Alaska Air Group Reports Record Third Quarter 2014 Results

Financial Highlights: Reported record third quarter net income, excluding special items, of $200 million - a 27% increase over the third quarter of 2013. Reported adjusted earnings per share of...

SEATTLE, Oct. 23, 2014 /PRNewswire/ —

Financial Highlights:

  • Reported record third quarter net income, excluding special items, of $200 million – a 27% increase over the third quarter of 2013.
  • Reported adjusted earnings per share of $1.47 per diluted share, a 32% increase over the third quarter of 2013 and ahead of First Call analyst consensus estimate of $1.42 per share.
  • Earned net income for the third quarter under Generally Accepted Accounting Principles (GAAP) of $198 million or $1.45 per diluted share, compared to net income of $289 million, or $2.04 per diluted share in 2013.
  • Recorded $84 million of incentive pay through the first nine months of 2014. This includes each Air Group employee earning at least $800 by meeting or exceeding monthly customer satisfaction and operational performance goals and tracking to earn above-target payouts for full-year goals.
  • Increased fuel efficiency (as measured by seat-miles per gallon) by 2.8% as part of our effort to be the airline leader in environmental stewardship.
  • Grew passenger revenues by 7%, compared to the third quarter of 2013.
  • Generated record adjusted pretax margin in the third quarter of 21.8% compared to 18.4% in 2013.
  • Generated 15.9% pretax margin for the trailing 12-month period ended Sept. 30, 2014, compared to 11.7% for the same period in the prior year.
  • Achieved trailing 12-month after-tax return on invested capital of 17.2% compared to 13.0% in the 12-month period ended Sept. 30, 2013.
  • Repurchased 3.4 million shares of common stock for $159 million in the third quarter of 2014, and 5.3 million shares for $242 million in the first nine months of 2014, representing 3.8% of the total shares outstanding at the beginning of the year.
  • Paid a $0.125 per-share quarterly cash dividend on September 4, bringing total dividend payments so far this year to $51 million.
  • Generated $1 billion in operating cash flows for the 12-months ended Sept. 30, 2014, generating $321 million of free cash flows.
  • Lowered adjusted debt-to-total-capitalization ratio to 31%.
  • Held $1.3 billion in unrestricted cash and marketable securities as of Sept. 30, 2014.
  • Became one of only two U.S. airlines with investment grade credit ratings.

Year-to-date highlights of Alaska Air Group’s five-year strategic plan:

Safety & Compliance

  • Launched Ready, Safe, Go safety campaign designed to increase safety awareness across the Air Group System.

People Focus

  • Reached a five-year agreement in concept with Alaska’s Flight Attendants.
  • Signed a six-year contract with Horizon’s Aircraft Technicians and Fleet Service Agents in June 2014.
  • Signed a new five-year contract with Alaska’s Clerical, Office, and Passenger Service employees (COPS) in April 2014.
  • Signed a four-year contract with Horizon’s Dispatchers in April 2014.
  • Completed “Gear Up” – an intensive leadership workshop for over 1,200 leaders at Alaska and Horizon.

Hassle-free Customer Experience

  • Ranked “Highest in Customer Satisfaction Among Traditional Carriers” in 2014 by J.D. Power for the seventh year in a row.
  • Ranked highest by frequent fliers in the first-ever J.D. Power Airline Loyalty/Rewards Program Satisfaction Report.
  • Launched online self-tag baggage options for passengers flying from Seattle to San Diego, Anchorage, or Juneau.
  • Became the launch customer of Boeing’s new, innovative, high-capacity 737 Space Bins, which will increase bag capacity in the cabin by 48%.

Energetic & Compelling Brand

  • Celebrated the opening of the Alaska Airlines Center sports complex at the University of Alaska Anchorage.
  • Sponsored Seattle’s bike share program that is guaranteed to put 500 bikes and 50 docking stations throughout the city of Seattle.
  • Committed to $1.5 million in grants to support job training for workers at the Seattle-Tacoma airport, in addition to a voluntary wage increase to $12 per hour for certain vendors.
  • Pledged $2.5 million to Seattle’s Museum of Flight to help create the Alaska Airlines Aerospace Education Center to guide students toward a future in science, technology, engineering and math (STEM), and sponsored Alaska Airlines Aviation Day in May 2014 to inspire youth to pursue careers in aviation.
  • Flew 12 relief flights to Los Cabos and Loreto, Mexico and transported approximately 2,000 passengers to safety following Hurricane Odile.

Low Fares, Low Costs, and Network Growth

  • Held the No. 1 spot in U.S. Department of Transportation on-time performance among the eight largest U.S. airlines for the twelve months ended August 2014.
  • Named No. 1 on-time carrier in North America for the fourth year in a row from FlightStats in February 2014.
  • Ordered ten additional Boeing 737-900ERs, which will further strengthen Alaska’s fuel efficient fleet.
  • Completed 92% of the cabin improvement project, with 67 aircraft upgraded with Recaro seats, all of which will have power at every seat.
  • Added split scimitar winglets to 23 aircraft, which would improve fuel efficiency by another 1.5%.
  • New routes launched and announced in the third quarter are as follows:
New Non-Stop Routes Launched in Q3New Non-Stop Routes Announced (Launch Dates)
Seattle to BaltimoreLas Vegas to Mammoth Lakes (1/15/15)
Seattle to Albuquerque, New MexicoSan Diego to Kona (03/05/15)
Seattle to Detroit, Michigan 

Alaska Air Group, Inc., (NYSE: ALK) today reported third quarter 2014 GAAP net income of $198 million, or $1.45 per diluted share, compared to $289 million, or $2.04 per diluted share in the third quarter of 2013. Excluding the impact of mark-to-market fuel hedge adjustments and a one-time special revenue item in the prior year, the company reported record adjusted net income of $200 million, or $1.47 per diluted share, compared to adjusted net income of $157 million, or $1.11 per diluted share, in 2013.

“This was our best quarterly result ever,” said CEO Brad Tilden. “I want to thank our 13,000 employees who are keeping a focus on playing our game, and working hard every day to run a great operation, keep fares low, and deliver award winning service to our customers.  All of us at Alaska would like to thank our customers for their continued loyalty.”

The following table reconciles the company’s reported GAAP net income and earnings per diluted share (EPS) during the third quarters of 2014 and 2013 to adjusted amounts:

Three Months Ended
September 30, 2014
20142015
(in millions, except per-share amounts)Dollars Diluted EPSDollars Diluted EPS
Reported GAAP net income$198$1.45$289$2.04
Mark-to-market fuel hedge adjustments, net of tax20.02(12)(0.08)
Special revenue item, net of tax(120)(0.85)
Non-GAAP adjusted income and per-share amounts$200$1.47$157 $1.11

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 third quarter results will be simulcast via the Internet at 8:30 a.m. Pacific time on October 23, 2014. It can be accessed through the company’s website 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. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” 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 Dec. 31, 2013. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines, a subsidiary of Alaska Air Group (NYSE: ALK), together with its partner regional airlines, serve more than 100 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Carriers” in the J.D. Power North American Airline Satisfaction Study for seven consecutive years from 2008 to 2014. Alaska Airlines’ Mileage Plan also ranked highest in the J.D. Power 2014 Airline Loyalty/Rewards Program Satisfaction Report. For reservations, visit www.alaskaair.com . For more news and information, visit the Alaska Airlines/Horizon Air Newsroom at www.alaskaair.com/newsroom.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions, except per-share amounts)

2014

   

2013

   

Change

 

2014

   

2013

   

Change

Operating Revenues:

                                   

Passenger

                                 

Mainline

$

1,030

   

$

960

   

7%

   

2,858

   

2,651

   

8%

 

Regional

219

   

208

   

5%

   

605

   

582

   

4%

 

Total passenger revenue

1,249

   

1,168

   

7%

   

3,463

   

3,233

   

7%

 

Freight and mail

32

   

32

   

—%

   

88

   

88

   

—%

 

Other – net

184

   

165

   

12%

   

511

   

433

   

18%

 

Special mileage plan revenue

   

192

   

NM

 

   

192

   

NM

Total Operating Revenues

1,465

   

1,557

   

NM

 

4,062

   

3,946

   

NM

                                   

Operating Expenses:

                                   

Wages and benefits

279

   

285

   

(2)%

   

832

   

806

   

3%

 

Variable incentive pay

30

   

26

   

15%

   

84

   

68

   

24%

 

Aircraft fuel, including hedging gains and losses

394

   

363

   

9%

   

1,112

   

1,115

   

—%

 

Aircraft maintenance

58

   

54

   

7%

   

166

   

187

   

(11)%

 

Aircraft rent

27

   

29

   

(7)%

   

84

   

89

   

(6)%

 

Landing fees and other rentals

74

   

71

   

4%

   

207

   

207

   

—%

 

Contracted services

66

   

54

   

22%

   

188

   

161

   

17%

 

Selling expenses

55

   

47

   

17%

   

154

   

137

   

12%

 

Depreciation and amortization

75

   

67

   

12%

   

218

   

203

   

7%

 

Food and beverage service

24

   

22

   

9%

   

68

   

63

   

8%

 

Other

67

   

69

   

(3)%

   

229

   

202

   

13%

 

Total Operating Expenses

1,149

   

1,087

   

6%

   

3,342

   

3,238

   

3%

 

Operating Income

316

   

470

   

(33)%

   

720

   

708

   

2%

 
                                   

Nonoperating Income (Expense):

                                   

Interest income

5

   

5

         

15

   

14

       

Interest expense

(12)

   

(13)

         

(36)

   

(42)

       

Interest capitalized

5

   

6

         

14

   

15

       

Other – net

2

   

(5)

         

20

   

(4)

       
 

   

(7)

         

13

   

(17)

       

Income Before Income Tax

316

   

463

         

733

   

691

       

Income tax expense

118

   

174

         

276

   

261

       

Net Income

$

198

   

$

289

         

457

   

430

       
                                   

Basic Earnings Per Share:

$

1.47

   

$

2.07

         

$

3.35

   

$

3.06

       

Diluted Earnings Per Share:

$

1.45

   

$

2.04

         

$

3.31

   

$

3.02

       
                                   

Shares Used for Computation:

                                   

Basic

134.865

   

139.559

         

136.482

   

140.304

       

Diluted

136.158

   

141.383

         

137.825

   

142.213

       
                                   

Cash dividend declared per share:

$

0.125

   

$

0.100

         

$

0.375

   

$

0.100

       

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

Alaska Air Group, Inc.

(in millions)

September 30, 2014

 

December 31, 2013

Cash and marketable securities

$

1,343

   

$

1,330

 
           

Total current assets

1,799

   

1,762

 

Property and equipment-net

4,244

   

3,893

 

Other assets

193

   

183

 

Total assets

6,236

   

5,838

 
           

Air traffic liability

703

   

564

 

Current portion of long-term debt

115

   

117

 

Other current liabilities

949

   

899

 

Current liabilities

1,767

   

1,580

 

Long-term debt

710

   

754

 

Other liabilities and credits

1,530

   

1,475

 

Shareholders’ equity

2,229

   

2,029

 

Total liabilities and shareholders’ equity

$

6,236

   

$

5,838

 
           

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

31%:69%

 

35%:65%

           

Number of common shares outstanding

133.469

   

137.492

 
(a)     Calculated using the present value of remaining aircraft lease payments.

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

Consolidated Operating Statistics:(a)

                                   

Revenue passengers (000)

7,994

   

7,395

   

8.1%

   

21,996

   

20,720

   

6.2%

 

RPMs (000,000) “traffic”

8,245

   

7,671

   

7.5%

   

23,078

   

21,852

   

5.6%

 

ASMs (000,000) “capacity”

9,582

   

8,868

   

8.1%

   

26,922

   

25,397

   

6.0%

 

Load factor

86.0%

   

86.5%

   

(0.5pts)

   

85.7%

   

86.0%

   

(0.3pts)

 

Yield

15.14¢

   

15.23¢

   

(0.6%)

   

15.00¢

   

14.80¢

   

1.4%

 

PRASM

13.03¢

   

13.17¢

   

(1.1%)

   

12.86¢

   

12.73¢

   

1.0%

 

RASM(b)

15.28¢

   

15.39¢

   

(0.7%)

   

15.09¢

   

14.78¢

   

2.1%

 

CASM excluding fuel(b)

7.87¢

   

8.16¢

   

(3.6%)

   

8.28¢

   

8.36¢

   

(1.0%)

 

Economic fuel cost per gallon(c)

$

3.15

   

$

3.24

   

(2.8%)

   

$

3.22

   

$

3.33

   

(3.3%)

 

Fuel gallons (000,000)

124

   

118

   

5.1%

   

351

   

337

   

4.2%

 

ASM’s per gallon

77.3

   

75.2

   

2.8%

   

76.7

   

75.4

   

1.7%

 

Average number of full-time equivalent employees (FTE)

12,998

   

12,295

   

5.7%

   

12,633

   

12,122

   

4.2%

 
                                   

Mainline Operating Statistics:

                                   

Revenue passengers (000)

5,752

   

5,366

   

7.2%

   

15,796

   

14,973

   

5.5%

 

RPMs (000,000) “traffic”

7,440

   

6,963

   

6.9%

   

20,871

   

19,864

   

5.1%

 

ASMs (000,000) “capacity”

8,607

   

8,027

   

7.2%

   

24,197

   

22,973

   

5.3%

 

Load factor

86.4%

   

86.7%

   

(0.3pts)

   

86.3%

   

86.5%

   

(0.2pts)

 

Yield

13.84¢

   

13.78¢

   

0.4%

   

13.69¢

   

13.35¢

   

2.5%

 

PRASM

11.97¢

   

11.96¢

   

0.1%

   

11.81¢

   

11.54¢

   

2.3%

 

RASM(b)

14.18¢

   

14.14¢

   

0.3%

   

14.01¢

   

13.56¢

   

3.3%

 

CASM excluding fuel(b)

7.02¢

   

7.33¢

   

(4.2%)

   

7.37¢

   

7.42¢

   

(0.7%)

 

Economic fuel cost per gallon(c)

$

3.15

   

$

3.24

   

(2.8%)

   

$

3.22

   

$

3.32

   

(3.0%)

 

Fuel gallons (000,000)

108

   

104

   

3.8%

   

305

   

297

   

2.7%

 

ASM’s per gallon

79.7

   

77.2

   

3.2%

   

79.3

   

77.4

   

2.5%

 

Average number of FTE’s

10,153

   

9,645

   

5.3%

   

9,837

   

9,484

   

3.7%

 

Aircraft utilization

10.8

   

11.0

   

(1.8%)

   

10.5

   

10.8

   

(2.8%)

 

Average aircraft stage length

1,161

   

1,157

   

0.3%

   

1,180

   

1,177

   

0.3%

 

Operating fleet

136

   

128

   

8a/c

   

136

   

128

   

8a/c

 
                                   

Regional Operating Statistics:(d)

                                   

Revenue passengers (000)

2,242

   

2,029

   

10.5%

   

6,200

   

5,747

   

7.9%

 

RPMs (000,000) “traffic”

806

   

708

   

13.8%

   

2,206

   

1,988

   

11.0%

 

ASMs (000,000) “capacity”

975

   

841

   

15.9%

   

2,725

   

2,424

   

12.4%

 

Load factor

82.7%

   

84.2%

   

(1.5pts)

   

81.0%

   

82.0%

   

(1.0pts)

 

Yield

27.17¢

   

29.41¢

   

(7.6%)

   

27.41¢

   

29.27¢

   

(6.4%)

 

PRASM

22.46¢

   

24.77¢

   

(9.3%)

   

22.19¢

   

24.00¢

   

(7.5%)

 

Operating fleet (Horizon only)

51

   

48

   

3a/c

   

51

   

48

   

3a/c

 
(a)  Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements. Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.
(b)  See a reconciliation of revenue excluding special items related to accounting changes, operating expenses excluding fuel, and Note A, in the accompanying pages, for a discussion of why these measures may be important to investors.
(c) See a reconciliation of economic fuel cost in the accompanying pages.
(d)Data presented includes information related to flights operated by Horizon Air and third-party carriers.

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Three Months Ended September 30, 2014

(in millions)

Mainline

 

Regional

 

Horizon

 

Consolidating

 

Air Group

Adjusted(a)

 

Special

Items(b)

 

Consolidated

Operating revenues

                                         

Passenger

                                       

Mainline

$

1,030

   

$

   

$

   

$

   

$

1,030

   

$

   

$

1,030

 

Regional

   

219

   

   

   

219

   

   

219

 

   Total passenger revenues

1,030

   

219

   

   

   

1,249

   

   

1,249

 

CPA revenues

   

   

99

   

(99)

   

   

   

 

Freight and mail

30

   

2

   

   

   

32

   

   

32

 

Other-net

161

   

22

   

1

   

   

184

   

   

184

 

Total operating revenues

1,221

   

243

   

100

   

(99)

   

1,465

   

   

1,465

 
                                         

Operating expenses

                                         

Operating expenses, excluding fuel

605

   

162

   

85

   

(97)

   

755

   

   

755

 

Economic fuel

338

   

52

   

   

   

390

   

4

   

394

 

Total operating expenses

943

   

214

   

85

   

(97)

   

1,145

   

4

   

1,149

 
                                         

Nonoperating income (expense)

                                         

Interest income

5

   

   

   

   

5

   

   

5

 

Interest expense

(8)

   

   

(4)

   

   

(12)

   

   

(12)

 

Other

7

   

   

   

   

7

   

   

7

 
 

4

   

   

(4)

   

   

   

   

 

Income (loss) before income tax

$

282

   

$

29

   

$

11

   

$

(2)

   

$

320

   

$

(4)

   

$

316

 

Three Months Ended September 30, 2013

(in millions)

Mainline

 

Regional

 

Horizon

 

Consolidating

 

Air Group

Adjusted(a)

 

Special

Items(b)

 

Consolidated

Operating revenues

                                         

Passenger

                                       

Mainline

$

960

   

$

   

$

   

$

   

$

960

   

$

   

$

960

 

Regional

   

208

   

   

   

208

   

   

208

 

   Total passenger revenues

960

   

208

   

   

   

1,168

   

   

1,168

 

CPA revenues

   

   

88

   

(88)

   

   

   

 

Freight and mail

31

   

1

   

   

   

32

   

   

32

 

Other-net

145

   

19

   

1

   

   

165

   

192

   

357

 

Total operating revenues

1,136

   

228

   

89

   

(88)

   

1,365

   

192

   

1,557

 
                                         

Operating expenses

                                         

Operating expenses, excluding fuel

588

   

144

   

80

   

(88)

   

724

   

   

724

 

Economic fuel

337

   

46

   

   

   

383

   

(20)

   

363

 

Total operating expenses

925

   

190

   

80

   

(88)

   

1,107

   

(20)

   

1,087

 
                                         

Nonoperating income (expense)

                                         

Interest income

5

   

   

   

   

5

   

   

5

 

Interest expense

(9)

   

   

(4)

   

   

(13)

   

   

(13)

 

Other

8

   

(8)

   

1

   

   

1

   

   

1

 
 

4

   

(8)

   

(3)

   

   

(7)

   

   

(7)

 

Income (loss) before income tax

$

215

   

$

30

   

$

6

   

$

   

$

251

   

$

212

   

$

463

 

Nine Months Ended September 30, 2014
 

Mainline

 

Regional

 

Horizon

 

Consolidating

 

Air Group

Adjusted(a)

 

Special

Items(b)

 

Consolidated

Operating revenues

                                         

Passenger

                                       

Mainline

$

2,858

   

$

   

$

   

$

   

$

2,858

   

$

   

$

2,858

 

Regional

   

605

   

   

   

605

   

   

605

 

   Total passenger revenues

2,858

   

605

   

   

   

3,463

   

   

3,463

 

CPA revenues

   

   

277

   

(277)

   

   

   

 

Freight and mail

84

   

4

   

   

   

88

   

   

88

 

Other – net

448

   

59

   

4

   

   

511

   

   

511

 

Total operating revenues

3,390

   

668

   

281

   

(277)

   

4,062

   

   

4,062

 
                                         

Operating expenses

                                         

Operating expenses, excluding fuel

1,783

   

464

   

257

   

(274)

   

2,230

   

   

2,230

 

Economic fuel

980

   

149

   

   

   

1,129

   

(17)

   

1,112

 

Total operating expenses

2,763

   

613

   

257

   

(274)

   

3,359

   

(17)

   

3,342

 
                                         

Nonoperating income (expense)

                                         

Interest income

15

   

   

   

   

15

   

   

15

 

Interest expense

(25)

   

(1)

   

(10)

   

   

(36)

   

   

(36)

 

Other

34

   

   

   

   

34

   

   

34

 
 

24

   

(1)

   

(10)

   

   

13

   

   

13

 

Income (loss) before income tax

$

651

   

$

54

   

$

14

   

$

(3)

   

$

716

   

$

17

   

$

733

 

Nine Months Ended September 30, 2013
 

Mainline

 

Regional

 

Horizon

 

Consolidating

 

Air Group

Adjusted(a)

 

Special

Items(b)

 

Consolidated

Operating revenues

                                         

Passenger

                                       

Mainline

$

2,651

   

$

   

$

   

$

   

$

2,651

   

$

   

$

2,651

 

Regional

   

582

   

   

   

582

   

   

582

 

   Total passenger revenues

2,651

   

582

   

   

   

3,233

   

   

3,233

 

CPA revenues

   

   

274

   

(274)

   

   

   

 

Freight and mail

85

   

3

   

   

   

88

   

   

88

 

Other – net

380

   

49

   

4

   

   

433

   

192

   

625

 

Total operating revenues

3,116

   

634

   

278

   

(274)

   

3,754

   

192

   

3,946

 
                                         

Operating expenses

                                         

Operating expenses, excluding fuel

1,704

   

440

   

253

   

(274)

   

2,123

   

   

2,123

 

Economic fuel

987

   

135

   

   

   

1,122

   

(7)

   

1,115

 

Total operating expenses

2,691

   

575

   

253

   

(274)

   

3,245

   

(7)

   

3,238

 
                                         

Nonoperating income (expense)

                                         

Interest income

14

   

   

   

   

14

   

   

14

 

Interest expense

(30)

   

   

(10)

   

(2)

   

(42)

   

   

(42)

 

Other

19

   

(9)

   

1

   

   

11

   

   

11

 
 

3

   

(9)

   

(9)

   

(2)

   

(17)

   

   

(17)

 

Income (loss) before income tax

$

428

   

$

50

   

$

16

   

$

(2)

   

$

492

   

$

199

   

$

691

 
(a)   The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain revenues/charges.  See Note A in the accompanying pages for further information .
(b)Includes mark-to-market fuel-hedge accounting charges and accounting adjustments related to Special mileage plan revenue.

Alaska Air Group, Inc.

CASM EXCLUDING FUEL RECONCILIATION (unaudited)
 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in cents)

2014

   

2013

   

2014

   

2013

 

Consolidated:

                     

CASM

11.99¢

   

12.26¢

   

12.41¢

   

12.75¢

 

Less the following components:

                     

Aircraft fuel, including hedging gains and losses

4.12

   

4.10

   

4.13

   

4.39

 

CASM excluding fuel

7.87¢

   

8.16¢

   

8.28¢

   

8.36¢

 
                       

Mainline:

                     

CASM

11.00¢

   

11.27¢

   

11.35¢

   

11.68¢

 

Less the following components:

                     

Aircraft fuel, including hedging gains and losses

3.98

   

3.94

   

3.98

   

4.26

 

CASM excluding fuel

7.02¢

   

7.33¢

   

7.37¢

   

7.42¢

 

FUEL RECONCILIATIONS (unaudited)
 

Three Months Ended September 30,

 

2014

 

2013

(in millions, except for per-gallon amounts)

Dollars

 

Cost/Gallon

 

Dollars

 

Cost/Gallon

Raw or “into-plane” fuel cost

$

383

   

$

3.09

   

$

373

   

$

3.16

 

Losses on settled hedges

7

   

0.06

   

10

   

0.08

 

Consolidated economic fuel expense

390

   

3.15

   

383

   

3.24

 

Mark-to-market fuel hedge adjustment

4

   

0.03

   

(20)

   

(0.17)

 

GAAP fuel expense

$

394

   

$

3.18

   

$

363

   

$

3.07

 

Fuel gallons

124

         

118

       
 
 

Nine Months Ended September 30, 2014

 

2014

 

2013

(in millions, except for per-gallon amounts)

Dollars

 

Cost/Gallon

 

Dollars

 

Cost/Gallon

Raw or “into-plane” fuel cost

$

1,095

   

$

3.12

   

$

1,076

   

$

3.19

 

Losses on settled hedges

34

   

0.10

   

46

   

0.14

 

Consolidated economic fuel expense

1,129

   

3.22

   

1,122

   

3.33

 

Mark-to-market fuel hedge adjustment

(17)

   

(0.05)

   

(7)

   

(0.02)

 

GAAP fuel expense

$

1,112

   

$

3.17

   

$

1,115

   

$

3.31

 

Fuel gallons

351

         

337

       

Note A: Pursuant to Regulation G, we are providing disclosure of the reconciliation 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 from our unit metrics, we believe that we have better visibility into the results of operations without the consideration of accounting changes or 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 term, 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.
  • Operating revenue per ASM (RASM) for the prior year excludes a favorable, one-time “special” revenue item of $192 million primarily related to our modified affinity card agreement with Bank of America, executed in July 2013. In accordance with accounting standards, we recorded this one-time special revenue item in the the third quarter of 2013. This is purely an accounting change and the prior period results do not reflect the economics of the agreement, rather it reflects a non-cash adjustment of the value of miles outstanding in the program. We believe it is appropriate to exclude this special revenue item from adjusted earnings and revenue metrics.
  • Cost per ASM (CASM) excluding fuel and certain special items 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 Taxes and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all 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 mark-to-market hedging adjustments or special revenues, 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.

Note B: Air Group has two operating airlines – Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. To manage the two operating airlines, management views the business in three operating segments. Alaska operates a fleet of passenger jets (Alaska Mainline) and contracts with Horizon, SkyWest Airlines, Inc. (SkyWest), and Peninsula Airways, Inc. (PenAir) for regional capacity under which Alaska receives all passenger revenue from those flights (Alaska Regional). Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase arrangement (Horizon). The Company believes the amounts paid by Alaska to Horizon approximate current market rates received by other regional carriers for similar flying and are available to pay for various Horizon operating expenses such as crew expenses, maintenance, and aircraft ownership costs.  All inter-company revenues and expenses between Alaska and Horizon are eliminated in consolidation.

Glossary of Terms

Aircraft Utilization – block hours per day; this represents the average number of hours our aircraft are flying

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

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

CASM – operating costs per ASM, or “unit cost”; represents all operating expenses including fuel and special items

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

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

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

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

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

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 jets and all associated revenues and costs

PRASM – passenger revenue per ASM; commonly called “passenger unit revenue”

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, Alaska 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, Alaska 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

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/alaska-air-group-reports-record-third-quarter-2014-results-366277626.html

SOURCE Alaska Air Group