ALK 10-Q 3/31/12
Table of Contents        


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
T
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

 
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
incorporation or organization
 
(I.R.S. Employer
Identification No.)
 
19300 International Boulevard, Seattle, Washington 98188
(Address of principal executive offices)

Registrant's telephone number, including area code: (206) 392-5040
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes T  No £ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer   T
Accelerated filer  £ 
Non-accelerated filer   £
Smaller reporting company   £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes £ No T
 
The registrant has 71,097,685 common shares, par value $1.00, outstanding at April 30, 2012.

Table of Contents

ALASKA AIR GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2012

 TABLE OF CONTENTS

 
 
 
 
 
 

 
As used in this Form 10-Q, the terms “Air Group,” the "Company," “our,” “we” and "us," refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”
 

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

•
changes in our operating costs, primarily fuel, which can be volatile;
•
general economic conditions, including the impact of those conditions on customer travel behavior;
•
the competitive environment in our industry;
•
our ability to meet our cost reduction goals;
•
operational disruptions;
•
an aircraft accident or incident;
•
labor disputes and our ability to attract and retain qualified personnel;
•
our significant indebtedness;
•
the concentration of our revenue from a few key markets;
•
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
•
our reliance on automated systems and the risks associated with changes made to those systems;
•
changes in laws and regulations.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2011. Please consider our forward-looking statements in light of those risks as you read this report.


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PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)
March 31, 2012
 
December 31, 2011
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
48.2

 
$
102.2

Marketable securities
1,093.0

 
1,038.7

Total cash and marketable securities
1,141.2

 
1,140.9

Receivables - net
168.3

 
136.4

Inventories and supplies - net
45.3

 
44.3

Deferred income taxes
142.5

 
134.2

Fuel hedge contracts
58.7

 
46.7

Prepaid expenses and other current assets
100.9

 
93.0

Total Current Assets
1,656.9

 
1,595.5

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
4,113.5

 
4,041.8

Other property and equipment
851.4

 
762.3

Deposits for future flight equipment
266.0

 
262.5

 
5,230.9

 
5,066.6

Less accumulated depreciation and amortization
1,727.2

 
1,665.1

Total Property and Equipment - Net
3,503.7

 
3,401.5

 
 
 
 
Fuel Hedge Contracts
72.8

 
70.2

 
 
 
 
Other Assets
148.6

 
127.8

 
 
 
 
Total Assets
$
5,382.0

 
$
5,195.0


See accompanying notes to consolidated financial statements.


4
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ALASKA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions except share amounts)
March 31,
2012
 
December 31,
2011
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
129.0

 
$
103.6

Accrued aircraft rent
4.8

 
31.6

Accrued wages, vacation and payroll taxes
123.8

 
163.8

Other accrued liabilities
551.5

 
513.3

Air traffic liability
654.0

 
489.4

Current portion of long-term debt
210.1

 
207.9

Total Current Liabilities
1,673.2

 
1,509.6

 
 
 
 
Long-Term Debt, Net of Current Portion
1,036.9

 
1,099.0

Other Liabilities and Credits
 

 
 

Deferred income taxes
405.2

 
362.9

Deferred revenue
406.2

 
410.2

Obligation for pension and postretirement medical benefits
458.4

 
463.4

Other liabilities
184.1

 
176.7

 
1,453.9

 
1,413.2

Commitments and Contingencies


 


Shareholders' Equity
 

 
 

Preferred stock, $1 par value Authorized: 5,000,000 shares, none issued or outstanding
—

 
—

Common stock, $1 par value Authorized: 100,000,000 shares, Issued: 2012 - 71,195,578 shares; 2011 - 75,733,044 shares
71.2

 
37.9

Capital in excess of par value
677.8

 
840.0

Treasury stock (common), at cost: 2012 - 0 shares; 2011 - 4,783,494 shares
—

 
(125.3
)
Accumulated other comprehensive loss
(382.4
)
 
(390.0
)
Retained earnings
851.4

 
810.6

 
1,218.0

 
1,173.2

Total Liabilities and Shareholders' Equity
$
5,382.0

 
$
5,195.0


See accompanying notes to consolidated financial statements.


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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
Three Months Ended March 31,
(in millions except per share amounts)
2012
 
2011
Operating Revenues
 
 
 
Passenger
 
 
 
Mainline
$
763.7

 
$
702.4

Regional
186.7

 
176.5

Total passenger revenue
950.4

 
878.9

Freight and mail
24.4

 
24.9

Other - net
64.5

 
61.4

Total Operating Revenues
1,039.3

 
965.2

 
 
 
 
Operating Expenses
 

 
 

Wages and benefits
256.6

 
249.3

Variable incentive pay
16.0

 
16.4

Aircraft fuel, including hedging gains and losses
318.8

 
194.5

Aircraft maintenance
50.1

 
53.3

Aircraft rent
28.0

 
30.5

Landing fees and other rentals
62.5

 
57.9

Contracted services
47.7

 
43.5

Selling expenses
41.1

 
39.8

Depreciation and amortization
63.7

 
60.3

Food and beverage service
17.8

 
15.1

Other
64.6

 
60.7

Fleet transition expenses
—

 
10.1

Total Operating Expenses
966.9

 
831.4

Operating Income
72.4

 
133.8

 
 
 
 
Nonoperating Income (Expense)
 

 
 

Interest income
4.9

 
7.6

Interest expense
(16.6
)
 
(23.4
)
Interest capitalized
4.5

 
1.8

Other - net
1.4

 
0.9

 
(5.8
)
 
(13.1
)
Income before income tax
66.6

 
120.7

Income tax expense
25.8

 
46.5

Net Income
$
40.8

 
$
74.2

 
 
 
 
Basic Earnings Per Share:
$
0.57

 
$
1.03

Diluted Earnings Per Share:
$
0.56

 
$
1.01

Shares used for computation:
 
 
 

Basic
71.192

 
71.988

Diluted
72.659

 
73.682


See accompanying notes to consolidated financial statements.

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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
Three Months Ended March 31,
(in millions)
2012
 
2011
 
 
 
 
Net Income
$
40.8

 
$
74.2

 
 
 
 
Other comprehensive income (loss):
 
 
 
Related to marketable securities:
 
 
 
Unrealized holding gains (losses) arising during the period
3.7

 
(2.2
)
Reclassification adjustment for gains included in net income
(1.0
)
 
(0.6
)
Income tax effect
(1.0
)
 
1.0

Total
1.7

 
(1.8
)
 
 
 
 
Related to employee benefit plans:
 
 
 
Prior service cost arising during period
9.9

 
6.3

Income tax effect
(3.7
)
 
(2.4
)
Total
6.2

 
3.9

 
 
 
 
Related to interest rate derivative instruments:
 
 
 
Unrealized holding gains arising during the period
3.2

 
2.2

Income tax effect
(3.5
)
 
(0.8
)
Total
(0.3
)
 
1.4

 
 
 
 
Other comprehensive income
7.6

 
3.5

 
 
 
 
Comprehensive income
48.4

 
77.7


See accompanying notes to consolidated financial statements.


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ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 
Three Months Ended March 31,
(in millions)
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
40.8

 
$
74.2

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Fleet transition expenses
—

 
10.1

Depreciation and amortization
63.7

 
60.3

Stock-based compensation and other
5.3

 
6.7

Changes in certain assets and liabilities:
 
 
 
Changes in fair values of open fuel hedge contracts
(24.9
)
 
(89.2
)
Changes in deferred income taxes
25.8

 
43.2

Increase in air traffic liability
164.6

 
163.0

Decrease in deferred revenue
(4.0
)
 
(15.7
)
Increase (decrease) in other long-term liabilities
17.6

 
(3.3
)
Pension contribution
(11.8
)
 
(11.1
)
Other - net
(93.8
)
 
(119.4
)
Net cash provided by operating activities
183.3

 
118.8

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(80.9
)
 
(139.3
)
Other flight equipment
(2.3
)
 
(4.9
)
Other property and equipment
(14.9
)
 
(4.9
)
Total property and equipment additions
(98.1
)
 
(149.1
)
Assets constructed for others (Terminal 6 at LAX)
(23.6
)
 
—

Purchases of marketable securities
(240.1
)
 
(181.6
)
Sales and maturities of marketable securities
188.1

 
314.0

Proceeds from disposition of assets and changes in restricted deposits
0.3

 
(17.1
)
Net cash used in investing activities
(173.4
)
 
(33.8
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Long-term debt payments
(59.1
)
 
(89.2
)
Common stock repurchases
(8.8
)
 
(26.3
)
Proceeds and tax benefit from issuance of common stock
3.8

 
8.3

Other financing activities
0.2

 
(7.1
)
Net cash used in financing activities
(63.9
)
 
(114.3
)
Net decrease in cash and cash equivalents
(54.0
)
 
(29.3
)
Cash and cash equivalents at beginning of year
102.2

 
89.5

Cash and cash equivalents at end of the period
$
48.2

 
$
60.2

 
 
 
 
Supplemental disclosure:
 

 
 

Cash paid (refunded) during the period for:
 
 
 
Interest (net of amount capitalized)
$
15.6

 
$
25.1

Income taxes
(2.5
)
 
—

Non-cash transactions:
 
 
 
Assets constructed related to Terminal 6 at LAX
50.9

 
—

See accompanying notes to consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 
Alaska Air Group, Inc.
March 31, 2012
 
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The interim condensed consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of March 31, 2012, as well as the results of operations for the three months ended March 31, 2012 and 2011. The adjustments made were of a normal recurring nature.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions and other factors, operating results for the three months ended March 31, 2012 are not necessarily indicative of operating results for the entire year. Certain reclassifications have been made to conform the prior year data to the current format.
 
NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):
March 31, 2012
Cost Basis
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash
$
14.7

 
$
—

 
$
—

 
$
14.7

Commercial paper, money market funds and other securities
33.5

 
—

 
—

 
33.5

Cash and cash equivalents
48.2

 
—

 
—

 
48.2

U.S. government and agency securities
345.4

 
2.7

 
(0.3
)
 
347.8

Foreign government bonds
22.3

 
0.6

 
—

 
22.9

Asset-back securities
84.0

 
0.4

 
—

 
84.4

Mortgage-back securities
113.6

 
1.2

 
(0.1
)
 
114.7

Corporate notes and bonds
500.9

 
7.8

 
(0.5
)
 
508.2

Municipal securities
14.9

 
0.1

 
—

 
15.0

Marketable securities
1,081.1

 
12.8

 
(0.9
)
 
1,093.0

Total
$
1,129.3

 
$
12.8

 
$
(0.9
)
 
$
1,141.2



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December 31, 2011
Cost Basis
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Cash
$
62.1

 
$
—

 
$
—

 
$
62.1

Money market funds
40.1

 
—

 
—

 
40.1

Cash and cash equivalents
102.2

 
—

 
—

 
102.2

U.S. government and agency securities
292.5

 
3.4

 
—

 
295.9

Foreign government bonds
24.9

 
0.5

 
—

 
25.4

Asset-back securities
58.2

 
0.1

 
(0.3
)
 
58.0

Mortgage-back securities
124.1

 
1.1

 
(0.3
)
 
124.9

Corporate notes and bonds
518.0

 
7.0

 
(2.4
)
 
522.6

Municipal securities
11.8

 
0.1

 
—

 
11.9

Marketable securities
1,029.5

 
12.2

 
(3.0
)
 
1,038.7

Total
$
1,131.7

 
$
12.2

 
$
(3.0
)
 
$
1,140.9


Activity for marketable securities (in millions):  
 
Three Months Ended March 31,
 
2012
 
2011
Proceeds from sales and maturities
$
188.1

 
$
314.0

Gross realized gains
1.6

 
1.9

Gross realized losses
0.3

 
1.3

Other-than-temporary impairments on investments
0.3

 
—

 
Of the marketable securities on hand at March 31, 2012, 14.1% mature in 2012, 34.2% in 2013, and 51.7% thereafter.

Investments with continuous unrealized losses (in millions):
 
Less than 12 months
 
Greater than 12 months
 
 
 
 
March 31, 2012
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
U.S. government and agency securities
$
95.6

 
$
(0.3
)
 
$
—

 
$
—

 
$
95.6

 
$
(0.3
)
Mortgage-backed obligations
21.4

 
(0.1
)
 
—

 
—

 
21.4

 
(0.1
)
Corporate notes and bonds
86.0

 
(0.5
)
 
—

 
—

 
86.0

 
(0.5
)
Total
$
203.0

 
$
(0.9
)
 
$
—

 
$
—

 
$
203.0

 
$
(0.9
)

 
Less than 12 months
 
Greater than 12 months
 
 
 
 
December 31, 2011
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
Asset-backed obligations
$
31.7

 
$
(0.1
)
 
$
1.1

 
$
(0.2
)
 
$
32.8

 
$
(0.3
)
Mortgage-backed obligations
35.1

 
(0.2
)
 
1.9

 
(0.1
)
 
37.0

 
(0.3
)
Corporate notes and bonds
137.4

 
(2.4
)
 
1.0

 
—

 
138.4

 
(2.4
)
Total
$
204.2

 
$
(2.7
)
 
$
4.0

 
$
(0.3
)
 
$
208.2

 
$
(3.0
)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of March 31, 2012.



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NOTE 3. DERIVATIVE INSTRUMENTS

Fuel Hedge Contracts

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and swap agreements for jet fuel refining margins. The Company is exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. The Company periodically reviews and seeks to mitigate exposure to the counterparty’s financial deterioration and nonperformance by monitoring the absolute exposure levels, and the counterparty’s credit rating. The credit exposure related to these financial instruments is limited to the fair value of contracts in a net receivable position at the reporting date. The Company also maintains security agreements that require the Company to post collateral if the value of selected instruments falls below specified mark-to-market thresholds.

As of March 31, 2012, the Company had fuel hedge contracts outstanding covering 10.2 million barrels of crude oil that will be settled from April 2012 to March 2015. Refer to the contractual obligations and commitments section of Item 2 for further information.

Interest Rate Swap Agreements

The Company has interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company's aircraft lease agreements for six Boeing 737-800 aircraft. The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate. All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and underlying notional values. The agreements expire from February 2020 through March 2021 to coincide with the lease termination dates.

Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):
 
March 31, 2012
 
December 31, 2011
Derivative Instruments Not Designated as Hedges
 
 
 
Fuel hedge contracts
 
 
 
Fuel hedge contracts, current assets
$
58.7

 
$
46.7

Fuel hedge contracts, noncurrent assets
72.8

 
70.2

Fuel hedge contracts, current liabilities
—

 
(10.3
)
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
Interest rate swaps
 
 
 
Other accrued liabilities
(5.2
)
 
(5.2
)
Other liabilities
(20.4
)
 
(23.6
)
Gains (losses) in AOCL
3.2

 
(20.0
)

The net cash received (paid) for new positions and settlements was $(6.4) million and $5.4 million during the three months ended March 31, 2012 and 2011, respectively.

The Company expects $5.2 million to be reclassified from AOCL into earnings within the next twelve months.


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Pretax effect of derivative instruments on earnings (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Derivative Instruments Not Designated as Hedges
 
 
 
Fuel hedge contracts
 
 
 
Gains (losses) recognized in aircraft fuel expense
$
18.5

 
$
94.5

 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
Interest rate swaps
 
 
 
Gains (losses) recognized in aircraft rent
(1.5
)
 
(1.5
)

The amounts shown as recognized in earnings for cash flow hedges represent the realized gains/(losses) transferred out of AOCL to earnings during the year.

NOTE 4. FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments on a Recurring Basis

Fair values of financial instruments on the consolidated balance sheet (in millions):
March 31, 2012
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government securities
$
347.8

 
$
—

 
$
347.8

Foreign government bonds
—

 
22.9

 
22.9

Asset-back securities
—

 
84.4

 
84.4

Mortgage-back securities
—

 
114.7

 
114.7

Corporate notes and bonds
—

 
508.2

 
508.2

Municipal securities
—

 
15.0

 
15.0

Derivative instruments
 
 
 
 
 
Fuel hedge contracts
—

 
131.5

 
131.5

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(25.6
)
 
(25.6
)


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December 31, 2011
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government securities
$
295.9

 
$
—

 
$
295.9

Foreign government bonds
—

 
25.4

 
25.4

Asset-back securities
—

 
58.0

 
58.0

Mortgage-back securities
—

 
124.9

 
124.9

Corporate notes and bonds
—

 
522.6

 
522.6

Municipal securities
—

 
11.9

 
11.9

Derivative instruments
 
 
 
 
 
Fuel hedge contracts
—

 
116.9

 
116.9

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Fuel hedge contracts
—

 
(10.3
)
 
(10.3
)
Interest rate swap agreements
—

 
(28.8
)
 
(28.8
)

The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign governments bonds, asset-back securities, mortgage-back securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on industry standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts are over-the-counter, are not exchange traded and determined based on observable inputs that are readily available in active markets or can be derived from information available in active, quoted markets. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by the total notional value.
The Company has no other financial assets that are measured at fair value on a nonrecurring basis at March 31, 2012.

Fair Value of Other Financial Instruments

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carried at amortized costs which approximates fair value.

Debt: The carrying amounts of the Company's variable-rate debt approximates fair values. For fixed-rate debt, the Company uses the income approach to determine the estimated fair value, by using discounted cash flow using the Company's current borrowing rate.

Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):
 
March 31, 2012
 
December 31, 2011
Carrying Amount
$
971.0

 
$
1,002.5

Fair value
1,040.9

 
1,075.8


NOTE 5. ASSETS CONSTRUCTED FOR OTHERS - TERMINAL 6 AT LOS ANGELES INTERNATIONAL AIRPORTS (LAX)

In March 2012, the Company placed into service assets constructed for others (Terminal 6 at LAX), including a new baggage system, additional gates, new common use systems, expansion of security screening checkpoints, and a new ticket lobby, all of

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which were constructed for the City of Los Angeles and Los Angeles World Airports (LAWA). Additionally, the Company placed into service proprietary renovations in the ticketing lobby and at the new gates included in Terminal 6. The majority of the assets constructed for LAX will be acquired by the City of Los Angeles and LAWA.

For accounting and financial reporting purposes, the Company is considered to be the owners of the project during construction and will not be able to qualify for sale and leaseback accounting when the non-proprietary assets are sold to the City of Los Angeles due to the Company's continuing involvement with the project. As a result, all of the costs incurred to fund the project are included in "Other property and equipment" and all amounts that have been and will be reimbursed will be in "Other liabilities" on the balance sheet. These assets and liabilities are summarized in the table below.

March 31, 2012
 
December 31, 2011
Proprietary assets of T6 at LAX
$
17.8

 
$
8.7

Assets constructed for others (T6 at LAX)
218.0

 
143.4

Other property and equipment
$
235.8

 
$
152.1




 


Other liabilities
$
33.4

 
$
17.7


Included in the asset balances above is capitalized interest of $6.0 million and $4.5 million at March 31, 2012 and December 31, 2011, respectively.

The assets will be depreciated over the life of the lease based on the straight-line method, while the liability will amortize using the effective interest method based on the lease rental payments. Because the Company will only operate a small portion of the gates in the new terminal, the asset and liability will depreciate and amortize to an estimated fair value at the end of the lease term, at which time we may derecognize our obligation or we may extend our lease term.

Future minimum payments related to the Terminal 6 lease are included in facility leases described in Note 10.

NOTE 6. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals are included in the consolidated balance sheets (in millions) as follows:
 
March 31, 2012
 
December 31, 2011
Current Liabilities:
 
 
 
Other accrued liabilities
$
283.4

 
$
271.4

Other Liabilities and Credits:
 
 
 
Deferred revenue
389.1

 
392.2

Other liabilities
16.7

 
16.9

Total
$
689.2

 
$
680.5

 
Alaska's Mileage Plan revenue is included in the consolidated statements of operations (in millions) as follows:
 
Three Months Ended March 31,
 
2012
 
2011
Passenger revenues
$
42.6

 
$
50.3

Other-net revenues
47.5

 
45.6

Total Mileage Plan revenues
$
90.1

 
$
95.9




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NOTE 7. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
March 31, 2012
 
December 31, 2011
Fixed-rate notes payable due through 2024
$
971.0

 
$
1,002.5

Variable-rate notes payable due through 2024
276.0

 
304.4

Long-term debt
1,247.0

 
1,306.9

Less current portion
210.1

 
207.9

 
$
1,036.9

 
$
1,099.0

 
 
 
 
Weighted-average fixed-interest rate
5.9
%
 
5.8
%
Weighted-average variable-interest rate
2.0
%
 
1.9
%
 
All of the Company’s borrowings were secured by aircraft.

During the three months ended March 31, 2012, the Company made scheduled debt payments of $37.0 million and prepaid the full debt balance on an outstanding aircraft debt agreement of $22.1 million.

At March 31, 2012, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2012
$
168.9

2013
163.8

2014
120.1

2015
116.6

2016
113.9

Thereafter
563.7

Total principal payments
$
1,247.0

 
Bank Line of Credit
 
The Company has two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. Borrowings on one of the $100 million facilities, which expires in March 2013, are secured by aircraft. Borrowings on the other $100 million facility, which expires in March 2016, are secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has no immediate plans to borrow using either of these facilities. These facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is in compliance with this covenant at March 31, 2012.

NOTE 8. INCOME TAXES

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, deferred assets and liabilities do not include certain deferred tax assets that arose directly from the tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Those deferred tax assets include $14.6 million and $10.3 million of loss carryforwards at March 31, 2012 and December 31, 2011, respectively, in which additional-paid-in-capital will be increased if and when such deferred tax assets are ultimately realized. The Company uses ASC 740 ordering for purposes of determining when excess tax benefits have been realized.



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NOTE 9. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized included the following components for the three months ended March 31 (in millions): 
 
Qualified

Nonqualified

Postretirement Medical
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
9.6

 
$
9.0

 
$
0.2

 
$
0.2

 
$
1.2

 
$
1.5

Interest cost
18.2

 
18.3

 
0.5

 
0.6

 
1.4

 
1.8

Expected return on assets
(23.3
)
 
(22.1
)
 
—

 
—

 
—

 
—

Amortization of prior service cost
(0.2
)
 
(0.2
)
 
—

 
—

 
0.1

 
0.1

Recognized actuarial loss
9.9

 
6.1

 
0.2

 
0.1

 
(0.1
)
 
0.3

Net periodic benefit costs
$
14.2

 
$
11.1

 
$
0.9

 
$
0.9

 
$
2.6

 
$
3.7


NOTE 10. COMMITMENTS

Future minimum fixed payments for commitments (in millions):
March 31, 2012
Aircraft Leases
 
Facility Leases
 
Aircraft Commitments
 
Capacity Purchase Agreements
 
Engine Maintenance
Remainder of 2012
$
50.5

 
$
46.6

 
$
308.5

 
$
18.8

 
$
31.4

2013
135.1

 
39.9

 
307.5

 
17.4

 
31.9

2014
125.6

 
35.7

 
170.4

 
17.7

 
26.4

2015
104.4

 
24.4

 
47.7

 
18.0

 
10.1

2016
81.9

 
15.7

 
18.4

 
18.3

 
—

Thereafter
130.7

 
146.0

 
36.8

 
26.5

 
—

Total
$
628.2

 
$
308.3

 
$
889.3

 
$
116.7

 
$
99.8


Lease Commitments

The Company had lease contracts for 60 aircraft, which have remaining noncancelable lease terms ranging up to nine years at March 31, 2012. Of these aircraft, 14 are non-operating (i.e. not in our fleet) and subleased to third-party carriers. The majority of airport and terminal facilities are also leased. Rent expense was $70.0 million and $69.1 million for the three months ended March 31, 2012 and 2011, respectively.

Aircraft Commitments
 
As of March 31, 2012, the Company is committed to purchasing four Boeing 737-800 aircraft and 19 Boeing 737-900ER aircraft, with deliveries in 2012 through 2015, and has options to purchase an additional 42 Boeing 737 aircraft. The Company is also committed to purchasing two Q400 aircraft in May 2012 and selling two Q400 aircraft in the fall of 2012, and has options to purchase an additional 10 Q400 aircraft.

Subsequent to March 31, 2012, the Company exercised one option and intends to exercise two additional options for Boeing 737-900ER aircraft, with deliveries in the fourth quarter of 2013. In addition, the Company is finalizing an agreement to sell and leaseback under short-term leases three Boeing 737-700 aircraft, which will be removed from the fleet in the fourth quarter of 2013.

Capacity Purchase Agreements (CPAs)
 
At March 31, 2012, Alaska had CPAs with three carriers, including our wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. On May 14, 2011, SkyWest Airlines, Inc. (SkyWest) began flying certain routes under a CPA with Alaska. In addition, Alaska has a CPA with Peninsula Airways, Inc. (PenAir) to fly in the state of Alaska. Under these agreements, Alaska pays the third-party carriers an amount which is based on a determination of their cost of operating those flights and other factors. The costs paid by Alaska to Horizon are based on similar data and are intended to approximate market rates for those services. Future payments (excluding Horizon) are based on minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual

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levels of flying and certain costs associated with operating flights such as fuel.

Engine Maintenance
 
The Company had power-by-the-hour maintenance agreements for all Boeing 737 engines other than the Boeing 737-800 at March 31, 2012. These agreements transfer risk to third-party service providers and fix the amount the Company pays per flight hour in exchange for maintenance and repairs under a predefined maintenance program. Future payments are based on minimum flight hours. Accordingly, payments could differ materially based on actual flight hours.

NOTE 11. SHAREHOLDERS' EQUITY
 
Common Stock Split

On February 15, 2012, the Board of Directors declared a two-for-one split of the Company's common stock to be accomplished by means of a stock distribution. The additional shares were distributed on March 16, 2012, to the shareholders of record on March 2, 2012. The stock split increased the Company's outstanding shares from approximately 35.5 million shares as of December 31, 2011 to 71.4 million shares as of March 31, 2012. Historical outstanding shares were recast upon the distribution.

Below are the effects of the stock split on earnings per share (EPS) for the three month ended March 31, 2011 (in millions, except per share amounts):
 
March 31, 2011
(Reported)
 
Adjustment
 
March 31, 2011
Net Income
$
74.2

 
—

 
$
74.2

 
 
 
 
 
 
Basic Earnings Per Share:
$
2.06

 
(1.03
)
 
$
1.03

Diluted Earnings Per Share:
$
2.01

 
(1.00
)
 
$
1.01

Shares used for computation:
 
 
 
 
 
Basic
35.994

 
35.994

 
71.988

Diluted
36.841

 
36.841

 
73.682


Common Stock Repurchase

In February 2012, the Board of Directors authorized a $50 million share repurchase program, which expires in February 2013. In June 2011, the Board of Directors authorized a $50 million share repurchase program, which was completed in January 2012. In June 2010, the Board of Directors authorized a $50 million share repurchase program, which was completed in April 2011.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended March 31,
 
2012
 
2011
 
Shares
 
Amount
 
Shares
 
Amount
2012 Repurchase Program
203,000

 
$
7.1

 
—

 
$
—

2011 Repurchase Program
46,340

 
1.7

 
—

 
—

2010 Repurchase Program
—

 
—

 
434,000

 
26.3

 
249,340

 
$
8.8

 
434,000

 
$
26.3


Retirement of Treasury Shares

In February 2012, the Company retired 4,829,834 common shares that had been held in treasury.  This action did not impact the total number of common shares outstanding.

Earnings Per Share

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Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three months ended March 31, 2012 and 2011, 0.3 million and 0.2 million stock options, respectively, were excluded from the calculation of diluted EPS because they were antidilutive.
 
NOTE 12. FLEET TRANSITION EXPENSES

In 2011, Horizon completed its transition to an all-Q400 fleet. During the first quarter of 2011, Horizon subleased four of the remaining CRJ-700 aircraft to a third-party carrier. The total charge associated with removing these aircraft from operations was $10.1 million for the three months ended March 31, 2011.



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NOTE 13. OPERATING SEGMENT INFORMATION
 
Management views the business in three operating segments.
Alaska Mainline - The 737 part of Alaska's business with average stage lengths greater than 1,000 miles.
Alaska Regional - Alaska's shorter distance network. In this segment, we record actual on board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under CPAs.
Horizon - Horizon operates regional aircraft. All of Horizon's capacity is sold to Alaska under a CPA.   Expenses included those typically borne by regional airlines such as crew costs, ownership costs, and maintenance costs.
The following table reports “Air Group adjusted,” which is not a measure determined in accordance with GAAP. The Company's chief operating decision-makers and others in management use this measure to evaluate operational performance and determine resource allocations. Adjustments are further explained below in reconciling to consolidated GAAP results. All inter-company revenues and expenses between Alaska and Horizon are eliminated in consolidation.

Operating segment information is as follows (in millions):
 
Three Months Ended March 31, 2012
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
763.7

 
$
—

 
$
—

 
$
—

 
$
763.7

 
$
—

 
$
763.7

Regional
—

 
186.7

 
—

 
—

 
186.7

 
—

 
186.7

Total passenger revenues
763.7

 
186.7

 
—

 
—

 
950.4

 
—

 
950.4

CPA revenues
—

 
—

 
87.0

 
(87.0
)
 
—

 
—

 
—

Freight and mail
23.5

 
0.9

 
—

 
—

 
24.4

 
—

 
24.4

Other-net
62.5

 
0.1

 
1.9

 
—

 
64.5

 
—

 
64.5

Total operating revenues
849.7

 
187.7

 
88.9

 
(87.0
)
 
1,039.3

 
—

 
1,039.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
519.6

 
136.8

 
78.3

 
(86.6
)
 
648.1

 
—

 
648.1

Economic fuel(c)
294.4

 
44.3

 
—

 
—

 
338.7

 
(19.9
)
 
318.8

Total operating expenses
814.0

 
181.1

 
78.3

 
(86.6
)
 
986.8

 
(19.9
)
 
966.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
4.9

 
—

 
—

 
—

 
4.9

 
—

 
4.9

Interest expense
(12.6
)
 
—

 
(4.0
)
 
—

 
(16.6
)
 
—

 
(16.6
)
Other
5.3

 
—

 
0.4

 
0.2

 
5.9

 
—

 
5.9

 
(2.4
)
 
—

 
(3.6
)
 
0.2

 
(5.8
)
 
—

 
(5.8
)
Income (loss) before income tax
$
33.3

 
$
6.6

 
$
7.0

 
$
(0.2
)
 
$
46.7

 
$
19.9

 
$
66.6



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Three Months Ended March 31, 2011
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
702.4

 
$
—

 
$
—

 
$
—

 
$
702.4

 
$
—

 
$
702.4

Regional
—

 
176.5

 
—

 
—

 
176.5

 
—

 
176.5

Total passenger revenues
702.4

 
176.5

 
—

 
—

 
878.9

 
—

 
878.9

CPA revenues
—

 
—

 
94.6

 
(94.6
)
 
—

 
—

 
—

Freight and mail
23.9

 
1.0

 
—

 
—

 
24.9

 
—

 
24.9

Other-net
59.0

 
—

 
2.4

 
—

 
61.4

 
—

 
61.4

Total operating revenues
785.3

 
177.5

 
97.0

 
(94.6
)
 
965.2

 
—

 
965.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel(b)
497.7

 
132.9

 
90.2

 
(94.0
)
 
626.8

 
10.1

 
636.9

Economic fuel(c)
238.4

 
38.1

 
—

 
—

 
276.5

 
(82.0
)
 
194.5

Total operating expenses
736.1

 
171.0

 
90.2

 
(94.0
)
 
903.3

 
(71.9
)
 
831.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
8.7

 
—

 
—

 
(1.1
)
 
7.6

 
—

 
7.6

Interest expense
(19.7
)
 
—

 
(4.7
)
 
1.0

 
(23.4
)
 
—

 
(23.4
)
Other
2.1

 
—

 
0.8

 
(0.2
)
 
2.7

 
—

 
2.7

 
(8.9
)
 
—

 
(3.9
)
 
(0.3
)
 
(13.1
)
 
—

 
(13.1
)
Income (loss) before income tax
$
40.3

 
$
6.5

 
$
2.9

 
$
(0.9
)
 
$
48.8

 
$
71.9

 
$
120.7

(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 charges.
(b) 
Refer to Note 12 for a summary of special charges.
(c) 
Represents adjustments to reflect the timing of gain or loss recognition resulting from mark-to-market fuel-hedge accounting.

Total assets were as follows (in millions):
 
March 31, 2012

 
December 31, 2011
Alaska(a)
$
4,894.2

 
$
4,803.3

Horizon
851.4

 
846.5

Parent company
1,506.5

 
1,583.5

Elimination of inter-company accounts
(1,870.1
)
 
(2,038.3
)
Consolidated
$
5,382.0

 
$
5,195.0

(a) 
There are no assets associated with purchased capacity flying at Alaska.


20
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the Company, our operations and our present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in Part I, “Item 1A. Risk Factors.” in our Annual Report on Form 10-K for the year ended December 31, 2011. This overview summarizes the MD&A, which includes the following sections:
 
•
First Quarter in Review—highlights from the first quarter of 2012 outlining some of the major events that happened during the period and how they affected our financial performance.
 
•
Results of Operations—an in-depth analysis of the results of our operations for the three months ended March 31, 2012. We believe this analysis will help the reader better understand our consolidated statements of operations. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2012. 
  
•
Liquidity and Capital Resources—an analysis of cash flows, sources and uses of cash, contractual obligations, commitments, and an overview of financial position.

FIRST QUARTER REVIEW

Our consolidated pretax income was $66.6 million during the first quarter of 2012, compared to $120.7 million in the first quarter of 2011. The $54.1 million decline was primarily due to the $124.3 million increase in aircraft fuel expense and $11.2 million increase in other operating expenses, partially offset by the $74.1 million improvement in revenues. The increase in fuel cost was driven by the 13.0% increase in raw cost per gallon on a 3.2% increase in consumption and less of a benefit from unrealized mark-to-market fuel hedges of $76.0 million. Our improvement in revenues was primarily due to a 6.5% increase in traffic and a 1.5% increase in yield.

See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of Non-GAAP measures to the most directly comparable GAAP measure.

Operations Performance

During the first quarter of 2012, our mainline operations reported March load factor of 88.8%, which was the highest load factor of any month in Air Group history. This also contributed to a record first quarter mainline load factor of 85.7%, and a consolidated load factor of 84.9%. Horizon reported first quarter 2012 load factor of 76.0%, similar to the first quarter of 2011 load factor of 75.9% on a decrease in capacity of 14.6%.

In January, a major storm hit the greater Seattle region resulting in on-time performance for mainline operations of 33.1% and 24.5% during the two peak days of the storm. Despite this major disruption, we still reported mainline on-time performance of 84.5% for the first quarter of 2012, and ranked first among the 10 largest U.S. airlines for the last twelve months ending in February. Additionally, Horizon significantly improved its operational performance from the prior year period, reporting 88.2% of its flights arrived on-time during the first quarter of 2012, from 77.0%.

Update on Labor Negotiations

We are currently in negotiations with Alaska's and Horizon's Association of Flight Attendants (AFA) unions, and Alaska's International Association of Machinists and Aerospace Workers (IAM) union for ramp services and stock clerks. The contracts with AFA are amendable on May 1st and the contract with IAM is amendable in mid-July.


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New Markets
 
In the first quarter of 2012, we began new service from San Jose to Palm Springs, from Seattle to Kansas City, and from Portland to Long Beach.

Additionally, scheduled new service to start in the second quarter as follows:
New Non-Stop Routes Between (Launch Date)
Oakland to Honolulu (4/10)
Portland to Bellingham (6/4)
San Jose to Honolulu (4/10)
Portland to Bozeman (6/4)
San Jose to Reno (6/4)
Portland to Santa Barbara (6/4)
San Diego to Santa Rosa (6/4)
Seattle to Philadelphia (6/11)
San Diego to Fresno (6/4)
Seattle to Fort Lauderdale (7/16)
San Diego to Monterey (6/4)
 

Stock Split and Repurchase

On March 16, 2012, we effected a stock split to shareholders of record on March 2, 2012. The number of shares outstanding increased from 35.5 million shares at December 31, 2011 to 71.4 million shares at March 31, 2012. All historical outstanding shares have been recast to reflect the stock split.

During the first quarter of 2012, we repurchased 249,340 shares of our common stock for $8.8 million under the $50 million repurchase plans authorized by our Board of Directors in June 2011 and February 2012.

Outlook
 
Our primary focus every year is to run safe, compliant and reliable operations at our airlines.  In addition to our primary objective, our key initiative in 2012 is to focus on the customer travel experience. Our specific focus will be on providing information and mobile capabilities to our customers as well as to speed them through the airport on the day of travel. We are currently working on a number of initiatives such as self bag tagging and booking reservations on mobile devices, among others.

As we look forward to the heavy spring and summer travel season, we are seeing solid demand for air travel. Our advance bookings suggest our load factors will be up 1.5 pts in May and 2.5 pts in June compared to the same periods in 2011 on an expected 6% increase in capacity for the second quarter of 2012. Our April load factors were up 2.5 pts, compared to April 2011.

RESULTS OF OPERATIONS
 
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011

Our consolidated net income for the first quarter of 2012 was $40.8 million, or $0.56 per diluted share, compared to net income of $74.2 million, or $1.01 per diluted share, in the first quarter of 2011. Significant items impacting the comparability between the periods are as follows:

•
Both periods include adjustments to reflect the timing of net unrealized mark-to-market gains related to our fuel hedge positions. For the first quarter of 2012, we recognized net mark-to-market gains of $19.9 million ($12.5 million after tax, or $0.17 per share) compared to gains of $82.0 million ($51.0 million after tax, or $0.70 per share) in the first quarter of 2011. The lower gains in the current period is partially due to restriking the premiums on our fuel portfolio in the fourth quarter of 2011, and due to the spread in crude oil from December 31, to March 31, of each period.

•
In the first quarter of 2011, we incurred $10.1 million ($6.3 million after tax, or $0.09 per share) in expense as part of Horizon's fleet transition out of the CRJ-700 aircraft.


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ADJUSTED (NON-GAAP) RESULTS AND PER-SHARE AMOUNTS

We believe disclosure of earnings excluding the impact of these individual charges is useful information to investors because:

•
We believe it is the basis by which we are evaluated by industry analysts;

•
Our results excluding these items are most often used in internal management and board reporting and decision-making;

•
Our results excluding these adjustments serve as the basis for our various employee incentive plans, thus the information allows investors to better understand the changes in variable incentive pay expense in our consolidated statements of operations;

•
It is useful to monitor performance without these items as it improves a reader’s ability to compare our results to those of other airlines; and

•
It is consistent with how we present information in our quarterly earnings press releases.

Although we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.

Excluding the mark-to-market fuel hedge adjustments and fleet transition costs in 2011, our adjusted consolidated net income for the first quarter of 2012 was $28.3 million, or $0.39 per diluted share, compared to an adjusted consolidated net income of $29.5 million, or $0.40 per share, in the first quarter of 2011.
 
Three Months Ended March 31,
 
2012
 
2011
(in millions, except per share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Net income and diluted EPS as reported
$
40.8

 
$
0.56

 
$
74.2

 
$
1.01

Fleet transition costs, net of tax
—

 
—

 
6.3

 
0.09

Mark-to-market fuel hedge adjustments, net of tax
(12.5
)
 
(0.17
)
 
(51.0
)
 
(0.70
)
Net income and diluted EPS, excluding noted items
$
28.3

 
$
0.39

 
$
29.5

 
$
0.40



23
Table of Contents        


OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.

Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which is a non-GAAP measure. Refer to page 29 on why this measure may be meaningful.
 
Three Months Ended March 31,
 
2012
 
2011
 
Change
Consolidated Operating Statistics:(a)
 
 
 
 
 
Revenue passengers (000)
5,995

 
5,752

 
4.2
 %
Revenue passenger miles (RPM) (000,000) "traffic"
6,232

 
5,853

 
6.5
 %
Available seat miles (ASM) (000,000) "capacity"
7,344

 
7,112

 
3.3
 %
Load factor
84.9
%
 
82.3
%
 
2.6 pts

Yield

15.25
¢
 

15.02
¢
 
1.5
 %
Passenger revenue per ASM (PRASM)

12.94
¢
 

12.36
¢
 
4.7
 %
Operating expense per ASM (CASM) excluding fuel and fleet transition costs(b)

8.82
¢
 

8.81
¢
 
0.1
 %
Economic fuel cost per gallon(b)
$
3.41

 
$
2.87

 
18.8
 %
Fuel gallons (000,000)
99.4

 
96.3

 
3.2
 %
Average number of full-time equivalent employees (FTE)
11,832

 
11,884

 
(0.4
)%
 
 
 
 
 
 
Mainline Operating Statistics:
 
 
 
 
 
Revenue passengers (000)
4,275

 
4,107

 
4.1
 %
RPMs (000,000) "traffic"
5,637

 
5,279

 
6.8
 %
ASMs (000,000) "capacity"
6,575

 
6,353

 
3.5
 %
Load factor
85.7
%
 
83.1
%
 
2.6 pts

Yield

13.55
¢
 

13.31
¢
 
1.8
 %
PRASM

11.62
¢
 

11.06
¢
 
5.1
 %
CASM excluding fuel(b)

7.90
¢
 

7.83
¢
 
0.9
 %
Economic fuel cost per gallon(b)
$
3.40

 
$
2.87

 
18.5
 %
Fuel gallons (000,000)
86.5

 
83.1

 
4.1
 %
Average number of full-time equivalent employees
9,010

 
8,884

 
1.4
 %
Aircraft utilization
10.2

 
10.4

 
(1.9
)%
Average aircraft stage length
1,152

 
1,119

 
2.9
 %
Mainline operating fleet at period-end
119

 
117

 
2 a/c