EX-99.1 2 ex9917252019earningsre.htm SECOND QUARTER 2019 EARNINGS RELEASE Exhibit


Exhibit 99.1
alaskaairgrouplogoa95.jpg

July 25, 2019
Media contact:
 
Investor/analyst contact:
Media Relations
 
Chris Berry
(206) 304-0008
 
VP Finance and Controller
 
 
(206) 392-5260

Alaska Air Group reports second quarter 2019 results
Financial Highlights:
•
Reported net income for the second quarter of 2019 under Generally Accepted Accounting Principles (GAAP) of $262 million, or $2.11 per diluted share, compared to net income of $193 million, or $1.56 per diluted share in the second quarter of 2018.
•
Reported net income for the second quarter of 2019, excluding merger-related costs and mark-to-market fuel hedge accounting adjustments of $270 million, or $2.17 per diluted share, compared to $206 million or $1.66 per diluted share, in the second quarter of 2018. This quarter's adjusted results compare to the First Call analyst consensus estimate of $2.13 per share.
•
Paid a $0.35 per-share quarterly cash dividend in the second quarter, a 9% increase over the dividend paid in the second quarter of 2018.
•
Repurchased a total of 408,665 shares of common stock for approximately $25 million in the first six months of 2019.
•
Generated $1 billion of operating cash flow in the first six months of 2019, including merger-related costs.
•
Held $1.6 billion in unrestricted cash and marketable securities as of June 30, 2019.
•
Reduced debt-to-capitalization ratio to 45% as of June 30, 2019 compared to 47% as of December 31, 2018.
Operational Highlights:
•
Alaska technicians, represented by the Aircraft Mechanics Fraternal Association, ratified an integrated seniority list and a transition agreement, including a two-year contract extension, in July 2019.
•
Reached a tentative agreement with the International Association of Machinists on a new five-year contract for Alaska's clerical, office, passenger service, ramp and stores employees.
•
Added EL AL Israel Airlines as a new global Mileage Plan partner.
•
Announced a new route connecting Paine Field in Everett, Washington to Palm Springs, California.
•
Finished painting the Alaska Airlines livery on all Airbus aircraft.
•
Completed cabin interior renovations of 14 Airbus aircraft and 11 737-700 aircraft.
•
Installed high-speed satellite Wi-Fi on the 44th mainline aircraft.
Recognition and Awards:
•
Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2019 by J.D. Power for the 12th year in a row.
•
Earned top spot for customer satisfaction on the American Customer Satisfaction Index Travel Report for 2018 - 2019.
•
Ranked as the best U.S. airline by Wallethub.
•
Named as No. 2 Domestic Airline by Travel & Leisure "World's Best Awards."

1


SEATTLE — Alaska Air Group Inc. (NYSE: ALK) today reported second quarter 2019 GAAP net income of $262 million, or $2.11 per diluted share, compared to $193 million, or $1.56 per diluted share in the second quarter of 2018. Excluding the impact of merger-related costs, mark-to-market fuel hedge adjustments and other special items, the company reported adjusted net income of $270 million, or $2.17 per diluted share, compared to $206 million, or $1.66 per diluted share in 2018.
"The three-percentage point improvement in our adjusted pretax margin shows that our revenue initiatives and cost management efforts are paying off. We set an ambitious plan and are executing it," said Alaska CEO Brad Tilden. "But what our people really do best is provide genuine, caring service for our guests, and that's why they earned our 12th-straight J.D. Power award this year. From all of us on the leadership team, thank you to our employees for your fantastic performance. We're all looking forward to building on this momentum in the months and years ahead."
The following table reconciles the company's reported GAAP net income and earnings per diluted share (diluted EPS) for the three and six months ended June 30, 2019 and 2018 to adjusted amounts.
 
Three Months Ended June 30,
 
2019
 
2018
(in millions, except per-share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
GAAP net income and diluted EPS
$
262

 
$
2.11

 
$
193

 
$
1.56

Mark-to-market fuel hedge adjustments
3

 
0.02

 
(22
)
 
(0.18
)
Special items - merger-related costs
8

 
0.06

 
39

 
0.31

Income tax effect of reconciling items above
(3
)
 
(0.02
)
 
(4
)
 
(0.03
)
Non-GAAP adjusted net income and diluted EPS
$
270

 
$
2.17

 
$
206

 
$
1.66

 
Six Months Ended June 30,
 
2019
 
2018
(in millions, except per-share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
GAAP net income and diluted EPS
$
266

 
$
2.14

 
$
197

 
$
1.59

Mark-to-market fuel hedge adjustments
(1
)
 
(0.01
)
 
(35
)
 
(0.28
)
Special items - merger-related costs
34

 
0.27

 
45

 
0.36

Special items - other
—

 
—

 
25

 
0.20

Income tax effect of reconciling items above
(8
)
 
(0.06
)
 
(8
)
 
(0.06
)
Non-GAAP adjusted net income and diluted EPS
$
291

 
$
2.34

 
$
224

 
$
1.81

Statistical data, as well as a reconciliation of the 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.
A conference call regarding the second quarter results will be streamed online at 1:30 p.m. Pacific time on July 25, 2019. It can be accessed at www.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. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, 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, 2018, 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,

2


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 46 million guests a year to more than 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 Airline Satisfaction Study for 12 consecutive years from 2008 to 2019. Learn 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).
###

3


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per-share amounts)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Passenger revenue
$
2,111

 
$
1,997

 
6
 %
 
$
3,827

 
$
3,681

 
4
 %
Mileage Plan other revenue
118

 
108

 
9
 %
 
228

 
215

 
6
 %
Cargo and other
59

 
51

 
16
 %
 
109

 
92

 
18
 %
Total Operating Revenues
2,288

 
2,156

 
6
 %
 
4,164

 
3,988

 
4
 %
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Wages and benefits
567

 
544

 
4
 %
 
1,124

 
1,080

 
4
 %
Variable incentive pay
44

 
38

 
16
 %
 
79

 
77

 
3
 %
Aircraft fuel, including hedging gains and losses
502

 
475

 
6
 %
 
922

 
884

 
4
 %
Aircraft maintenance
115

 
106

 
8
 %
 
235

 
213

 
10
 %
Aircraft rent
82

 
77

 
6
 %
 
165

 
151

 
9
 %
Landing fees and other rentals
113

 
110

 
3
 %
 
245

 
236

 
4
 %
Contracted services
70

 
76

 
(8
)%
 
142

 
157

 
(10
)%
Selling expenses
87

 
88

 
(1
)%
 
159

 
166

 
(4
)%
Depreciation and amortization
105

 
97

 
8
 %
 
211

 
191

 
10
 %
Food and beverage service
53

 
55

 
(4
)%
 
102

 
105

 
(3
)%
Third-party regional carrier expense
42

 
39

 
8
 %
 
83

 
76

 
9
 %
Other
136

 
141

 
(4
)%
 
274

 
282

 
(3
)%
Special items - merger-related costs
8

 
39

 
(79
)%
 
34

 
45

 
(24
)%
Special items - other
—

 
—

 
NM

 
—

 
25

 
NM

Total Operating Expenses
1,924

 
1,885

 
2
 %
 
3,775

 
3,688

 
2
 %
Operating Income
364

 
271

 
34
 %
 
389

 
300

 
30
 %
Nonoperating Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income
11

 
10

 
10
 %
 
20

 
18

 
11
 %
Interest expense
(20
)
 
(25
)
 
(20
)%
 
(42
)
 
(49
)
 
(14
)%
Interest capitalized
3

 
4

 
(25
)%
 
7

 
9

 
(22
)%
Other—net
(7
)
 
(1
)
 
NM

 
(17
)
 
(13
)
 
31
 %
Total Nonoperating Income (Expense)
(13
)
 
(12
)
 
8
 %
 
(32
)
 
(35
)
 
(9
)%
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividend declared per share:
$
0.35

 
$
0.32

 
 
 
$
0.70

 
$
0.64

 
 


4


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
(in millions)
June 30, 2019
 
December 31, 2018
Cash and marketable securities
$
1,627

 
$
1,236

Other current assets
591

 
551

Current assets
2,218

 
1,787

Property and equipment - net
6,744

 
6,781

Operating lease assets
1,696

 
—

Goodwill
1,943

 
1,943

Intangible assets - net
125

 
127

Other assets
225

 
274

Total assets
12,951

 
10,912

 
 
 
 
Air traffic liability
1,173

 
788

Current portion of long-term debt
288

 
486

Current portion of operating lease liabilities
273

 
—

Other current liabilities
1,800

 
1,668

Current liabilities
3,534

 
2,942

Long-term debt
1,538

 
1,617

Long-term operating lease liabilities
1,424

 
—

Other liabilities and credits
2,482

 
2,602

Shareholders' equity
3,973

 
3,751

Total liabilities and shareholders' equity
$
12,951

 
$
10,912

 
 

 
 

Debt-to-capitalization ratio, including operating leases(a)
45
%
 
47
%
 
 

 
 

Number of common shares outstanding
123.338

 
123.194

(a)
Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.




5


OPERATING STATISTICS SUMMARY (unaudited)
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Consolidated Operating Statistics:(a)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
12,026
 
12,069
 
(0.4)%
 
22,442
 
22,558
 
(0.5)%
RPMs (000,000) "traffic"
14,638
 
14,484
 
1.1%
 
27,087
 
26,887
 
0.7%
ASMs (000,000) "capacity"
16,980
 
16,833
 
0.9%
 
32,487
 
32,313
 
0.5%
Load factor
86.2%
 
86.0%
 
0.2 pts
 
83.4%
 
83.2%
 
0.2 pts
Yield
14.43¢
 
13.79¢
 
4.6%
 
14.13¢
 
13.69¢
 
3.2%
RASM
13.48¢
 
12.81¢
 
5.2%
 
12.82¢
 
12.34¢
 
3.9%
CASMex(b)
8.33¢
 
8.14¢
 
2.3%
 
8.68¢
 
8.46¢
 
2.6%
Economic fuel cost per gallon(b)
$2.27
 
$2.30
 
(1.3)%
 
$2.20
 
$2.22
 
(0.9)%
Fuel gallons (000,000)
220
 
216
 
1.9%
 
419
 
413
 
1.5%
ASM's per gallon
77.2
 
77.9
 
(0.9)%
 
77.5
 
78.2
 
(0.9)%
Average number of full-time equivalent employees (FTE)
21,921
 
21,655
 
1.2%
 
21,876
 
21,461
 
1.9%
Mainline Operating Statistics:
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
9,206
 
9,462
 
(2.7)%
 
17,070
 
17,673
 
(3.4)%
RPMs (000,000) "traffic"
13,207
 
13,221
 
(0.1)%
 
24,379
 
24,581
 
(0.8)%
ASMs (000,000) "capacity"
15,241
 
15,289
 
(0.3)%
 
29,114
 
29,387
 
(0.9)%
Load factor
86.7%
 
86.5%
 
0.2 pts
 
83.7%
 
83.6%
 
0.1 pts
Yield
13.38¢
 
12.95¢
 
3.3%
 
13.08¢
 
12.83¢
 
1.9%
RASM
12.66¢
 
12.16¢
 
4.1%
 
12.02¢
 
11.70¢
 
2.7%
CASMex(b)
7.65¢
 
7.43¢
 
3.0%
 
7.96¢
 
7.71¢
 
3.2%
Economic fuel cost per gallon(b)
$2.26
 
$2.29
 
(1.3)%
 
$2.19
 
$2.22
 
(1.4)%
Fuel gallons (000,000)
187
 
188
 
(0.5)%
 
356
 
360
 
(1.1)%
ASM's per gallon
81.5
 
81.3
 
0.2%
 
81.8
 
81.5
 
0.4%
Average number of FTE's
16,551
 
16,477
 
0.4%
 
16,504
 
16,245
 
1.6%
Aircraft utilization
11.1
 
11.6
 
(4.3)%
 
10.7
 
11.4
 
(6.1)%
Average aircraft stage length
1,311
 
1,298
 
1.0%
 
1,308
 
1,294
 
1.1%
Operating fleet
238
 
228
 
10 a/c
 
238
 
228
 
10 a/c
Regional Operating Statistics:(c)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
2,820
 
2,607
 
8.2%
 
5,372
 
4,885
 
10.0%
RPMs (000,000) "traffic"
1,431
 
1,263
 
13.3%
 
2,708
 
2,306
 
17.4%
ASMs (000,000) "capacity"
1,739
 
1,544
 
12.6%
 
3,373
 
2,926
 
15.3%
Load factor
82.3%
 
81.8%
 
0.5 pts
 
80.3%
 
78.8%
 
1.5 pts
Yield
24.06¢
 
22.64¢
 
6.3%
 
23.57¢
 
22.93¢
 
2.8%
RASM
20.51¢
 
19.14¢
 
7.2%
 
19.62¢
 
18.72¢
 
4.8%
Operating fleet
94
 
89
 
5 a/c
 
94
 
89
 
5 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, excluding Pen Air.


6


OPERATING SEGMENTS (unaudited)
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2019
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
$
1,767

 
$
344

 
$
—

 
$
—

 
$
2,111

 
$
—

 
$
2,111

CPA revenues
—

 
—

 
112

 
(112
)
 
—

 
—

 
—

Mileage Plan other revenue
105

 
13

 
—

 
—

 
118

 
—

 
118

Cargo and other
57

 
—

 
—

 
2

 
59

 
—

 
59

Total operating revenues
1,929

 
357

 
112

 
(110
)
 
2,288

 
—

 
2,288

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,167

 
268

 
95

 
(116
)
 
1,414

 
8

 
1,422

Economic fuel
422

 
77

 
—

 
—

 
499

 
3

 
502

Total operating expenses
1,589

 
345

 
95

 
(116
)
 
1,913

 
11

 
1,924

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
17

 
—

 
—

 
(6
)
 
11

 
—

 
11

Interest expense
(19
)
 
—

 
(7
)
 
6

 
(20
)
 
—

 
(20
)
Interest capitalized
3

 
—

 
—

 
—

 
3

 
—

 
3

Other - net
(7
)
 
—

 
—

 
—

 
(7
)
 
—

 
(7
)
Total Nonoperating income (expense)
(6
)
 
—

 
(7
)
 
—

 
(13
)
 
—

 
(13
)
Income (loss) before income tax
$
334

 
$
12

 
$
10

 
$
6

 
$
362

 
$
(11
)
 
$
351

 
Three Months Ended June 30, 2018
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
$
1,711

 
$
286

 
$
—

 
$
—

 
$
1,997

 
$
—

 
$
1,997

CPA revenues
—

 
—

 
137

 
(137
)
 
—

 
—

 
—

Mileage Plan other revenue
99

 
9

 
—

 
—

 
108

 
—

 
108

Cargo and other
49

 
1

 
1

 
—

 
51

 
—

 
51

Total operating revenues
1,859

 
296

 
138

 
(137
)
 
2,156

 
—

 
2,156

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,135

 
249

 
123

 
(136
)
 
1,371

 
39

 
1,410

Economic fuel
432

 
65

 
—

 
—

 
497

 
(22
)
 
475

Total operating expenses
1,567

 
314

 
123

 
(136
)
 
1,868

 
17

 
1,885

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
13

 
—

 
—

 
(3
)
 
10

 
—

 
10

Interest expense
(22
)
 
—

 
(5
)
 
2

 
(25
)
 
—

 
(25
)
Interest capitalized
4

 
—

 
—

 
—

 
4

 
—

 
4

Other - net
1

 
(2
)
 
—

 
—

 
(1
)
 
—

 
(1
)
Total Nonoperating income (expense)
(4
)
 
(2
)
 
(5
)
 
(1
)
 
(12
)
 
—

 
(12
)
Income (loss) before income tax
$
288

 
$
(20
)
 
$
10

 
$
(2
)
 
$
276

 
$
(17
)
 
$
259



7


 
Six Months Ended June 30, 2019
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
$
3,189

 
$
638

 
$
—

 
$
—

 
$
3,827

 
$
—

 
$
3,827

CPA revenues
—

 
—

 
228

 
(228
)
 
—

 
—

 
—

Mileage Plan other revenue
205

 
23

 
—

 
—

 
228

 
—

 
228

Cargo and other
105

 
1

 
1

 
2

 
109

 
—

 
109

Total operating revenues
3,499

 
662

 
229

 
(226
)
 
4,164

 
—

 
4,164

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
2,319

 
542

 
192

 
(234
)
 
2,819

 
34

 
2,853

Economic fuel
780

 
143

 
—

 
—

 
923

 
(1
)
 
922

Total operating expenses
3,099

 
685

 
192

 
(234
)
 
3,742

 
33

 
3,775

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
33

 
—

 
—

 
(13
)
 
20

 
—

 
20

Interest expense
(40
)
 
—

 
(15
)
 
13

 
(42
)
 
—

 
(42
)
Interest capitalized
7

 
—

 
—

 
—

 
7

 
—

 
7

Other - net
(17
)
 
—

 
—

 
—

 
(17
)
 
—

 
(17
)
Total Nonoperating income (expense)
(17
)
 
—

 
(15
)
 
—

 
(32
)
 
—

 
(32
)
Income (loss) before income tax
$
383

 
$
(23
)
 
$
22

 
$
8

 
$
390

 
$
(33
)
 
$
357

 
Six Months Ended June 30, 2018
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating & Other
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
$
3,152

 
$
529

 
$
—

 
$
—

 
$
3,681

 
$
—

 
$
3,681

CPA revenues
—

 
—

 
247

 
(247
)
 
—

 
—

 
—

Mileage Plan other revenue
197

 
18

 
—

 
—

 
215

 
—

 
215

Cargo and other
89

 
1

 
2

 
—

 
92

 
—

 
92

Total operating revenues
3,438

 
548

 
249

 
(247
)
 
3,988

 
—

 
3,988

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
2,266

 
488

 
227

 
(247
)
 
2,734

 
70

 
2,804

Economic fuel
799

 
120

 
—

 
—

 
919

 
(35
)
 
884

Total operating expenses
3,065

 
608

 
227

 
(247
)
 
3,653

 
35

 
3,688

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
24

 
—

 
—

 
(6
)
 
18

 
—

 
18

Interest expense
(44
)
 
—

 
(10
)
 
5

 
(49
)
 
—

 
(49
)
Interest capitalized
8

 
—

 
1

 
—

 
9

 
—

 
9

Other - net
(4
)
 
(9
)
 
—

 
—

 
(13
)
 
—

 
(13
)
Total Nonoperating income (expense)
(16
)
 
(9
)
 
(9
)
 
(1
)
 
(35
)
 
—

 
(35
)
Income (loss) before income tax
$
357

 
$
(69
)
 
$
13

 
$
(1
)
 
$
300

 
$
(35
)
 
$
265

(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 excludes certain charges. See Note A in the accompanying pages for further information.
(b)
Includes merger-related costs, an employee bonus awarded in January 2018 in connection with the Tax Cuts and Jobs Act, and mark-to-market fuel hedge accounting adjustments.


8


GAAP TO NON-GAAP RECONCILIATIONS (unaudited)
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CASM Excluding Fuel and Special Items Reconciliation
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Consolidated:
 
 
 
 
 
 
 
CASM

11.33
¢
 

11.20
¢
 

11.62
¢
 

11.41
¢
Less the following components:
 
 
 

 
 
 
 
Aircraft fuel, including hedging gains and losses
2.96

 
2.82

 
2.84

 
2.74

Special items - merger-related costs
0.04

 
0.24

 
0.10

 
0.13

Special items - other(a)
—

 
—

 
—

 
0.08

CASM excluding fuel and special items

8.33
¢
 

8.14
¢
 

8.68
¢
 

8.46
¢
 
 
 
 
 
 
 
 
Mainline:
 
 
 
 
 
 
 
CASM

10.50
¢
 

10.36
¢
 

10.76
¢
 

10.54
¢
Less the following components:
 
 
 

 
 
 
 
Aircraft fuel, including hedging gains and losses
2.79

 
2.68

 
2.68

 
2.60

Special items - merger-related costs
0.06

 
0.25

 
0.12

 
0.14

Special items - other(a)
—

 
—

 
—

 
0.09

CASM excluding fuel and special items

7.65
¢
 

7.43
¢
 

7.96
¢
 

7.71
¢
(a)
Special items - other includes special charges associated with the employee tax reform bonus awarded in January 2018.
Fuel Reconciliation
 
Three Months Ended June 30,
 
2019
 
2018
(in millions, except for per-gallon amounts)
Dollars
 
Cost/Gallon
 
Dollars
 
Cost/Gallon
Raw or "into-plane" fuel cost
$
495

 
$
2.25

 
$
506

 
$
2.34

(Gains) losses on settled hedges
4

 
0.02

 
(9
)
 
(0.04
)
Consolidated economic fuel expense
499

 
2.27

 
497

 
2.30

Mark-to-market fuel hedge adjustment
3

 
0.01

 
(22
)
 
(0.10
)
GAAP fuel expense
$
502

 
$
2.28

 
$
475

 
$
2.20

Fuel gallons
220

 
 
 
216

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2019
 
2018
(in millions, except for per gallon amounts)
Dollars
 
Cost/Gallon
 
Dollars
 
Cost/Gallon
Raw or "into-plane" fuel cost
$
916

 
$
2.18

 
$
929

 
$
2.25

(Gains) losses on settled hedges
7

 
0.02

 
(10
)
 
(0.03
)
Consolidated economic fuel expense
$
923

 
$
2.20

 
$
919

 
$
2.22

Mark-to-market fuel hedge adjustment
(1
)
 
—

 
(35
)
 
(0.08
)
GAAP fuel expense
$
922

 
$
2.20

 
$
884

 
$
2.14

Fuel gallons
419

 
 
 
413

 
 


9


Debt-to-capitalization, adjusted for operating leases
(in millions)
June 30, 2019
 
December 31, 2018
Long-term debt
$
1,538

 
$
1,617

Capitalized operating leases(a)
1,697

 
1,768

Adjusted debt
3,235

 
3,385

Shareholders' equity
3,973

 
3,751

Total Invested Capital
$
7,208

 
$
7,136

 
 
 
 
Debt-to-capitalization ratio, including operating leases
45
%
 
47
%
(a)
Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(in millions)
June 30, 2019
Adjusted debt
$
3,235

Current portion of long-term debt
288

Total adjusted debt
3,523

Less: Cash and marketable securities
(1,627
)
Net adjusted debt
$
1,896

 
 
(in millions)
Last Twelve Months Ended June 30, 2019
GAAP Operating Income(a)
$
732

Adjusted for:


Special items
96

Mark-to-market fuel hedge adjustments
56

Depreciation and amortization
418

Aircraft rent
329

EBITDAR
$
1,631

 
 
Net adjusted debt to EBITDAR
1.2x

(a)
Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.


10



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) 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.


11


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 (EPS) 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, Airbus 320 and Airbus 321neo family 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


12