 
0.42

 
(14
)
 
(0.11
)
Special items - merger-related costs
20

 
0.16

 
30

 
0.24

Special items - other (b)
20

 
0.16

 
—

 
—

Income tax effect on special items and fuel hedge adjustments
(22
)
 
(0.18
)
 
(6
)
 
(0.05
)
Special tax (benefit)/expense(c)
—

 
—

 
(237
)
 
(1.92
)
Non-GAAP adjusted net income and diluted EPS
$
93

 
$
0.75

 
$
88

 
$
0.71

 
Twelve Months Ended December 31,
 
2018
 
2017(a)
(in millions, except per share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Reported GAAP net income and diluted EPS
$
437

 
$
3.52

 
$
960

 
$
7.75

Mark-to-market fuel hedge adjustments
22

 
0.18

 
(7
)
 
(0.06
)
Special items - merger-related costs
87

 
0.70

 
116

 
0.94

Special items - other (b)
45

 
0.36

 
—

 
—

Income tax effect on special items and fuel hedge adjustments
(37
)
 
(0.30
)
 
(41
)
 
(0.33
)
Special tax (benefit)/expense(c)
—

 
—

 
(237
)
 
(1.92
)
Non-GAAP adjusted net income and diluted EPS
$
554

 
$
4.46

 
$
791

 
$
6.38

(a)
Certain historical information has been adjusted to reflect the adoption of new accounting standards.
(b)
Special items - other includes special charges associated with the employee tax reform bonus paid in Q1 2018, and a $20 million contract termination fee incurred in Q4 2018.
(c)
The special tax benefit in 2017 is due to the remeasurement of deferred tax liabilities as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, offset by certain state tax law enactments. The resulting net tax benefit is excluded from our adjusted non-GAAP earnings.

Statistical data, as well as a reconciliation of other reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

3

A conference call regarding the fourth quarter and full year results will be simulcast online at 1:30 p.m. Pacific time on January 24, 2019. It can be accessed through the company's website at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this news release to “Air Group,” “company,” “we,” “us” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as “Alaska,” “Horizon,” and "Virgin America" respectively, and together as our “airlines.”

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance, or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines and its regional partners fly 44 million guests a year to 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada, and Costa Rica. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Carriers in North America” in the J.D. Power North America Satisfaction Study for 11 consecutive years from 2008 to 2018. Learn more about Alaska’s award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).
###


4

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
(in millions, except per share amounts)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Passenger revenue
1,907

 
1,796

 
6
 %
 
7,632

 
7,301

 
5
 %
Mileage Plan other revenue
105

 
104

 
1
 %
 
434

 
418

 
4
 %
Cargo and other
52

 
42

 
24
 %
 
198

 
175

 
13
 %
Total Operating Revenues
2,064

 
1,942

 
6
 %
 
8,264

 
7,894

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Wages and benefits
561

 
534

 
5
 %
 
2,190

 
1,931

 
13
 %
Variable incentive pay
43

 
37

 
16
 %
 
147

 
135

 
9
 %
Aircraft fuel, including hedging gains and losses
539

 
396

 
36
 %
 
1,936

 
1,447

 
34
 %
Aircraft maintenance
115

 
120

 
(4
)%
 
435

 
391

 
11
 %
Aircraft rent
82

 
70

 
17
 %
 
315

 
274

 
15
 %
Landing fees and other rentals
128

 
122

 
5
 %
 
499

 
460

 
8
 %
Contracted services
79

 
80

 
(1
)%
 
306

 
314

 
(3
)%
Selling expenses
81

 
91

 
(11
)%
 
326

 
368

 
(11
)%
Depreciation and amortization
108

 
97

 
11
 %
 
398

 
372

 
7
 %
Food and beverage service
53

 
50

 
6
 %
 
211

 
195

 
8
 %
Third-party regional carrier expense
40

 
37

 
8
 %
 
154

 
121

 
27
 %
Other
149

 
141

 
6
 %
 
572

 
562

 
2
 %
Special items - merger-related costs
20

 
30

 
(33
)%
 
87

 
116

 
(25
)%
Special items - other
20

 
—

 
NM

 
45

 
—

 
NM

Total Operating Expenses
2,018

 
1,805

 
12
 %
 
7,621

 
6,686

 
14
 %
Operating Income
46

 
137

 
(66
)%
 
643

 
1,208

 
(47
)%
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income
9

 
9

 
 
 
38

 
34

 
 
Interest expense
(20
)
 
(26
)
 
 
 
(91
)
 
(103
)
 
 
Interest capitalized
4

 
4

 
 
 
18

 
17

 
 
Other - net
(3
)
 
2

 
 
 
(23
)
 
3

 
 
Total Nonoperating Income (Expense)
(10
)
 
(11
)
 
 
 
(58
)
 
(49
)
 
 
Income Before Income Tax
36

 
126

 
 
 
585

 
1,159

 
 
Income tax expense
13

 
48

 
 
 
148

 
436

 
 
Special income tax benefit
—

 
(237
)
 
 
 
—

 
(237
)
 
 
Total Income Tax Expense/(Benefit)
$
13

 
$
(189
)
 
 
 
$
148

 
$
199

 
 
Net Income
$
23

 
$
315

 
 
 
$
437

 
$
960

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
0.19

 
$
2.56

 
 
 
$
3.55

 
$
7.79

 
 
Diluted Earnings Per Share:
$
0.19

 
$
2.55

 
 
 
$
3.52

 
$
7.75

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares Used for Computation:
 
 
 
 
 
 
 
 
 
 
 
Basic
123.271

 
123.147

 
 
 
123.230

 
123.211

 
 
Diluted
124.095

 
123.670

 
 
 
123.975

 
123.854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividend declared per share
$
0.32

 
$
0.30

 
 
 
$
1.28

 
$
1.20

 
 

5


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
(in millions)
December 31, 2018
 
December 31, 2017

Cash and marketable securities
$
1,236

 
$
1,621

 
 

 
 

Total current assets
1,787

 
2,152

Property and equipment-net
6,781

 
6,284

Goodwill
1,943

 
1,943

Intangible assets-net
127

 
133

Other assets
274

 
234

Total assets
$
10,912

 
$
10,746

 
 

 
 

Air traffic liability
788

 
806

Current portion of long-term debt
486

 
307

Other current liabilities
1,668

 
1,573

Current liabilities
$
2,942

 
$
2,686

Long-term debt
1,617

 
2,262

Other liabilities and credits
2,602

 
2,338

Shareholders' equity
3,751

 
3,460

Total liabilities and shareholders' equity
$
10,912

 
$
10,746

 
 

 
 

Debt-to-capitalization ratio, adjusted for operating leases(a)
47%

 
53%

 
 

 
 

Number of common shares outstanding
123.194

 
123.061

(a)
Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date.



6

OPERATING STATISTICS SUMMARY (unaudited)
 
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Consolidated Operating Statistics:(a)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
11,117
 
10,966
 
1.4%
 
45,802
 
44,005
 
4.1%
RPMs (000,000) "traffic"
13,401
 
13,265
 
1.0%
 
54,673
 
52,338
 
4.5%
ASMs (000,000) "capacity"
16,079
 
15,901
 
1.1%
 
65,335
 
62,072
 
5.3%
Load factor
83.3%
 
83.4%
 
(0.1) pts
 
83.7%
 
84.3%
 
(0.6) pts
Yield
14.24¢
 
13.54¢
 
5.2%
 
13.96¢
 
13.95¢
 
0.1%
RASM
12.84¢
 
12.21¢
 
5.2%
 
12.65¢
 
12.72¢
 
(0.6)%
CASMex(b)
8.95¢
 
8.68¢
 
3.1%
 
8.50¢
 
8.25¢
 
3.0%
Economic fuel cost per gallon(b) 
$2.35
 
$2.00
 
17.5%
 
$2.28
 
$1.82
 
25.3%
Fuel gallons (000,000)
208
 
205
 
1.2%
 
839
 
797
 
5.3%
ASM's per gallon
77.5
 
77.6
 
(0.1)%
 
77.9
 
77.9
 
—%
Average full-time equivalent employees (FTEs)
21,838
 
21,561
 
1.3%
 
21,641
 
20,183
 
7.2%
Employee productivity (PAX/FTEs/months)
169.7
 
169.5
 
0.1%
 
176.4
 
181.7
 
(2.9)%
Mainline Operating Statistics:
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
8,496
 
8,659
 
(1.9)%
 
35,603
 
34,510
 
3.2%
RPMs (000,000) "traffic"
12,104
 
12,191
 
(0.7)%
 
49,781
 
48,236
 
3.2%
ASMs (000,000) "capacity"
14,457
 
14,547
 
(0.6)%
 
59,187
 
56,945
 
3.9%
Load factor
83.7%
 
83.8%
 
(0.1) pts
 
84.1%
 
84.7%
 
(0.6) pts
Yield
13.18¢
 
12.71¢
 
3.7%
 
13.01¢
 
13.02¢
 
(0.1)%
RASM
12.04¢
 
11.58¢
 
4.0%
 
11.93¢
 
12.00¢
 
(0.6)%
CASMex(b)
8.20¢
 
7.98¢
 
2.8%
 
7.73¢
 
7.50¢
 
3.1%
Economic fuel cost per gallon(b)
$2.34
 
$1.99
 
17.6%
 
$2.27
 
$1.82
 
24.7%
Fuel gallons (000,000)
177
 
180
 
(1.7)%
 
727
 
706
 
3.0%
ASM's per gallon
81.7
 
80.8
 
1.1%
 
81.4
 
80.7
 
0.9%
Average number of FTEs
16,445
 
16,295
 
0.9%
 
16,353
 
15,653
 
4.5%
Aircraft utilization
10.7
 
11.5
 
(7.0)%
 
11.2
 
11.2
 
—%
Average aircraft stage length
1,313
 
1,316
 
(0.2)%
 
1,298
 
1,301
 
(0.2)%
Operating fleet
233
 
221
 
12 a/c
 
233
 
221
 
12 a/c
Regional Operating Statistics:(c)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
2,621
 
2,307
 
13.6%
 
10,199
 
9,495
 
7.4%
RPMs (000,000) "traffic"
1,298
 
1,074
 
20.9%
 
4,892
 
4,101
 
19.3%
ASMs (000,000) "capacity"
1,623
 
1,354
 
19.9%
 
6,148
 
5,127
 
19.9%
Load factor
80.0%
 
79.3%
 
0.7 pts
 
79.6%
 
80.0%
 
(0.4) pts
Yield
24.13¢
 
23.00¢
 
4.9%
 
23.66¢
 
24.96¢
 
(5.2)%
Operating Fleet
97
 
83
 
14 a/c
 
97
 
83
 
14 a/c
(a)
Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)
See a reconciliation of this non-GAAP measure and Note A for a discussion of potential importance of this measure to investors in the accompanying pages.
(c)
Data presented includes information related to flights operated by Horizon and third-party carriers.


7

OPERATING SEGMENTS (unaudited)
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31, 2018
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
1,595

 
312

 
—

 
—

 
1,907

 
—

 
1,907

CPA revenues
—

 
—

 
133

 
(133
)
 
—

 
—

 
—

Mileage Plan other revenue
96

 
9

 
—

 
—

 
105

 
—

 
105

Cargo and other
50

 
2

 
—

 
—

 
52

 
—

 
52

Total operating revenues
1,741

 
323

 
133

 
(133
)
 
2,064

 
—

 
2,064

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-fuel operating expenses
1,185

 
269

 
120

 
(135
)
 
1,439

 
40

 
1,479

Fuel expense
415

 
72

 
—

 
—

 
487

 
52

 
539

Total operating expenses
1,600

 
341

 
120

 
(135
)
 
1,926

 
92

 
2,018

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
14

 
—

 
—

 
(5
)
 
9

 
—

 
9

Interest expense
(18
)
 
—

 
(6
)
 
4

 
(20
)
 
—

 
(20
)
Interest capitalized
4

 
—

 
—

 
—

 
4

 
—

 
4

Other
(3
)
 
—

 
—

 
—

 
(3
)
 
—

 
(3
)
Total Nonoperating income (expense)
(3
)
 
—

 
(6
)
 
(1
)
 
(10
)
 
—

 
(10
)
Income (loss) before income tax
$
138

 
$
(18
)
 
$
7

 
$
1

 
$
128

 
$
(92
)
 
$
36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31, 2017
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
1,549

 
247

 
—

 
—

 
1,796

 
—

 
1,796

CPA revenues
—

 
—

 
109

 
(109
)
 
—

 
—

 
—

Mileage Plan other revenue
96

 
8

 
—

 
—

 
104

 
—

 
104

Cargo and other
40

 
1

 
1

 
—

 
42

 
—

 
42

Total operating revenues
1,685

 
256

 
110

 
(109
)
 
1,942

 
—

 
1,942

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-fuel operating expenses
1,160

 
227

 
104

 
(112
)
 
1,379

 
30

 
1,409

Fuel expense
359

 
51

 
—

 
—

 
410

 
(14
)
 
396

Total operating expenses
1,519

 
278

 
104

 
(112
)
 
1,789

 
16

 
1,805

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
11

 
—

 
—

 
(2
)
 
9

 
—

 
9

Interest expense
(24
)
 
—

 
(4
)
 
2

 
(26
)
 
—

 
(26
)
Interest capitalized
3

 
—

 
1

 
—

 
4

 
—

 
4

Other
2

 
—

 
—

 
—

 
2

 
—

 
2

Total Nonoperating income (expense)
(8
)
 
—

 
(3
)
 
—

 
(11
)
 
—

 
(11
)
Income (loss) before income tax
$
158

 
$
(22
)
 
$
3

 
$
3

 
$
142

 
$
(16
)
 
$
126


8

OPERATING SEGMENTS (unaudited)
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended December 31, 2018
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
6,475

 
1,157

 
—

 
—

 
7,632

 
—

 
7,632

CPA revenues
—

 
—

 
508

 
(508
)
 
—

 
—

 
—

Mileage Plan other revenue
397

 
37

 
—

 
—

 
434

 
—

 
434

Cargo and other
191

 
3

 
4

 
—

 
198

 
—

 
198

Total operating revenues
7,063

 
1,197

 
512

 
(508
)
 
8,264

 
—

 
8,264

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-fuel operating expenses
4,577

 
1,024

 
465

 
(513
)
 
5,553

 
132

 
5,685

Fuel expense
1,652

 
262

 
—

 
—

 
1,914

 
22

 
1,936

Total operating expenses
6,229

 
1,286

 
465

 
(513
)
 
7,467

 
154

 
7,621

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
53

 
—

 
—

 
(15
)
 
38

 
—

 
38

Interest expense
(82
)
 
—

 
(22
)
 
13

 
(91
)
 
—

 
(91
)
Interest capitalized
16

 
—

 
2

 
—

 
18

 
—

 
18

Other
(12
)
 
(11
)
 
—

 
—

 
(23
)
 
—

 
(23
)
Total Nonoperating income (expense)
(25
)
 
(11
)
 
(20
)
 
(2
)
 
(58
)
 
—

 
(58
)
Income (loss) before income tax
$
809

 
$
(100
)
 
$
27

 
$
3

 
$
739

 
$
(154
)
 
$
585

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended December 31, 2017
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
6,278

 
1,023

 
—

 
—

 
7,301

 
—

 
7,301

CPA revenues
—

 
—

 
426

 
(426
)
 
—

 
—

 
—

Mileage Plan other revenue
387

 
31

 
—

 
—

 
418

 
—

 
418

Cargo and other
167

 
4

 
4

 
—

 
175

 
—

 
175

Total operating revenues
6,832

 
1,058

 
430

 
(426
)
 
7,894

 
—

 
7,894

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-fuel operating expenses
4,271

 
852

 
427

 
(427
)
 
5,123

 
116

 
5,239

Fuel expense
1,282

 
172

 
—

 
—

 
1,454

 
(7
)
 
1,447

Total operating expenses
5,553

 
1,024

 
427

 
(427
)
 
6,577

 
109

 
6,686

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
39

 
—

 
—

 
(5
)
 
34

 
—

 
34

Interest expense
(92
)
 
—

 
(13
)
 
2

 
(103
)
 
—

 
(103
)
Interest capitalized
15

 
—

 
2

 
—

 
17

 
—

 
17

Other
3

 
—

 
—

 
—

 
3

 
—

 
3

Total Nonoperating income (expense)
(35
)
 
—

 
(11
)
 
(3
)
 
(49
)
 
—

 
(49
)
Income (loss) before income tax
$
1,244

 
$
34

 
$
(8
)
 
$
(2
)
 
$
1,268

 
$
(109
)
 
$
1,159

(a)
The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.
(b)
Includes merger-related costs, mark-to-market fuel-hedge accounting charges, special charges associated with the employee tax reform bonus paid in Q1 2018, and a $20 million contract termination fee incurred in Q4 2018.

9


GAAP TO NON-GAAP RECONCILIATIONS (unaudited)
Alaska Air Group, Inc.     
CASM Excluding Fuel and Special Items Reconciliation (unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
Twelve Months Ended December 31,
(in cents)
2018
 
2017
 
2018
 
2017
Consolidated:
 
 
 
 
 
 
 
Total operating expenses per ASM (CASM)

12.55
¢
 

11.35
¢
 

11.66
¢
 

10.77
¢
Less the following components:
 
 
 

 
 
 
 

Aircraft fuel, including hedging gains and losses
3.35

 
2.49

 
2.96

 
2.33

Special items - merger-related costs
0.13

 
0.18

 
0.13

 
0.19

Special items - other
0.12

 
—

 
0.07

 
—

CASM, excluding fuel and special items

8.95
¢
 

8.68
¢
 

8.50
¢
 

8.25
¢
 
 
 
 
 
 
 
 
Mainline:
 
 
 
 
 
 
 
Total operating expenses per ASM (CASM)

11.70
¢
 

10.55
¢
 

10.78
¢
 

9.94
¢
Less the following components:
 
 
 

 
 
 
 

Aircraft fuel, including hedging gains and losses
3.23

 
2.37

 
2.83

 
2.24

Special items - merger-related costs
0.14

 
0.20

 
0.14

 
0.20

Special items - other
0.13

 
—

 
0.08

 
—

CASM, excluding fuel and special items

8.20
¢
 

7.98
¢
 

7.73
¢
 

7.50
¢
 
 
 
 
 
 
 
 
Fuel Reconciliations (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
2018
 
2017
(in millions, except for per gallon amounts)
Dollars
 
Cost/Gal
 
Dollars
 
Cost/Gal
Raw or "into-plane" fuel cost
$
488

 
$
2.35

 
$
406

 
$
1.98

Losses (gains) on settled hedges
(1
)
 
—

 
4

 
0.02

Consolidated economic fuel expense
$
487

 
$
2.35

 
$
410

 
$
2.00

Mark-to-market fuel hedge adjustments
52

 
0.25

 
(14
)
 
(0.07
)
GAAP fuel expense
$
539

 
$
2.60

 
$
396

 
$
1.93

Fuel gallons
208

 
 
 
205

 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended December 31,
 
2018
 
2017
(in millions, except for per gallon amounts)
Dollars
 
Cost/Gal
 
Dollars
 
Cost/Gal
Raw or "into-plane" fuel cost
$
1,938

 
$
2.31

 
$
1,437

 
$
1.80

Losses (gains) on settled hedges
(24
)
 
(0.03
)
 
17

 
0.02

Consolidated economic fuel expense
$
1,914

 
$
2.28

 
$
1,454

 
$
1.82

Mark-to-market fuel hedge adjustments
22

 
0.03

 
(7
)
 
—

GAAP fuel expense
$
1,936

 
$
2.31

 
$
1,447

 
$
1.82

Fuel gallons
839

 
 
 
797

 
 


10


Debt-to-capitalization, adjusted for aircraft operating leases
(in millions)
December 31, 2018
 
December 31, 2017(a)
Long-term debt
$
1,617

 
$
2,262

Capitalization of aircraft operating leases(b)
1,768

 
1,671

Adjusted debt
3,385

 
3,933

Shareholders' equity
3,751

 
3,460

Total Invested Capital
$
7,136

 
$
7,393

 
 
 
 
Debt-to-capitalization ratio, adjusted for aircraft operating leases
47%

 
53%

(a)
Certain historical information has been adjusted to reflect the adoption of new accounting standards.
(b)
Calculated using the present value of remaining aircraft lease payments. In 2019, following the adoption of the new leasing standard, this calculation will be performed utilizing the aircraft component of the right-of-use asset as capitalized on our balance sheet.


11

Note A: Pursuant to Regulation G, we are providing reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

•
By eliminating fuel expense and certain special items (including merger-related costs, a one-time contract termination fee, an employee tax reform bonus, changes resulting from the Tax Cuts and Jobs Act, and certain state tax law enactments) from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

•
Cost per ASM (CASM) excluding fuel and certain special items, such as merger-related costs, is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

•
Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.

•
CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

•
Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as merger-related costs and mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

•
Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.



12

GLOSSARY OF TERMS

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737 and Airbus jets and all associated revenues and costs

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan™, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile


13
Exhibit


Exhibit 99.2
https://cdn.kscope.io/022c52800605477fb9414d930534d509-alaskaairgrouplogoa72.jpg

Investor Update - January 24, 2019

References in this update to “Air Group,” “Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.

This update includes forecasted operational and financial information. Our disclosure of operating cost per available seat mile, excluding fuel and other items, provides us (and may provide investors) with the ability to measure and monitor our performance without these items. The most directly comparable GAAP measure is total operating expenses per available seat mile. However, due to the large fluctuations in fuel prices, we are unable to predict total operating expenses for any future period with any degree of certainty. In addition, we believe the disclosure of fuel expense on an economic basis is useful to investors in evaluating our ongoing operational performance. Please see the cautionary statement under “Forward-Looking Information.”

We are providing information about estimated fuel prices and our hedging program. Management believes it is useful to compare results between periods on an “economic basis.” Economic fuel expense is defined as the raw or “into-plane” fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period. Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.

We are also providing our expected capital expenditures and fleet count for future periods. These estimates are based on firm commitments we currently have in place for future aircraft deliveries and our current estimate of non-aircraft capital spending.

Forward-Looking Information
This update contains forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2017, as well as in other documents filed by Alaska Air Group with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.



AIR GROUP - CONSOLIDATED
Forecast Information
 
Forecast Full Year 2019
 
Full Year 2018
 
% Change
Capacity (ASMs in millions)
66,685 - 66,885
 
65,335
 
~ 2%
Cost per ASM excluding fuel and special items (cents)
8.67¢ - 8.72¢
 
8.50¢
 
~ 2.0% - 2.5%
Fuel gallons (000,000)
845
 
839
 
~ 1%

 
Forecast Q1 2019
 
Q1 2018
 
% Change
Capacity (ASMs in millions)
15,645 - 15,695
 
15,480
 
~ 1.2%
Cost per ASM excluding fuel and special items (cents)
9.21¢ - 9.26¢
 
8.81¢
 
~ 4.5% - 5%
Revenue per ASM (cents)
12.15¢ - 12.35¢
 
11.84¢
 
~ 2.5% - 4.5%
Fuel gallons (000,000)
199
 
197
 
~ 1%
Economic fuel cost per gallon(a)
$2.05
 
$2.14
 
~ (4)%
(a)
Our economic fuel cost per gallon estimate for the first quarter includes the following per-gallon assumptions:  crude oil cost - $1.24 ($52 per barrel); refining margin - 60 cents; cost of settled hedges - 2 cents, with the remaining difference due to taxes and other into-plane costs.

First quarter and first half 2019 CASMex are impacted disproportionately by the mix of Regional flying, which we guided at Investor Day would have ~120 basis points of impact on 2019 CASMex. First half CASMex is also impacted by the timing of aircraft maintenance events, higher ownership costs due to deliveries in late 2018, and costs associated with all-employee training through April. Forecasted maintenance expense by quarter as compared to 2018 actual reported results is as follows:

(in millions)
Q1
 
Q2
 
Q3
 
Q4
 
Full Year
2018 Actual maintenance expense
$107
 
$106
 
$107
 
$115
 
$435
2019 Forecasted maintenance expense(b)
$132
 
$113
 
$105
 
$96
 
$446
 
 
 
 
 
 
 
 
 
 
% Change
23%
 
7%
 
(2)%
 
(17)%
 
3%
(b)
Forecasted maintenance costs reflect expected timing of scheduled and unscheduled engine and airframe events and are subject to change.

2019 Forecasted Capacity and CASMex by Quarter
The following table shows 2019 quarterly forecasted capacity by segment and forecasted consolidated CASMex with percent change from the same period in the prior year.
 
Forecast
 
Q1
 
Q2
 
Q3
 
Q4
 
Full Year
Mainline ASMs
~ (0.5)%
 
~ 1.0%
 
~ 2.0%
 
~ 3.0%
 
~ 1.5%
Regional ASMs
~ 20.5%
 
~ 13.0%
 
~ 9.5%
 
~ 4.0%
 
~ 11.5%
Total Air Group ASMs
~ 1.2%
 
~ 2.0%
 
~ 2.5%
 
~ 3.0%
 
~ 2.0%
 
 
 
 
 
 
 
 
 
 
CASMex (cents)
9.21¢ - 9.26¢
 
8.53 - 8.58
 
8.33 - 8.38
 
8.66 - 8.71
 
8.67 - 8.72
% Change
~ 4.5% - 5%
 
~ 5%
 
~ 2.5%
 
~ (3)%
 
~ 2.0% - 2.5%








Capacity and Capital Expenditures Forecast
The guidance below is based on our current expectation of capacity growth and capital expenditures.
(in millions, except %)
2018 Actuals
 
2019
 
2020
Capacity (ASMs) growth
5.3%
 
~ 2%
 
~ 3% - 4%
Targeted capital expenditures
$960
 
~$750
 
~$750

Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $19 million in the first quarter of 2019. The increase from the quarterly run rate of $12 million in the second half of 2018 is a result of an expected $6 million quarterly impact of higher pension expense. The higher pension expense results from a decline in the market value of our plan assets in 2018.

Future Fuel Hedge Positions
All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. Our crude oil positions are as follows:
 
Approximate % of Expected Fuel Requirements
 
Weighted-Average Crude Oil Price per Barrel
 
Average Premium Cost per Barrel
First Quarter 2019
50%
 
$72
 
$1
Second Quarter 2019
50%
 
$76
 
$1
Third Quarter 2019
40%
 
$77
 
$2
Fourth Quarter 2019
30%
 
$76
 
$2
   Full Year 2019
42%
 
$75
 
$2
First Quarter 2020
20%
 
$70
 
$3
Second Quarter 2020
10%
 
$64
 
$3
   Full Year 2020
7%
 
$68
 
$3