EMPLOYEE BENEFIT PLANS

Four defined-benefit and five defined-contribution retirement plans cover various employee groups of Alaska and Horizon. The defined-benefit plans provide benefits based on an employee’s term of service and average compensation for a specified period of time before retirement. The qualified defined-benefit pension plans are closed to new entrants.

Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers and an unfunded, non-contributory defined-contribution plan for other elected officers.

Accounting standards require recognition of the overfunded or underfunded status of an entity’s defined-benefit pension and other postretirement plan as an asset or liability in the financial statements and requires recognition of the funded status in AOCL.

Qualified Defined-Benefit Pension Plans

The Company’s pension plans are funded as required by the Employee Retirement Income Security Act of 1974 (ERISA).

The defined-benefit plan assets consist primarily of marketable equity and fixed-income securities. The Company uses a December 31 measurement date for these plans.

Weighted average assumptions used to determine benefit obligations as of December 31:

Discount rates of 4.65% and 5.55% were used as of December 31, 2011 and 2010, respectively. For 2011, the rate of compensation increase used varied from 2.94% to 4.17%, depending on the related work group. For 2010, the rate of compensation increases was 2.99% to 4.35%.

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:

Discount rates of 5.55%, 5.85%, and 6.20% were used for the years ended December 31, 2011, 2010, and 2009, respectively. For all three years, the expected return on plan assets used was 7.75%, and the rate of compensation increase used varied from 2.99% to 4.35%, depending on the plan and the related work group.

In determining the discount rate used, the Company’s policy is to use the rates at the end of the year on high-quality long-term bonds with maturities that closely match the expected timing of future cash distributions from the plan. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.

Plan assets are invested in common commingled trust funds invested in equity and fixed income securities. The asset allocation of the funds in the qualified defined-benefit plans, by asset category, is as follows as of the end of 2011 and 2010:



	2011		2010
Asset category:
Money market fund	1	%	2	%
Domestic equity securities	45	%	51	%
Non-U.S. equity securities	20	%	18	%
Fixed income securities	34	%	29	%
Plan assets	100	%	100	%

The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle. The Company uses a fund manager and invests in various asset classes to diversify risk. Target allocations for the primary asset classes are approximately:



Domestic equities:	45% - 55%
Non-U.S. equities:	17% - 23%
Fixed income:	25% - 35%

Pension assets are rebalanced periodically to maintain these target asset allocations. An individual equity investment will not exceed 10% of the entire equity portfolio. Fixed-income securities carry a minimum “A” rating by Moody’s and/or Standard and Poor’s and the average life of the bond portfolio may not exceed ten years. The Company does not currently intend to invest plan assets in the Company’s common stock.

The Company made a $100 million contribution to the plan in December 2010 and another $100 million contribution to the plan in December 2011, which were distributed immediately to investments in accordance with the target asset allocations.

As of December 31, 2011, other than the money market fund, all assets were invested in common commingled trust funds. The Company uses the net asset values of these funds to determine fair value as allowed using the practical expediency method outlined in the accounting standards. The fund categories included in plan assets as of December 31, 2011 and 2010, their amounts, and their fair value hierarchy level are as follows (dollars in millions):



	2011		2010		Level
Fund type:
Money market fund	$	12.0	$	27.7	1
U.S. equity market fund	578.7		561.9		2
Non-U.S. equity fund	256.1		210.0		2
U.S. debt index fund	75.0		135.0		2
Government/credit bond index fund	366.2		208.1		2
Plan assets	$	1,288.0	$	1,142.7

Nonqualified Defined-Benefit Pension Plan

Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This plan uses a December 31 measurement date.

Weighted average assumptions used to determine benefit obligations as of December 31:

Discount rates of 4.65% and 5.55% were used as of December 31, 2011 and 2010 respectively. The rate of compensation increase used was 5.00% as of December 31, 2011 and 2010.

Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:

Discount rates of 5.55%, 5.85%, and 6.20% were used for the years ended December 31, 2011, 2010, and 2009, respectively. The rate of compensation increase used was 5.00% for all three years presented.

Combined Disclosures for Defined-Benefit Pension Plans

The following table sets forth the status of the plans for 2011 and 2010 (in millions):



	Qualified						Nonqualified
	2011			2010			2011			2010
Projected benefit obligation (PBO)
Beginning of year	$	1,343.0		$	1,179.8		$	41.1		$	37.3
Service cost	35.3			32.3			1.0			0.8
Interest cost	72.9			67.7			2.2			2.1
Plan amendments	(21.6		)	—			0.2			—
Actuarial loss	206.3			101.0			3.2			4.1
Benefits paid	(41.6		)	(37.8		)	(4.9		)	(3.2		)
End of year	$	1,594.3		$	1,343.0		$	42.8		$	41.1

Plan assets at fair value
Beginning of year	$	1,142.7		$	906.9		$	—		$	—
Actual return on plan assets	53.6			128.0			—			—
Employer contributions	133.3			145.6			4.9			3.2
Benefits paid	(41.6		)	(37.8		)	(4.9		)	(3.2		)
End of year	$	1,288.0		$	1,142.7		$	—		$	—
Funded status (unfunded)	$	(306.3	)	$	(200.3	)	$	(42.8	)	$	(41.1	)

Percent funded	81		%	85		%	—			—

The accumulated benefit obligation for the combined qualified defined-benefit pension plans was $1,483.0 million and $1,232.1 million at December 31, 2011 and 2010, respectively. The accumulated benefit obligation for the nonqualified defined-benefit plan was $41.8 million and $40.4 million at December 31, 2011 and 2010, respectively.

As of December 31, 2011 and 2010, the amounts recognized in the consolidated balance sheets were as follows (in millions):



	2011				2010
	Qualified		Nonqualified		Qualified		Nonqualified
Accrued benefit liability-current	$	—	$	2.2	$	—	$	2.3
Accrued benefit liability-long term	306.3		40.6		200.3		38.8
Total liability recognized	$	306.3	$	42.8	$	200.3	$	41.1

AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN AOCL:



	2011					2010
	Qualified			Nonqualified		Qualified			Nonqualified
Prior service credit	$	(15.7	)	$	—	$	(16.7	)	$	0.1
Net loss	613.2			11.5		417.0			8.7
Amount recognized in AOCL (pretax)	$	597.5		$	11.5	$	400.3		$	8.8

The expected amortization of prior service credit and net loss from AOCL in 2012 is $1.0 million and $39.6 million, respectively, for the qualified defined-benefit pension plans. For the nonqualified defined-benefit pension plans, the expected combined amortization of prior service cost and net loss from AOCL in 2011 is $0.8 million.

Net pension expense for the defined-benefit plans included the following components for 2011, 2010, and 2009 (in millions):



	Qualified									Nonqualified
	2011			2010			2009			2011		2010		2009
Service cost	$	35.3		$	32.3		$	44.2		$	1.0	$	0.8	$	0.7
Interest cost	72.9			67.7			66.9			2.2		2.1		2.2
Expected return on assets	(88.2		)	(70.9		)	(51.3		)	—		—		—
Amortization of prior service cost	(1.0		)	(0.9		)	4.3			0.1		0.1		0.1
Curtailment loss	—			—			—			0.2		—		—
Recognized actuarial loss	23.2			22.0			28.9			0.4		0.1		0.1
Net pension expense	$	42.2		$	50.2		$	93.0		$	3.9	$	3.1	$	3.1

Historically, the Company’s practice has been to contribute to the qualified defined-benefit pension plans in an amount equal to the greater of 1) the minimum required by law, 2) the Pension Protection Act (PPA) target liability, or 3) the service cost as actuarially calculated. There are no current funding requirements for the Company’s plans in 2012. However, the funding in 2012 is estimated to be $35 million to $50 million. The Company expects to contribute approximately $2 million to the nonqualified defined-benefit pension plans during 2012.

Future benefits expected to be paid over the next ten years under the defined-benefit pension plans from the assets of those plans as of December 31, 2011 are as follows (in millions):



	Qualified		Nonqualified
2012	$	50.9	$	2.2
2013	61.1		2.3
2014	66.0		2.4
2015	76.5		2.7
2016	76.5		2.8
2017– 2021	486.5		16.6

Postretirement Medical Benefits

The Company allows retirees to continue their medical, dental, and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, currently age 65. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims. The accumulated postretirement benefit obligation (APBO) for this subsidy is unfunded. This liability was determined using an assumed discount rate of 4.65% and 5.55% at December 31, 2011 and 2010, respectively. The Company does not believe the U.S. Health Care Reform: The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act will have a significant impact.



(in millions)	2011			2010
Accumulated postretirement benefit obligation
Beginning of year	$	132.5		$	117.3
Service cost	6.0			5.3
Interest cost	7.2			6.7
Actuarial (gain) loss	(22.9		)	4.9
Benefits paid	(2.6		)	(1.7		)
End of year	$	120.2		$	132.5

Plan assets at fair value
Beginning of year	$	—		$	—
Employer contributions	2.6			1.7
Benefits paid	(2.6		)	(1.7		)
End of year	$	—		$	—
Funded status (unfunded)	$	(120.2	)	$	(132.5	)

As of December 31, 2011 and 2010, the amounts recognized in the consolidated balance sheets were as follows (in millions):



	2011		2010
Accrued benefit liability-current	$	4.1	$	4.9
Accrued benefit liability-long term	116.1		127.6
Total liability recognized	$	120.2	$	132.5

AMOUNTS NOT YET REFLECTED IN NET PERIODIC BENEFIT COST AND INCLUDED IN AOCL:



(in millions)	2011			2010
Prior service cost	$	2.2		$	2.5
Net loss	(3.8		)	20.3
Amount recognized in AOCL (pretax)	$	(1.6	)	$	22.8

No expected combined amortization of prior service cost and net loss from AOCL in 2012.

The Company uses a December 31 measurement date to assess obligations associated with the subsidy of retiree medical costs. Net periodic benefit cost for the postretirement medical plans included the following components for 2011, 2010 and 2009 (in millions):



	2011		2010		2009
Service cost	$	6.0	$	5.3	$	5.6
Interest cost	7.2		6.7		7.8
Amortization of prior service cost	0.3		—		2.9
Recognized actuarial loss	1.2		0.3		0.8
Net periodic benefit cost	$	14.7	$	12.3	$	17.1

This is an unfunded plan. The Company expects to contribute approximately $4 million to the postretirement medical benefits plan in 2012, which is equal to the expected benefit payments.

Future benefits expected to be paid over the next ten years under the postretirement medical benefits plan as of December 31, 2011 are as follows (in millions):



2012	$	4.1
2013	4.7
2014	5.5
2015	6.4
2016	7.2
2017 - 2021	47.8

The assumed health care cost trend rates to determine the expected 2012 benefits cost are 8.6%, 8.6%, 5.0% and 4.0% for medical, prescription drugs, dental and vision costs, respectively. The assumed trend rate declines steadily through 2028 where the ultimate assumed trend rates are 4.7% for medical, prescription drugs and dental, and 4.0% for vision.

A 1% higher or lower trend rate in health care costs has the following effect on the Company’s postretirement medical plans during 2011, 2010 and 2009 (in millions):



	2011			2010			2009
Change in service and interest cost
1% higher trend rate	$	1.9		$	1.8		$	2.1
1% lower trend rate	(1.7		)	(1.5		)	(1.7		)
Change in year-end postretirement benefit obligation
1% higher trend rate	$	14.4		$	16.0		$	14.4
1% lower trend rate	(12.5		)	(13.8		)	(12.4		)

Defined-Contribution Plans

The defined-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code. All of these plans require Company contributions. Total expense for the defined-contribution plans was $42.0 million, $40.0 million, and $28.6 million in 2011, 2010, and 2009, respectively. The increase in 2010 is due to pilots that elected to freeze or reduce their service credits in the defined-benefit pension plan receiving a higher Company contribution under the new collective bargaining agreement.

The Company also has a noncontributory, unfunded defined-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined-benefit pension plan. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheet at December 31, 2011 and 2010.

Pilot Long-term Disability Benefits

The collective bargaining agreement with Alaska’s pilots calls for the removal of long-term disability benefits from the defined-benefit plan for any pilot that was not already receiving long-term disability payments prior to January 1, 2010. As a result of this plan change, the PBO of $32.6 million associated with assumed future disability payments was removed from the overall defined-benefit pension plan liability in 2009, $29.6 million of which was recorded through AOCL. Furthermore, the removal of the plan from the defined-benefit pension plan reduced the accumulated postretirement benefit obligation for medical costs as the new plan no longer considers long-term disability to be “retirement” from the Company.

The new long-term disability plan removes the service requirement that was in place under the former defined-benefit plan. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long-term basis as of December 31, 2011 and does not include any assumptions for future disability. The liability includes the discounted expected future benefit payments and medical costs. The total liability at December 31, 2011 is $8.1 million, which is recorded net of a prefunded trust account of $0.9 million, and is included in long-term other liabilities on the consolidated balance sheets.

Employee Incentive-Pay Plans

Alaska and Horizon have employee incentive plans that pay employees based on certain financial and operational metrics. The aggregate expense under these plans in 2011, 2010 and 2009 was $71.9 million, $92.0 million, and $76.0 million, respectively. The plans are summarized below:


•	Performance-Based Pay (PBP) is a program that rewards virtually all employees. The program is based on four separate metrics related to: (1) Air Group profitability, (2) safety, (3) achievement of unit-cost goals, and (4) employee engagement as measured by customer satisfaction.


•	The Operational Performance Rewards Program entitles all Air Group employees to quarterly payouts of up to $300 per person if certain operational and customer service objectives are met.