-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+Xf1WV/88goA783QoNX/GeEnAA7EJQEkaaY07Elb4CrgR7xt+5qEqSJo4h1IqJf JrSD086GTNsxz/xrEc5lqQ== 0000766421-98-000007.txt : 19981029 0000766421-98-000007.hdr.sgml : 19981029 ACCESSION NUMBER: 0000766421-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981028 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALASKA AIR GROUP INC CENTRAL INDEX KEY: 0000766421 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 911292054 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08957 FILM NUMBER: 98731651 BUSINESS ADDRESS: STREET 1: 19300 PACIFIC HWY SOUTH CITY: SEATTLE STATE: WA ZIP: 98188 BUSINESS PHONE: 2064333200 MAIL ADDRESS: STREET 1: PO BOX 68947 CITY: SEATTLE STATE: WA ZIP: 98168-0947 10-Q 1 ALASKA AIR GROUP INC 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . . . . . . to . . . . . . Commission file number 1-8957 ALASKA AIR GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 91-1292054 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 19300 Pacific Highway South, Seattle, Washington 98188 (Address of principal executive offices) Registrant's telephone number, including area code: (206) 431-7040 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes. No. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The registrant has 26,212,548 common shares, par value $1.00, outstanding at September 30, 1998. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Attached are the following Alaska Air Group, Inc. (the Company or Air Group) unaudited financial statements: (i) consolidated balance sheets as of September 30, 1998 and December 31, 1997; (ii) consolidated statements of income for the quarters and nine months ended September 30, 1998 and 1997; (iii) consolidated statement of shareholders' equity for the nine months ended September 30, 1998; and, (iv) consolidated statements of cash flows for the nine months ended September 30, 1998 and 1997. Also attached are the accompanying notes to the Company's consolidated financial statements that have changed significantly during the nine months ended September 30, 1998. These statements, which should be read in conjunction with the financial statements in the Company's annual report on Form 10-K for the year ended December 31, 1997, include all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The adjustments made were of a normal recurring nature. Air Group is a holding company incorporated in Delaware in 1985. Its principal subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Third Quarter 1998 Compared with Third Quarter 1997 The consolidated net income for the third quarter of 1998 was $45.4 million, or $1.72 per share (diluted), compared with net income of $42.2 million, or $1.96 per share in 1997. The 1998 third quarter includes an after-tax charge of $10.1 million ($0.38 per diluted share) for settlement of the MarkAir litigation. Consolidated operating income for the third quarter of 1998 was $89.5 million compared to $76.3 million for 1997. Lower fuel prices accounted for $11.2 million of the $13.2 million improvement in operating income. Airline financial and statistical data is shown following the Air Group financial statements. A discussion of this data follows. Alaska Airlines Operating income increased 14.4% to $79.3 million, resulting in a 17.8% operating margin as compared to a 16.5% margin in 1997. Operating revenue per available seat mile (ASM) decreased 4.3% to 9.62 cents while operating expenses per ASM decreased 5.8% to 7.92 cents. The decrease in revenue per ASM was due to a 1.2 point decrease in system passenger load factor combined with a 2.2% decrease in system passenger yield. The lower load factors and yields are largely due to an 11.0% increase in capacity in 1998. Approximately half of the yield decline is due to the Canadian market, which is still in the development stage. Freight and mail revenues decreased 0.9% due to lower freight volumes, resulting from increased competition in the Seattle-Anchorage market. Other-net revenues increased 4.1% due to increased revenue from travel partners in Alaska's frequent flyer program. The table below shows the major operating expense elements on a cost per ASM basis for Alaska for the third quarters of 1997 and 1998.
Alaska Airlines Operating Expenses Per ASM (In Cents) 1997 1998 Change % Change Wages and benefits 2.67 2.66 (.01) -- Employee profit sharing .16 .17 .01 6 Contracted services .26 .26 -- -- Aircraft fuel 1.18 .96 (.22) (19) Aircraft maintenance .43 .42 (.01) (2) Aircraft rent .90 .91 .01 1 Food and beverage service .31 .29 (.02) (7) Commissions .72 .57 (.15) (21) Other selling expenses .49 .44 (.05) (10) Depreciation and amortization .35 .34 (.01) (3) Gain on sale of assets (.01) -- .01 NM Landing fees and other rentals .34 .34 -- -- Other .60 .56 (.04) (7) Alaska Airlines Total 8.40 7.92 (.48) (6) NM = Not Meaningful
Alaska's lower unit costs were primarily due to lower fuel prices and lower travel agent commission rates. Significant unit cost changes are discussed below. Fuel expense per ASM decreased 19%, due to a 19% decrease in the price of fuel. Commission expense per ASM decreased 21%, because the commission rate paid to travel agents decreased from 10% to 8% for sales made October 1, 1997 and thereafter. As a percentage of passenger revenue, commissions expense decreased 18%, from 7.9% to 6.5%. Horizon Air Operating income increased 45.7% to $10.4 million. Horizon's operating margin was 10.4% as compared to 8.2% in 1997. Operating revenue per ASM decreased 11.8% to 19.68 cents while operating expenses per ASM decreased 13.9% to 17.62 cents. The decrease in revenue per ASM was due to a 13.8 % decrease in yield per revenue passenger mile (RPM), partly offset by a 1.6 point increase in passenger load factor. The decrease in yield per RPM is partly due to an increase in Horizon's average trip length, as it is providing more longer- haul nonstop service to existing city pairs with F-28 jets. The table below shows the major operating expense elements on a cost per ASM basis for Horizon for the third quarters of 1997 and 1998.
Horizon Air Operating Expenses Per ASM (In Cents) 1997 1998 Change % Change Wages and benefits 6.33 5.57 (.76) (12) Employee profit sharing .16 .42 .26 163 Contracted services .44 .50 .06 14 Aircraft fuel 2.08 1.64 (.44) (21) Aircraft maintenance 3.23 2.06 (1.17) (36) Aircraft rent 2.35 2.07 (.28) (12) Food and beverage service .12 .14 .02 17 Commissions 1.29 .97 (.32) (25) Other selling expenses 1.18 1.07 (.11) (9) Depreciation and amortization .75 .67 (.08) (11) Loss on sale of assets .02 .03 .01 NM Landing fees and other rentals .93 .98 .05 5 Other 1.59 1.50 (.09) (16) Horizon Air Total 20.47 17.62 (2.85) (14)
Horizon's unit costs decreased 14%, primarily due to 21% lower fuel prices, lower travel agency commission rates and more efficient operations that have resulted from a simplified fleet. Consolidated Nonoperating Income (Expense) Nonoperating expense was significantly affected by the $16.5 million charge for settling the MarkAir litigation (see Legal Proceedings). This charge was partly offset by $4.3 million less interest expense incurred (due to conversion of convertible bonds in 1998) and by a $3.3 million increase in interest income earned on higher cash balances, resulting in an $8.3 million increase in net nonoperating expense. Nine Months 1998 Compared with Nine Months 1997 The consolidated net income for the nine months ended September 30, 1998 was $97.4 million, or $3.79 per share (diluted), compared with net income of $57.3 million, or $2.80 per share in 1997. Consolidated operating income for the first nine months of 1998 was $174.6 million compared to $111.8 million for 1997. Lower fuel prices, adjusted for profit sharing, accounted for $41.8 million of the $62.8 million improvement in operating income. A discussion of operating results for the two airlines follows. Alaska Airlines Operating income increased 45.0% to $159.4 million, resulting in a 13.4% operating margin as compared to a 10.0% margin in 1997. Operating revenue per ASM remained even at 9.47 cents while operating expenses per ASM decreased 3.7% to 8.21 cents. A 1.3% increase in system passenger yield was offset by a 0.4 point decrease in the system passenger load factor. Unit costs decreased 3.7% due to lower fuel prices and commission rates, partly offset by higher maintenance and profit sharing costs. Horizon Air Operating income increased 519% to $16.1 million, resulting in a 6.2% operating margin as compared to a 1.1% margin in 1997. Operating revenue per ASM decreased 8.3% to 19.47 cents, while operating expenses per ASM decreased 13.1% to 18.26 cents. The changes in unit revenue and unit expense are due to the same reasons stated above in the third quarter comparison. Consolidated Nonoperating Income (Expense) Net nonoperating items improved $1.7 million over 1997 due to lower interest expense and higher interest income, which were partly offset by a $16.5 million charge for a legal settlement. Liquidity and Capital Resources The table below presents the major indicators of financial condition and liquidity.
Dec. 31, 1997 Sep. 30, 1998 Change (In millions, except debt-to-equity and per share amounts) Cash and marketable securities $212.7 $407.3 $194.6 Working capital (deficit) (48.7) 60.7 109.4 Long-term debt and capital lease obligations 401.4 181.1 (220.3) Shareholders' equity 475.3 761.8 286.5 Book value per common share $26.00 $29.06 $3.06 Debt-to-equity 46%:54% 19%:81% NA
The Company's cash and marketable securities portfolio increased by $195 million during the first nine months of 1998. Operating activities provided $303 million of cash during this period. Additional cash was provided by the sale and leaseback of nine B737-400 aircraft and seven Dash 8-200 aircraft ($345 million) and the return of $22 million of equipment deposits. Cash was used for $445 million of capital expenditures, including the purchase of nine new B737-400 aircraft, eight new Dash 8-200 aircraft, flight equipment deposits and airframe and engine overhauls and the repayment of debt ($35 million). Shareholders' equity increased $287 million due to the conversion of $186 million of convertible bonds into common stock, net income of $97 million and issuance of $6 million of common stock under stock plans. Commitments During May 1998, Alaska ordered one Boeing 737-400 and two Boeing 737-700 aircraft to be delivered in 1999, and three more B737-700s to be delivered in 2000. At September 30, 1998, the Company had firm orders for 37 aircraft with a total cost of approximately $896 million as set forth below.
Delivery Period - Firm Orders Aircraft 1998 1999 2000 2001 2002 2003-05 Total Boeing B737-400 -- 3 -- -- -- -- 3 Boeing B737-700 -- 5 5 -- -- -- 10 Boeing B737-900 -- -- -- 5 5 -- 10 de Havilland Dash 8-200 3 1 3 -- -- 7 14 Total 3 9 8 5 5 7 37 Cost (Millions) $3 $261 $185 $175 $175 $70 $896
Year 2000 Computer Issue The Company uses a significant number of computer software programs and embedded operating systems that were not originally designed to process dates beyond 1999. The Company has implemented a project to ensure that the Company's systems will function properly in the year 2000 and thereafter. The Company anticipates completing this project for substantially all key systems in early 1999 and believes that, with modifications to its existing software and systems and/or conversions to new software, the year 2000 issue will not pose significant operational problems. Most of the Company's information technology projects in the last several years have made the affected systems Year 2000 compliant. The direct costs of projects solely intended to correct year 2000 problems are currently estimated at less than $2 million. Additional systems currently under review may require further resources. The Company does not expect any cost increases to have a material effect on its results of operations. The Company is also in contact with its significant suppliers and vendors with which its systems interface and exchange data or upon which its business depends. These efforts are designed to minimize the extent to which its business will be vulnerable to their failure to remediate their own year 2000 issues. The Company's business is also dependent upon certain governmental organizations or entities such as the Federal Aviation Administration (FAA) that provide essential aviation industry infrastructure. The Company is working with the Airline Transport Association to monitor the FAA's progress in making its systems year 2000 compliant. There can be no assurance that such third parties on which the Company's business relies will successfully remediate their systems on a timely basis. The Company's business, financial condition or results of operations could be materially adversely affected by the failure of its systems or those operated by other parties to operate properly beyond 1999. Areas that could be adversely affected include flight operations, maintenance, planning, reservations, sales, accounting and the frequent flyer program. The Company already has in place certain disaster contingency plans anticipating the potential loss of essential services such as electricity and financial accounting systems. The Company will leverage its Year 2000 contingency planning off these existing plans. In addition, the Company is developing and executing additional contingency plans designed to allow continued operation in the event of failure of third party systems or products. New Accounting Standards During June 1998, the Financial Accounting Standards Board issued FAS 133, Accounting for Derivative Instruments and Hedging Activities The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Due to the Company's minimal use of derivatives, the new standard is expected to have no material impact on its financial position or results of operations. FAS 133 will be effective for the Company's fiscal year beginning January 1, 2000. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings In July 1998, the Company announced that it had reached an agreement in principle with the trustee for creditors of the defunct MarkAir, Inc. regarding a breach of contract lawsuit. Subsequently, a formal settlement agreement was approved by the bankruptcy court. The $16.5 million settlement resulted in an after-tax charge of $10.1 million ($0.38 per diluted share) in the third quarter of 1998. ITEM 5. Other Information During the first quarter of 1998, Alaska's mechanics, inspectors, cleaners, janitors and fleet service employees voted to be represented by the Aircraft Mechanics Fraternal Association (AMFA) rather than the International Association of Machinists (IAM). The negotiation of an initial contract began in July 1998. The IAM will continue to represent Alaska's stock clerks and ramp service employees, whose contract became amendable August 31, 1997. Alaska and the IAM are continuing negotiations of a new contract with the assistance of a federal mediator. During the second quarter of 1998, Horizon and the Transport Workers Union of America signed a new three-year contract covering approximately 400 mechanics and related classifications. Horizon and the International Brotherhood of Teamsters are continuing negotiations of an initial contract covering approximately 500 pilots. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial data schedule. (b) No reports on Form 8-K were filed during the third quarter of 1998. Signatures Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALASKA AIR GROUP, INC. Registrant Date: October 28, 1998 /s/ John F. Kelly John F. Kelly Chairman, President and Chief Executive Officer /s/ Harry G. Lehr Harry G. Lehr Senior Vice President/Finance (Principal Financial Officer) CONSOLIDATED BALANCE SHEET Alaska Air Group, Inc.
ASSETS December 31, September 30, (In Millions) 1997 1998 Current Assets Cash and cash equivalents $102.6 $192.4 Marketable securities 110.1 214.9 Receivables - net 72.6 90.7 Inventories and supplies 47.2 48.2 Prepaid expenses and other assets 92.1 88.8 Total Current Assets 424.6 635.0 Property and Equipment Flight equipment 950.1 995.0 Other property and equipment 258.5 284.0 Deposits for future flight equipment 108.9 111.0 1,317.5 1,390.0 Less accumulated depreciation and amortization 373.8 416.5 943.7 973.5 Capital leases: Flight and other equipment 44.4 44.4 Less accumulated amortization 27.5 29.1 16.9 15.3 Total Property and Equipment - Net 960.6 988.8 Intangible Assets - Subsidiaries 59.6 58.0 Other Assets 88.3 84.1 Total Assets $1,533.1 $1,765.9 See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, September 30, (In Millions) 1997 1998 Current Liabilities Accounts payable $73.9 $83.7 Accrued aircraft rent 60.7 64.9 Accrued wages, vacation and payroll taxes 70.1 77.7 Other accrued liabilities 73.5 126.6 Air traffic liability 166.4 193.8 Current portion of long-term debt and capital lease obligations 28.7 27.6 Total Current Liabilities 473.3 574.3 Long-Term Debt and Capital Lease Obligations 401.4 181.1 Other Liabilities and Credits Deferred income taxes 72.3 107.4 Deferred income 19.5 40.8 Other liabilities 91.3 100.5 183.1 248.7 Shareholders' Equity Common stock, $1 par value Authorized: 50,000,000 shares Issued: 1997 - 21,030,762 shares 1998 - 28,962,650 shares 21.0 29.0 Capital in excess of par value 292.5 473.4 Treasury stock, at cost: 1997 - 2,748,030 shares 1998 - 2,750,102 shares (62.6) (62.7) Deferred compensation (1.8) (1.5) Retained earnings 226.2 323.6 475.3 761.8 Total Liabilities and Shareholders' Equity $1,533.1 $1,765.9 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME Alaska Air Group, Inc.
Three Months Ended September 30 (In Millions except Per share Amounts) 1997 1998 Operating Revenues Passenger $457.2 $495.6 Freight and mail 26.0 25.5 Other - net 18.0 18.3 Total Operating Revenues 501.2 539.4 Operating Expenses Wages and benefits 143.1 161.0 Contracted services 12.7 14.0 Aircraft fuel 57.3 52.5 Aircraft maintenance 30.1 29.8 Aircraft rent 46.6 52.4 Food and beverage service 13.2 14.2 Commissions 30.7 27.2 Other selling expenses 24.8 25.7 Depreciation and amortization 17.3 19.0 Loss (gain) on sale of assets (0.4) 0.3 Landing fees and other rentals 17.6 20.4 Other 31.9 33.4 Total Operating Expenses 424.9 449.9 Operating Income 76.3 89.5 Nonoperating Income (Expense) Interest income 3.0 6.3 Interest expense (8.6) (4.3) Interest capitalized 1.3 1.4 Other - net 0.5 (15.5) (3.8) (12.1) Income before income tax 72.5 77.4 Income tax expense 30.3 32.0 Net Income $42.2 $45.4 Basic Earnings Per Share $2.88 $1.73 Diluted Earnings Per Share $1.96 $1.72 Shares used for computation: Basic 14.671 26.209 Diluted 22.558 26.423 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME Alaska Air Group, Inc.
Nine Months Ended September 30 (In Millions Except Per Share Amounts) 1997 1998 Operating Revenues Passenger $1,191.9 $1,313.5 Freight and mail 70.7 72.0 Other - net 54.0 55.2 Total Operating Revenues 1,316.6 1,440.7 Operating Expenses Wages and benefits 398.5 447.2 Contracted services 35.5 41.9 Aircraft fuel 174.8 145.5 Aircraft maintenance 82.1 92.4 Aircraft rent 136.2 147.9 Food and beverage service 36.2 38.3 Commissions 82.6 74.5 Other selling expenses 65.1 70.4 Depreciation and amortization 50.7 55.1 Loss (gain) on sale of assets (0.9) 0.5 Landing fees and other rentals 50.3 56.7 Other 93.7 95.7 Total Operating Expenses 1,204.8 1,266.1 Operating Income 111.8 174.6 Nonoperating Income (Expense) Interest income 7.0 15.5 Interest expense (25.6) (17.2) Interest capitalized 3.6 4.8 Other - net 2.1 (14.3) (12.9) (11.2) Income before income tax 98.9 163.4 Income tax expense 41.6 66.0 Net Income $57.3 $97.4 Basic Earnings Per Share $3.93 $4.34 Diluted Earnings Per Share $2.80 $3.79 Shares used for computation: Basic 14.580 22.436 Diluted 22.462 26.400 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Alaska Air Group, Inc.
Common Capital in Treasury Deferred Shares Common Excess of Stock Compen- Retained (In Millions) Outstanding Stock Par Value at Cost sation Earnings Total Balances at December 31, 1997 18.283 $21.0 $292.5 $(62.6) $(1.8) $226.2 $475.3 Net income for the nine months ended September 30, 1998 97.4 97.4 Stock issued under stock plans 0.185 0.3 5.9 6.2 Stock issued for convertible subordinated debentures 7.747 7.7 175.0 182.7 Treasury stock purchase (0.002) (0.1) (0.1) Employee Stock Ownership Plan shares allocated 0.3 0.3 Balances at September 30, 1998 26.213 $29.0 $473.4 $(62.7) $(1.5) $323.6 $761.8 See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS Alaska Air Group, Inc.
Nine Months Ended September 30 (In Millions) 1997 1998 Cash flows from operating activities: Net income $57.3 $97.4 Adjustments to reconcile net income to cash: Depreciation and amortization 50.7 55.1 Amortization of airframe and engine overhauls 26.3 30.0 Loss (gain) on sale of assets (0.9) 0.5 Increase in deferred income taxes 34.6 35.1 Increase in accounts receivable (18.4) (18.1) Decrease in other current assets 20.0 2.3 Increase in air traffic liability 21.0 27.4 Increase in other current liabilities 43.4 74.7 Other-net (6.8) (1.5) Net cash provided by operating activities 227.2 302.9 Cash flows from investing activities: Proceeds from sale of assets 2.5 0.6 Purchases of marketable securities (236.2) (158.9) Sales and maturities of marketable securities 195.2 54.1 Flight equipment deposits returned 7.9 22.3 Additions to flight equipment deposits (47.0) (117.4) Additions to property and equipment (269.8) (327.7) Restricted deposits and other (0.7) (1.4) Net cash used in investing activities (348.1) (528.4) Cash flows from financing activities: Proceeds from short-term borrowings 56.4 - Repayment of short-term borrowings (103.4) - Proceeds from sale and leaseback transactions 199.4 344.5 Proceeds from issuance of long-term debt 28.0 - Long-term debt and capital lease payments (15.8) (35.4) Proceeds from issuance of common stock 5.6 6.2 Net cash provided by financing activities 170.2 315.3 Net increase in cash and cash equivalents 49.3 89.8 Cash and cash equivalents at beginning of period 49.4 102.6 Cash and cash equivalents at end of period $98.7 $192.4 Supplemental disclosure of cash paid during the period for: Interest (net of amount capitalized) $19.7 $14.3 Income taxes 1.5 28.1 Noncash investing and financing activities: 1997 - None 1998 - $186.0 million of convertible debentures were converted into 7.7 million shares of common stock. See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED SIGNIFICANTLY DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Alaska Air Group, Inc. Note 1. Commitments (See Note 5 to Consolidated Financial Statements at December 31, 1997) During the first nine months of 1998, Alaska's lease commitments increased approximately $414 million due to the sale and leaseback of nine B737-400 aircraft under 18-year operating leases. During the first nine months of 1998, Horizon's lease commitments increased approximately $95 million due to the sale and leaseback of seven Dash 8-200 aircraft under 15-year operating leases. Note 2. Earnings per Share (See Note 9 to Consolidated Financial Statements at December 31, 1997) Earnings per share (EPS) calculations were as follows (in millions except per share amounts):
Three Months Ended Sep. 30 Nine Months Ended Sep. 30 1997 1998 1997 1998 Net income $42.2 $45.4 $57.3 $97.4 Avg. shares outstanding 14.671 26.209 14.580 22.436 Basic earnings per share $2.88 $1.73 $3.93 $4.34 Net income $42.2 $45.4 $57.3 $97.4 After-tax interest on: 6-1/2% debentures 1.3 -- 4.0 2.2 6-7/8% debentures 0.6 -- 1.7 0.4 Diluted EPS income $44.1 $45.4 $63.0 $100.0 Avg. shares outstanding 14.671 26.209 14.580 22.436 Assumed conversion of: 6-1/2% debentures 6.151 -- 6.151 3.399 6-7/8% debentures 1.608 -- 1.608 .342 Assumed exercise of stock options .128 .214 .123 .223 Diluted EPS shares 22.558 26.423 22.462 26.400 Diluted earnings per share $1.96 $1.72 $2.80 $3.79
Convertible debentures and stock options only enter the diluted EPS calculation when their individual effect is dilutive. Note 3. Operating Segment Information (See Note 11 to Consolidated Financial Statements at December 31, 1997) Operating segment information for Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon) was as follows (in millions):
Three Months Ended Sep. 30 Nine Months Ended Sep. 30 1997 1998 1997 1998 Operating revenues: Alaska $420.3 $446.5 $1,097.9 $1,193.6 Horizon 84.9 97.7 227.3 258.7 Elimination of intercompany revenues (4.0) (4.8) (8.6) (11.6) Consolidated 501.2 539.4 1,316.6 1,440.7 Pretax income (loss): Alaska 67.6 66.9 103.7 151.7 Horizon 7.2 10.4 2.7 16.5 Air Group (2.3) 0.1 (7.5) (4.8) Consolidated 72.5 77.4 98.9 97.4 Total assets at end of period: Alaska 1,366.6 1,596.2 1,366.6 1,596.2 Horizon 156.0 178.5 156.0 178.5 Air Group 596.0 763.1 596.0 763.1 Elimination of intercompany accounts (667.9) (771.9) (667.9) (771.9) Consolidated 1,450.7 1,765.9 1,450.7 1,765.9
Alaska Airlines Financial and Statistical Data Quarter Ended September 30 Nine Months Ended September 30 Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change Operating Revenues: Passenger $380.5 $406.2 6.8 $984.0 $1,076.9 9.4 Freight and mail 22.9 22.7 (0.9) 62.3 63.9 2.6 Other - net 16.9 17.6 4.1 51.6 52.8 2.3 Total Operating Revenues 420.3 446.5 6.2 1,097.9 1,193.6 8.7 Operating Expenses: Wages and benefits 111.8 123.3 10.3 317.7 351.1 10.5 Employee profit sharing 6.7 8.0 19.4 9.7 16.0 64.9 Contracted services 11.0 12.1 10.0 30.9 36.9 19.4 Aircraft fuel 49.4 44.4 (10.1) 150.4 123.2 (18.1) Aircraft maintenance 17.8 19.6 10.1 48.8 60.3 23.6 Aircraft rent 37.7 42.1 11.7 110.2 117.7 6.8 Food and beverage service 12.7 13.5 6.3 34.9 36.6 4.9 Commissions 30.1 26.5 (12.0) 77.9 71.9 (7.7) Other selling expenses 20.3 20.4 0.5 52.2 56.3 7.9 Depreciation and amortization 14.4 15.6 8.3 42.1 46.0 9.3 Loss (gain) on sale of assets (0.4) 0.1 NM (0.3) 0.3 NM Landing fees and other rentals 14.1 15.9 12.8 40.4 44.6 10.4 Other 25.4 25.7 1.2 73.1 73.3 0.3 Total Operating Expenses 351.0 367.2 4.6 988.0 1,034.2 4.7 Operating Income 69.3 79.3 14.4 109.9 159.4 45.0 Interest income 3.3 6.5 8.4 16.4 Interest expense (6.4) (4.3) (19.1) (13.5) Interest capitalized 0.8 1.0 2.4 3.6 Other - net 0.6 (15.6) 2.1 (14.2) (1.7) (12.4) (6.2) (7.7) Income Before Income Tax $67.6 $66.9 $103.7 $151.7 Operating Statistics: Revenue passengers (000) 3,441 3,661 6.4 9,325 9,845 5.6 RPMs (000,000) 2,933 3,200 9.1 7,896 8,535 8.1 ASMs (000,000) 4,179 4,639 11.0 11,589 12,603 8.8 Passenger load factor 70.2% 69.0% (1.2)pts 68.1% 67.7% (0.4)pts Breakeven load factor 56.6% 57.3% 0.7 pts 60.5% 58.0% (2.5)pts Yield per passenger mile 12.97c 12.69c (2.2) 12.46c 12.62c 1.3 Operating revenue per ASM 10.06c 9.62c (4.3) 9.47c 9.47c (0.0) Operating expenses per ASM 8.40c 7.92c (5.8) 8.53c 8.21c (3.7) Fuel cost per gallon 66.9c 54.2c (19.0) 72.8c 55.2c (24.2) Fuel gallons (000,000) 73.9 81.9 10.8 206.4 223.1 8.1 Average number of employees 8,534 9,015 5.6 8,240 8,669 5.2 Aircraft utilization (block hours) 11.9 11.8 (0.8) 11.5 11.6 0.9 Operating fleet at period-end 78 85 9.0 78 85 9.0 NM = Not Meaningful c = cents
Horizon Air Financial and Statistical Data Quarter Ended September 30 Nine Months Ended September 30 Financial Data (in millions): 1997 1998 % Change 1997 1998 % Change Operating Revenues: Passenger $81.0 $93.5 15.4 $216.8 $246.8 13.8 Freight and mail 3.0 2.8 (6.7) 8.5 8.1 (4.7) Other - net 0.9 1.4 55.6 2.0 3.8 90.0 Total Operating Revenues 84.9 97.7 15.1 227.3 258.7 13.8 Operating Expenses: Wages and benefits 24.1 27.6 14.5 70.5 77.0 9.2 Employee profit sharing 0.6 2.1 250.0 0.6 3.1 416.7 Contracted services 1.7 2.5 47.1 4.6 6.5 41.3 Aircraft fuel 7.9 8.1 2.5 24.4 22.3 (8.6) Aircraft maintenance 12.3 10.2 (17.1) 33.3 32.1 (3.6) Aircraft rent 8.9 10.1 13.5 26.0 30.3 16.5 Food and beverage service 0.5 0.6 20.0 1.4 1.7 21.4 Commissions 4.9 4.8 (2.0) 13.7 12.9 (5.8) Other selling expenses 4.5 5.3 17.8 12.9 14.2 10.1 Depreciation and amortization 2.9 3.4 17.2 8.5 8.9 4.7 Loss (gain) on sale of assets 0.1 0.2 NM (0.6) 0.1 NM Landing fees and other rentals 3.5 4.7 34.3 10.0 12.4 24.0 Other 6.0 7.9 31.7 19.4 21.1 8.8 Total Operating Expenses 77.9 87.5 12.3 224.7 242.6 8.0 Operating Income 7.0 10.2 45.7 2.6 16.1 519.2 Interest income 0.1 0.0 0.1 0.0 Interest expense (0.4) (0.2) (1.5) (1.0) Interest capitalized 0.4 0.4 1.2 1.2 Other - net 0.1 0.0 0.3 0.2 0.2 0.2 0.1 0.4 Income Before Income Tax $7.2 $10.4 $2.7 $16.5 Operating Statistics: Revenue passengers (000) 1,010 1,221 20.9 2,747 3,203 16.6 RPMs (000,000) 246 329 33.8 658 832 26.4 ASMs (000,000) 380 496 30.4 1,070 1,329 24.2 Passenger load factor 64.7% 66.3% 1.6 pts 61.5% 62.6% 1.1 pts Breakeven load factor 58.3% 58.1% (0.2)pts 60.9% 58.0% (2.9)pts Yield per passenger mile 32.96c 28.41c (13.8) 32.94c 29.66c (9.9) Operating revenue per ASM 22.32c 19.68c (11.8) 21.24c 19.47c (8.3) Operating expenses per ASM 20.47c 17.62c (13.9) 21.00c 18.26c (13.1) Fuel cost per gallon 71.8c 56.8c (20.9) 78.0c 58.4c (25.1) Fuel gallons (000,000) 11.0 14.3 30.0 31.3 38.1 21.7 Average number of employees 2,735 3,132 14.5 2,750 2,940 6.9 Aircraft utilization (block hours) 7.5 8.3 10.7 7.1 7.9 11.3 Operating fleet at period-end 57 58 1.8 57 58 1.8 NM = Not Meaningful c = cents
EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALASKA AIR GROUP INC THIRD QUARTER 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1000 9-MOS DEC-31-1998 SEP-30-1998 192400 214900 90700 0 48200 635000 1434400 445600 1765900 574300 181100 0 0 29000 732800 1765900 1440700 1440700 1266100 1266100 0 0 17200 163400 66000 97400 0 0 0 97400 4.34 3.79
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