SEC Filing | Alaska Air Group Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐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.)



Title of each class	Name of each exchange on which registered	Ticker Symbol
Common stock, $0.01 par value	New York Stock Exchange	ALK



19300 International Boulevard,	Seattle,	WA	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 ☒ 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by checkmark 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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒

The registrant has 123,272,253 common shares, par value $0.01, outstanding at July 31, 2019.

This document is also available on our website at http://investor.alaskaair.com.

ALASKA AIR GROUP, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2019

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION	4
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	40
ITEM 4.	CONTROLS AND PROCEDURES	40
PART II.	OTHER INFORMATION	41
ITEM 1.	LEGAL PROCEEDINGS	41
ITEM 1A.	RISK FACTORS	41
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41
ITEM 4.	MINE SAFETY DISCLOSURES	41
ITEM 5.	OTHER INFORMATION	42
ITEM 6.	EXHIBITS	42
	SIGNATURES	42

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., Virgin America Inc. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc), and Horizon Air Industries, Inc. are referred to as “Alaska,” “Virgin America” and “Horizon” and together as our “airlines.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary Note Regarding Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause actual results to differ from our expectations are:


•	the competitive environment in our industry;


•	changes in our operating costs, including fuel, which can be volatile;


•	our ability to meet our cost reduction goals;


•	our ability to achieve anticipated synergies and timing thereof in connection with our acquisition of Virgin America;


•	our ability to successfully integrate the Boeing and Airbus operations;


•	labor disputes and our ability to attract and retain qualified personnel;


•	operational disruptions;


•	general economic conditions, including the impact of those conditions on customer travel behavior;


•	the concentration of our revenue from a few key markets;


•	an aircraft accident or incident;


•	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, 2018, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.

PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



(in millions)	June 30, 2019		December 31, 2018
ASSETS
Current Assets
Cash and cash equivalents	$	244	$	105
Marketable securities	1,383		1,131
Total cash and marketable securities	1,627		1,236
Receivables—net	389		366
Inventories and supplies—net	55		60
Prepaid expenses and other current assets	147		125
Total Current Assets	2,218		1,787

Property and Equipment
Aircraft and other flight equipment	8,417		8,221
Other property and equipment	1,238		1,363
Deposits for future flight equipment	396		439
	10,051		10,023
Less accumulated depreciation and amortization	3,307		3,242
Total Property and Equipment - Net	6,744		6,781

Operating lease assets	1,696		—
Goodwill	1,943		1,943
Intangible assets - net	125		127
Other noncurrent assets	225		274
Other Assets	3,989		2,344

Total Assets	$	12,951	$	10,912

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



(in millions, except share amounts)	June 30, 2019			December 31, 2018
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	156		$	132
Accrued wages, vacation and payroll taxes	371			415
Air traffic liability	1,173			788
Other accrued liabilities	505			416
Deferred revenue	768			705
Current portion of operating lease liabilities	273			—
Current portion of long-term debt	288			486
Total Current Liabilities	3,534			2,942

Long-Term Debt, Net of Current Portion	1,538			1,617

Noncurrent Liabilities
Long-term operating lease liabilities, net of current portion	1,424			—
Deferred income taxes	582			512
Deferred revenue	1,181			1,169
Obligation for pension and postretirement medical benefits	522			503
Other liabilities	197			418
	3,906			2,602
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: 400,000,000 shares, Issued: 2019 - 131,365,855 shares; 2018 - 130,813,476 shares, Outstanding: 2019 - 123,338,144 shares; 2018 - 123,194,430 shares	1			1
Capital in excess of par value	270			232
Treasury stock (common), at cost: 2019 - 8,027,711 shares; 2018 - 7,619,046 shares	(593		)	(568		)
Accumulated other comprehensive loss	(422		)	(448		)
Retained earnings	4,717			4,534
	3,973			3,751
Total Liabilities and Shareholders' Equity	$	12,951		$	10,912

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions, except per share amounts)	2019			2018			2019			2018
Operating Revenues
Passenger revenue	$	2,111		$	1,997		3,827			3,681
Mileage Plan other revenue	118			108			228			215
Cargo and other	59			51			109			92
Total Operating Revenues	2,288			2,156			4,164			3,988
Operating Expenses
Wages and benefits	567			544			1,124			1,080
Variable incentive pay	44			38			79			77
Aircraft fuel, including hedging gains and losses	502			475			922			884
Aircraft maintenance	115			106			235			213
Aircraft rent	82			77			165			151
Landing fees and other rentals	113			110			245			236
Contracted services	70			76			142			157
Selling expenses	87			88			159			166
Depreciation and amortization	105			97			211			191
Food and beverage service	53			55			102			105
Third-party regional carrier expense	42			39			83			76
Other	136			141			274			282
Special items - merger-related costs	8			39			34			45
Special items - other	—			—			—			25
Total Operating Expenses	1,924			1,885			3,775			3,688
Operating Income	364			271			389			300
Nonoperating Income (Expense)
Interest income	11			10			20			18
Interest expense	(20		)	(25		)	(42		)	(49		)
Interest capitalized	3			4			7			9
Other—net	(7		)	(1		)	(17		)	(13		)
Total Nonoperating Income (Expense)	(13		)	(12		)	(32		)	(35		)
Income Before Income Tax	351			259			357			265
Income tax expense	89			66			91			68
Net Income	$	262		$	193		$	266		$	197

Basic Earnings Per Share:	$	2.12		$	1.57		$	2.15		$	1.60
Diluted Earnings Per Share:	$	2.11		$	1.56		$	2.14		$	1.59
Shares used for computation:
Basic	123.418			123.268			123.355			123.212
Diluted	124.301			124.036			124.179			123.953

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in millions)	2019			2018			2019			2018
Net Income	$	262		$	193		$	266		$	197

Other Comprehensive Income (Loss):
Related to marketable securities:
Unrealized holding gain (loss) arising during the period	13			(4		)	27			(17		)
Reclassification of (gain) loss into Other - net nonoperating income (expense)	—			1			2			3
Income tax effect	(3		)	—			(7		)	3
Total	10			(3		)	22			(11		)

Related to employee benefit plans:
Reclassification of net pension expense into Wages and benefits and Other - net nonoperating income (expense)	8			7			16			14
Income tax effect	(2		)	(1		)	(4		)	(3		)
Total	6			6			12			11

Related to interest rate derivative instruments:
Unrealized holding gain (loss) arising during the period	(7		)	2			(12		)	8
Reclassification of (gain) loss into Aircraft rent	—			—			1			1
Income tax effect	2			—			3			(2		)
Total	(5		)	2			(8		)	7

Other Comprehensive Income	11			5			26			7

Comprehensive Income	$	273		$	198		$	292		$	204

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)



(in millions)	Common Stock Outstanding		Common Stock		Capital in Excess of Par Value			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balances at December 31, 2018	123.194		$	1	$	232		$	(568	)	$	(448	)	$	4,534		$	3,751
Cumulative effect of accounting changes^(a)	—		—		—			—			—			3			3
Net income	—		—		—			—			—			4			4
Other comprehensive income (loss)	—		—		—			—			15			—			15
Common stock repurchase	(0.215	)	—		—			(13		)	—			—			(13		)
Stock-based compensation	—		—		12			—			—			—			12
Cash dividend declared ($0.35 per share)	—		—		—			—			—			(43		)	(43		)
Stock issued for employee stock purchase plan	0.391		—		20			—			—			.			20
Stock issued under stock plans	0.134		—		(3		)	—			—			—			(3		)
Balances at March 31, 2019	123.504		$	1	$	261		$	(581	)	$	(433	)	$	4,498		$	3,746
Net income	—		—		—			—			—			262			262
Other comprehensive income (loss)	—		—		—			—			11			—			11
Common stock repurchase	(0.194	)	—		—			(12		)	—			—			(12		)
Stock-based compensation	—		—		9			—			—			—			9
Cash dividend declared ($0.35 per share)	—		—		—			—			—			(43		)	(43		)
Stock issued under stock plans	0.028		—		—			—			—			—			—
Balances at June 30, 2019	123.338		$	1	$	270		$	(593	)	$	(422	)	$	4,717		$	3,973


(a)	Represents the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)



(in millions)	Common Stock Outstanding		Common Stock		Capital in Excess of Par Value			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Balances at December 31, 2017	123.061		$	1	$	164		$	(518	)	$	(380	)	$	4,193		$	3,460
Reclassification of tax effects to Retained Earnings	—		—		—			—			(62		)	62			—
Net income	—		—		—			—			—			4			4
Other comprehensive income (loss)	—		—		—			—			2			—			2
Common stock repurchase	(0.186	)	—		—			(13		)	—			—			(13		)
Stock-based compensation	—		—		12			—			—			—			12
Cash dividend declared ($0.32 per share)	—		—		—			—			—			(40		)	(40		)
Stock issued for employee stock purchase plan	0.312		—		17			—			—			—			17
Stock issued under stock plans	0.163		—		(3		)	—			—			—			(3		)
Balances at March 31, 2018	123.350		$	1	$	190		$	(531	)	$	(440	)	$	4,219		$	3,439
Net income	—		—		—			—			—			193			193
Other comprehensive income (loss)	—		—		—			—			5			—			5
Common stock repurchase	(0.204	)	—		—			(13		)	—			—			(13		)
Stock-based compensation	—		—		9			—			—			—			9
Cash dividend declared ($0.32 per share)	—		—		—			—			—			(39		)	(39		)
Stock issued under stock plans	0.058		—		(1		)	—			—			—			(1		)
Balances at June 30, 2018	123.204		$	1	$	198		$	(544	)	$	(435	)	$	4,373		$	3,593

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



	Six Months Ended June 30,
(in millions)	2019			2018
Cash flows from operating activities:
Net income	$	266		$	197
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	211			191
Stock-based compensation and other	16			17
Changes in certain assets and liabilities:
Changes in deferred tax provision	62			67
Increase in air traffic liability	385			306
Increase in deferred revenue	75			52
Other—net	18			(104		)
Net cash provided by operating activities	1,033			726
Cash flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits	(172		)	(271		)
Other flight equipment	(83		)	(56		)
Other property and equipment	(78		)	(96		)
Total property and equipment additions, including capitalized interest	(333		)	(423		)
Purchases of marketable securities	(885		)	(529		)
Sales and maturities of marketable securities	663			474
Other investing activities	25			10
Net cash used in investing activities	(530		)	(468		)
Cash flows from financing activities:
Proceeds from issuance of debt	254			—
Long-term debt payments	(532		)	(258		)
Common stock repurchases	(25		)	(25		)
Dividends paid	(86		)	(79		)
Other financing activities	26			15
Net cash used in financing activities	(363		)	(347		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	140			(89		)
Cash, cash equivalents, and restricted cash at beginning of year	114			197
Cash, cash equivalents, and restricted cash at end of the period	$	254		$	108

Cash paid during the period for:
Interest (net of amount capitalized)	$	34		$	39
Income taxes	—			—

Reconciliation of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents	$	244		$	102
Restricted cash included in Prepaid expenses and other current assets	10			6
Total cash, cash equivalents, and restricted cash at end of the period	$	254		$	108

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska (including Virgin America in 2018) and Horizon. The condensed consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant 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. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2018. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of June 30, 2019 and the results of operations for the three and six months ended June 30, 2019 and 2018. Such adjustments were of a normal recurring nature.

Certain reclassifications and rounding adjustments have been made to prior year financial statements to conform to classifications used in the current year.

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 and six months ended June 30, 2019 are not necessarily indicative of operating results for the entire year.

NOTE 2. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues, such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan other revenue includes brand and marketing revenue from our co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

The Company disaggregates revenue by segment in Note 9. The details within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Passenger ticket revenue, including ticket breakage and net of taxes and fees	$	1,792	$	1,693	$	3,231	$	3,121
Passenger ancillary revenue	147		137		271		254
Mileage Plan passenger revenue	172		167		325		306
Total Passenger revenue	$	2,111	$	1,997	$	3,827	$	3,681

Mileage Plan™ Loyalty Program

Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Passenger revenue	$	172	$	167	$	325	$	306
Mileage Plan other revenue	118		108		228		215
Total Mileage Plan revenue	$	290	$	275	$	553	$	521

Cargo and Other

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cargo revenue	$	38	$	34	$	68	$	60
Other revenue	21		17		41		32
Total Cargo and other revenue	$	59	$	51	$	109	$	92

Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

The Company recognized Passenger revenue of $89 million and $79 million from the prior year-end air traffic liability balance for the three months ended June 30, 2019 and 2018, and $563 million and $513 million for the six months ended June 30, 2019 and 2018.

Mileage Plan^TM liabilities

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $122 million of such receivables as of June 30, 2019 and $119 million as of December 31, 2018.

The table below presents a roll forward of the total frequent flyer liability (in millions):



	Six Months Ended June 30,
	2019			2018
Total Deferred Revenue balance at January 1	$	1,874		$	1,725
Travel miles and companion certificate redemption - Passenger revenue	(325		)	(306		)
Miles redeemed on partner airlines - Other revenue	(51		)	(44		)
Increase in liability for mileage credits issued	451			402
Total Deferred Revenue balance at June 30	$	1,949		$	1,777

NOTE 3. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.

Fair Value of Financial Instruments on a Recurring Basis

As of June 30, 2019, total cost basis for all marketable securities was $1.4 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):

June 30, 2019

December 31, 2018

Level 1

Level 2

Total

Level 1

Level 2

Total

Assets

Marketable securities