ALK 10-Q2 2015


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

T    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015
 
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.
 
Delaware
 
91-1292054
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

 
19300 International Boulevard, Seattle, Washington 98188
Telephone: (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 127,322,155 common shares, par value $0.01, outstanding at July 31, 2015.



ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2015

 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.”
 

2



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:

•
the competitive environment in our industry;
•
changes in our operating costs, primarily fuel, which can be volatile;
•
general economic conditions, including the impact of those conditions on customer travel behavior;
•
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;
•
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, 2014, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.


3


PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
45

 
$
107

Marketable securities
1,147

 
1,110

Total cash and marketable securities
1,192

 
1,217

Receivables - net
194

 
259

Inventories and supplies - net
58

 
58

Deferred income taxes
123

 
117

Prepaid expenses and other current assets
87

 
105

Total Current Assets
1,654

 
1,756

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
5,345

 
5,165

Other property and equipment
915

 
896

Deposits for future flight equipment
905

 
555

 
7,165

 
6,616

Less accumulated depreciation and amortization
2,460

 
2,317

Total Property and Equipment - Net
4,705

 
4,299

 
 
 
 
Other Assets
121

 
126

 
 
 
 
Total Assets
$
6,480

 
$
6,181


See accompanying notes to condensed consolidated financial statements.


4

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts)
June 30,
2015
 
December 31,
2014
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
56

 
$
62

Accrued wages, vacation and payroll taxes
179

 
232

Other accrued liabilities
736

 
629

Air traffic liability
840

 
631

Current portion of long-term debt
116

 
117

Total Current Liabilities
1,927

 
1,671

 
 
 
 
Long-Term Debt, Net of Current Portion
629

 
686

Other Liabilities and Credits
 

 
 

Deferred income taxes
718

 
750

Deferred revenue
401

 
374

Obligation for pension and postretirement medical benefits
247

 
246

Other liabilities
339

 
327

 
1,705

 
1,697

Commitments and Contingencies


 


Shareholders' Equity
 

 
 

Preferred stock, $0.01 par value Authorized: 5,000,000 shares, none issued or outstanding
—

 
—

Common stock, $0.01 par value, Authorized: 200,000,000 shares, Issued: 2015 - 128,144,917 shares; 2014 - 131,556,573 shares, Outstanding: 2015 - 128,024,917 shares; 2014 - 131,481,473
1

 
1

Capital in excess of par value
56

 
296

Treasury stock (common), at cost: 2015 - 120,000 shares; 2014 - 75,100 shares
(8
)
 
(4
)
Accumulated other comprehensive loss
(304
)
 
(310
)
Retained earnings
2,474

 
2,144

 
2,219

 
2,127

Total Liabilities and Shareholders' Equity
$
6,480

 
$
6,181

See accompanying notes to condensed consolidated financial statements.


5

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share amounts)
2015
 
2014
 
2015
 
2014
Operating Revenues
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
Mainline
$
1,019

 
$
974

 
$
1,920

 
$
1,828

Regional
212

 
200

 
398

 
386

Total passenger revenue
1,231

 
1,174

 
2,318

 
2,214

Freight and mail
30

 
32

 
53

 
56

Other - net
176

 
169

 
335

 
327

Total Operating Revenues
1,437

 
1,375

 
2,706

 
2,597

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 

 
 

Wages and benefits
305

 
281

 
611

 
553

Variable incentive pay
32

 
29

 
58

 
54

Aircraft fuel, including hedging gains and losses
261

 
360

 
496

 
718

Aircraft maintenance
52

 
57

 
115

 
108

Aircraft rent
26

 
29

 
52

 
57

Landing fees and other rentals
66

 
64

 
137

 
133

Contracted services
68

 
62

 
135

 
122

Selling expenses
54

 
53

 
107

 
99

Depreciation and amortization
79

 
73

 
155

 
143

Food and beverage service
28

 
23

 
53

 
44

Other
94

 
81

 
177

 
161

Total Operating Expenses
1,065

 
1,112

 
2,096

 
2,192

Operating Income
372

 
263

 
610

 
405

 
 
 
 
 
 
 
 
Nonoperating Income (Expense)
 
 
 
 
 

 
 

Interest income
6

 
5

 
11

 
10

Interest expense
(11
)
 
(12
)
 
(22
)
 
(25
)
Interest capitalized
8

 
4

 
16

 
9

Other - net
1

 
5

 
1

 
18

 
4

 
2

 
6

 
12

Income before income tax
376

 
265

 
616

 
417

Income tax expense
142

 
100

 
233

 
158

Net Income
$
234

 
$
165

 
$
383

 
$
259

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
1.80

 
$
1.20

 
$
2.93

 
$
1.88

Diluted Earnings Per Share:
$
1.79

 
$
1.19

 
$
2.91

 
$
1.86

 
 
 
 
 
 
 
 
Shares used for computation:
 
 
 
 
 
 
 

Basic
129.236

 
137.274

 
130.173

 
137.304

Diluted
130.255

 
138.711

 
131.271

 
138.776

 
 
 
 
 
 
 
 
Cash dividend declared per share:
$
0.20

 
$
0.125

 
$
0.40

 
$
0.25

See accompanying notes to condensed consolidated financial statements.

6

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net Income
$
234

 
$
165

 
$
383

 
$
259

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Related to marketable securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(5
)
 
4

 
2

 
7

Reclassification of (gains) losses into Other-net nonoperating income (expense)
—

 
(1
)
 
—

 
(1
)
Income tax effect
2

 
(1
)
 
(1
)
 
(2
)
Total
(3
)
 
2

 
1

 
4

 
 
 
 
 
 
 
 
Related to employee benefit plans:
 
 
 
 
 
 
 
Reclassification of net pension expense into Wages and benefits
5

 
3

 
8

 
5

Income tax effect
(2
)
 
(1
)
 
(3
)
 
(2
)
Total
3

 
2

 
5

 
3

 
 
 
 
 
 
 
 
Related to interest rate derivative instruments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
1

 
(2
)
 
(3
)
 
(5
)
Reclassification of (gains) losses into Aircraft rent
1

 
1

 
3

 
3

Income tax effect
(1
)
 
—

 
—

 
—

Total
1

 
(1
)
 
—

 
(2
)
 
 
 
 
 
 
 
 
Other Comprehensive Income
1

 
3

 
6

 
5

 
 
 
 
 
 
 
 
Comprehensive Income
$
235

 
$
168

 
$
389

 
$
264

See accompanying notes to condensed consolidated financial statements.


7

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Six Months Ended June 30,
(in millions)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
383

 
$
259

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

 
 

Depreciation and amortization
155

 
143

Stock-based compensation and other
14

 
21

Changes in certain assets and liabilities:
 
 
 
Changes in deferred income taxes
(44
)
 
14

Increase in air traffic liability
209

 
243

Increase (decrease) in deferred revenue
27

 
7

Other - net
145

 
(52
)
Net cash provided by operating activities
889

 
635

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(490
)
 
(255
)
Other flight equipment
(43
)
 
(60
)
Other property and equipment
(26
)
 
(35
)
Total property and equipment additions
(559
)
 
(350
)
Purchases of marketable securities
(711
)
 
(628
)
Sales and maturities of marketable securities
676

 
398

Proceeds from disposition of assets and changes in restricted deposits
—

 
(2
)
Net cash used in investing activities
(594
)
 
(582
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from issuance of debt
—

 
51

Long-term debt payments
(58
)
 
(64
)
Common stock repurchases
(262
)
 
(83
)
Dividends paid
(52
)
 
(34
)
Other financing activities
15

 
19

Net cash used in financing activities
(357
)
 
(111
)
Net increase (decrease) in cash and cash equivalents
(62
)
 
(58
)
Cash and cash equivalents at beginning of year
107

 
80

Cash and cash equivalents at end of the period
$
45

 
$
22

 
 
 
 
Supplemental disclosure:
 

 
 

Cash paid during the period for:
 
 
 
Interest (net of amount capitalized)
$
8

 
$
16

Income taxes paid (received)
108

 
93

See accompanying notes to condensed consolidated financial statements.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 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 the Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of June 30, 2015, as well as the results of operations for the three and six months ended June 30, 2015 and 2014. 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, changes in the competitive environment, and other factors, operating results for the three and six months ended June 30, 2015, are not necessarily indicative of operating results for the entire year.

Certain reclassifications, such as changes in our equity structure, have been made to prior year financial statements to conform with classifications used in the current year.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update 2014-09, "Revenue from Contracts with Customers" (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB agreed to defer the effective date one year, and now allows early adoption one year prior to the effective date. The standard would be effective for the Company on January 1, 2018, and early adoption is allowed on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined whether or not it will early adopt the standard.

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):
June 30, 2015
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
5

 
$
—

 
$
—

 
$
5

Cash equivalents
40

 
—

 
—

 
40

Cash and cash equivalents
45

 
—

 
—

 
45

U.S. government and agency securities
179

 
—

 
—

 
179

Foreign government bonds
31

 
—

 
—

 
31

Asset-backed securities
131

 
—

 
—

 
131

Mortgage-backed securities
120

 
1

 
(1
)
 
120

Corporate notes and bonds
662

 
3

 
(1
)
 
664

Municipal securities
22

 
—

 
—

 
22

Marketable securities
1,145

 
4

 
(2
)
 
1,147

Total
$
1,190

 
$
4

 
$
(2
)
 
$
1,192



9


December 31, 2014
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
4

 
$
—

 
$
—

 
$
4

Cash equivalents
103

 
—

 
—

 
103

Cash and cash equivalents
107

 
—

 
—

 
107

U.S. government and agency securities
166

 
—

 
—

 
166

Foreign government bonds
25

 
—

 
—

 
25

Asset-backed securities
130

 
—

 
—

 
130

Mortgage-backed securities
127

 
—

 
(1
)
 
126

Corporate notes and bonds
644

 
3

 
(2
)
 
645

Municipal securities
18

 
—

 
—

 
18

Marketable securities
1,110

 
3

 
(3
)
 
1,110

Total
$
1,217

 
$
3

 
$
(3
)
 
$
1,217


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 June 30, 2015.

Activity for marketable securities (in millions):  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales and maturities
$
417

 
$
171

 
$
676

 
$
398

Gross realized gains
1

 
1

 
2

 
2

Gross realized losses
(1
)
 
—

 
(2
)
 
(1
)
 
Maturities for marketable securities (in millions):
June 30, 2015
Cost Basis
 
Fair Value
Due in one year or less
$
105

 
$
105

Due after one year through five years
1,038

 
1,040

Due after five years through 10 years
2

 
2

Due after 10 years
—

 
—

Total
$
1,145

 
$
1,147


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.

As of June 30, 2015, the Company had outstanding fuel hedge contracts covering 259 million gallons of crude oil that will be settled from July 2015 to December 2016. 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.

10



Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):
 
June 30,
2015
 
December 31,
2014
Derivative Instruments Not Designated as Hedges
 
 
 
Fuel hedge contracts
 
 
 
Fuel hedge contracts, current assets
$
7

 
$
3

Fuel hedge contracts, noncurrent assets
3

 
4

 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
Interest rate swaps
 
 
 
Other accrued liabilities
(6
)
 
(6
)
Other liabilities
(13
)
 
(13
)
Losses in accumulated other comprehensive loss (AOCL)
(19
)
 
(19
)

The net cash received (paid) for new positions and settlements was ($4) million and $1 million during the three months ended June 30, 2015 and 2014, respectively. The net cash received (paid) for new positions and settlements was ($8) million and ($6) million during the six months ended June 30, 2015 and 2014, respectively.

Pretax effect of derivative instruments on earnings (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Derivative Instruments Not Designated as Hedges
 
 
 
 
 
 
 
Fuel hedge contracts:
 
 
 
 
 
 
 
Gains (losses) recognized in aircraft fuel expense
$
1

 
$
5

 
$
(4
)
 
$
(6
)
 
 
 
 
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
 
 
 
 
Interest rate swaps:
 
 
 
 
 
 
 
Losses recognized in aircraft rent
(1
)
 
(1
)
 
(3
)
 
(3
)
Gains (losses) recognized in other comprehensive income (OCI)
1

 
(2
)
 
(3
)
 
(5
)

The Company expects $6 million to be reclassified from AOCL to aircraft rent within the next twelve months.

Credit Risk and Collateral

The Company maintains security agreements with a number of its counterparties which may require the Company to post collateral if the fair value of the selected derivative instruments fall below specified mark-to-market thresholds. The posted collateral does not offset the fair value of the derivative instruments and is included in "Prepaid expenses and other current assets" on the consolidated balance sheet. The Company posted collateral of $1 million and $3 million as of June 30, 2015 and December 31, 2014, respectively.


11


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):
June 30, 2015
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
179

 
$
—

 
$
179

All other securities
—

 
968

 
968

Derivative instruments
 
 
 
 
 
Fuel hedge call options
—

 
10

 
10

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(19
)
 
(19
)

December 31, 2014
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
166

 
$
—

 
$
166

All other securities
—

 
944

 
944

Derivative instruments
 
 
 
 
 
Fuel hedge call options
—

 
7

 
7

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(19
)
 
(19
)

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. All other securities (Foreign government bonds, asset-backed securities, mortgage-backed 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.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts are Level 2 as the fair value is primarily based on inputs which are readily available in active markets or can be derived from information available in active markets. The fair value considers the exposure to credit losses in the event of nonperformance by counterparties. 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 forward interest rates at period end, multiplied by the total notional value.

The Company has no financial assets that are measured at fair value on a nonrecurring basis at June 30, 2015.

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 cost, which approximates fair value.

Debt: The carrying amount 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, through a discounted cash flow analysis using interest rates for

12


comparable debt over the weighted remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

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):
 
June 30,
2015
 
December 31,
2014
Carrying amount
$
567

 
$
614

Fair value
612

 
666


NOTE 5. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals on the consolidated balance sheets (in millions):
 
June 30,
2015
 
December 31,
2014
Current Liabilities:
 
 
 
Other accrued liabilities
$
352

 
$
343

Other Liabilities and Credits:
 
 
 
Deferred revenue
395

 
367

Other liabilities
20

 
20

Total
$
767

 
$
730

 
Alaska's Mileage Plan revenue included in the consolidated statements of operations (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Passenger revenues
$
69

 
$
62

 
$
134

 
$
118

Other - net revenues
82

 
73

 
159

 
146

Total
$
151

 
$
135

 
$
293

 
$
264


NOTE 6. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
June 30,
2015
 
December 31,
2014
Fixed-rate notes payable due through 2024
$
567

 
$
614

Variable-rate notes payable due through 2025
178

 
189

Total debt
745

 
803

Less current portion
116

 
117

Long-term debt, less current portion
$
629

 
$
686

 
 
 
 
Weighted-average fixed-interest rate
5.7
%
 
5.7
%
Weighted-average variable-interest rate
1.7
%
 
1.6
%

During the six months ended June 30, 2015, the Company made debt payments of $58 million.


13


At June 30, 2015, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2015
$
59

2016
115

2017
121

2018
151

2019
114

Thereafter
185

Total
$
745

 
Bank Lines of Credit
 
The Company has two $100 million variable rate credit facilities, with interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in September 2017, is secured by aircraft. The other $100 million facility, which expires in March 2017, is 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 June 30, 2015.

NOTE 7. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized in the consolidated statements of operations (in millions): 
 
Three Months Ended June 30,
 
Qualified
 
Postretirement Medical
 
2015
 
2014
 
2015
 
2014
Service cost
$
10

 
$
8

 
$
—

 
$
—

Interest cost
21

 
20

 
1

 
1

Expected return on assets
(30
)
 
(29
)
 
—

 
—

Amortization of prior service cost
—

 
(1
)
 
—

 
—

Recognized actuarial loss (gain)
6

 
4

 
(2
)
 
—

Total
$
7

 
$
2

 
$
(1
)
 
$
1


Net periodic benefit costs recognized in the consolidated statements of operations (in millions): 
 
Six Months Ended June 30,
 
Qualified
 
Postretirement Medical
 
2015
 
2014
 
2015
 
2014
Service cost
$
20

 
$
16

 
$
1

 
$
1

Interest cost
42

 
40

 
2

 
2

Expected return on assets
(61
)
 
(58
)
 
—

 
—

Amortization of prior service cost
—

 
(1
)
 
—

 
—

Recognized actuarial loss (gain)
13

 
7

 
(5
)
 
(1
)
Total
$
14

 
$
4

 
$
(2
)
 
$
2



14


NOTE 8. COMMITMENTS

Future minimum fixed payments for commitments (in millions):
June 30, 2015
Aircraft Commitments
 
Capacity Purchase Agreements (CPA)
 
Aircraft Leases(a)
 
Facility Leases
Remainder of 2015
$
133

 
$
31

 
$
27

 
$
50

2016
604

 
67

 
111

 
99

2017
548

 
58

 
93

 
94

2018
428

 
60

 
78

 
44

2019
372

 
64

 
67

 
42

Thereafter
650

 
623

 
345

 
212

Total
$
2,735

 
$
903

 
$
721

 
$
541

(a)  
Includes embedded leases under the CPA with SkyWest.

Aircraft Commitments
 
As of June 30, 2015, the Company is committed to purchasing 76 B737 aircraft (39 737-900ER aircraft and 37 737 MAX aircraft) and two Q400 aircraft, with deliveries in 2015 through 2022. In addition, the Company has options to purchase 46 B737 aircraft and five Q400 aircraft.

Capacity Purchase Agreements (CPAs)
 
At June 30, 2015, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, for which all intercompany transactions are eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest Airlines, Inc. (SkyWest) to fly certain routes and Peninsula Airways, Inc. (PenAir) to fly one route 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 those due to Horizon) are based on contractually required minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights, such as fuel.

During the second quarter Alaska signed an amendment to the CPA with SkyWest to remove the eight CRJ-700 aircraft out of regional operations and replace them with eight E-175 aircraft. Six of these CRJ-700 aircraft are leased by the Company and two of the aircraft are owned by the Company. The E-175 aircraft will be introduced into service throughout 2016, at which time the CRJ-700 aircraft will be removed from service. The CPA with SkyWest is a service contract that, in accordance with GAAP, includes embedded leases related to the aircraft operated under the agreement.

Lease Commitments

At June 30, 2015, the Company had lease contracts for 28 B737 aircraft, 15 Q400 aircraft, 6 CRJ-700 aircraft (operated by SkyWest), and 8 CRJ-700 aircraft that are subleased and operated by another carrier (i.e. not in the Company's fleet). In addition, the Company has 15 E-175 aircraft under the CPA with SkyWest, three of which are included in the fleet as of June 30, 2015. All lease contracts have remaining noncancelable lease terms ranging from 2015 to 2028. The Company has the option to increase capacity flown by SkyWest with 16 additional E-175 aircraft.

The majority of airport and terminal facilities are also leased. Rent expense for aircraft and facility leases was $67 million and $66 million for the three months ended June 30, 2015 and 2014, respectively. Rent expense for aircraft and facility leases was $140 million and $141 million for the six months ended June 30, 2015 and 2014, respectively.

NOTE 9. SHAREHOLDERS' EQUITY

Dividends

During the three months ended June 30, 2015, the Company declared and paid cash dividends of $0.20 per share, or $26 million. During the six months ended June 30, 2015, the Company declared and paid cash dividends of $0.40 per share, or $52 million.


15


Common Stock Repurchase

In September 2012, the Board of Directors authorized a $250 million share repurchase program, which was completed in July 2014. In May 2014, the Board of Directors authorized a $650 million share repurchase program.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
2014 Repurchase Program - $650 million
2,480,807

 
$
160

 
—

 
$
—

 
4,061,554

 
$
262

 
—

 
$
—

2012 Repurchase Program - $250 million
—

 
$
—

 
1,108,334

 
$
53

 
—

 
$
—

 
1,814,036

 
$
83

Total
2,480,807

 
$
160

 
1,108,334

 
$
53

 
4,061,554

 
$
262

 
1,814,036

 
$
83

 
Accumulated Other Comprehensive Loss
 
Components of accumulated other comprehensive income (loss), net of tax (in millions):
 
June 30,
2015
 
December 31,
2014
Marketable securities
$
1

 
$
—

Employee benefit plans
(293
)
 
(298
)
Interest rate derivatives
(12
)
 
(12
)
Total
$
(304
)
 
$
(310
)

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of 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 and six months ended June 30, 2015 and 2014, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 10. OPERATING SEGMENT INFORMATION
 
Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. Horizon sells 100% of its capacity to Alaska under a CPA, for which all intercompany transactions are eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest to fly certain routes and PenAir to fly one route in the state of Alaska. The Company attributes revenue between Mainline and Regional based on the coupon fare in effect on the date of issuance relative to the origin and destination of each flight segment. To manage the two operating airlines and the revenues and expenses associated with the CPAs, management views the business in three operating segments.
Alaska Mainline - Flying Boeing 737 jets and all associated revenues and costs.
Alaska Regional - Alaska's CPAs with 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 CPAs. Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska on behalf of the regional operations.
Horizon - Horizon operates turboprop Q400 aircraft. All of Horizon's capacity is sold to Alaska under a CPA.  Expenses include 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 reconciliation to consolidated GAAP results. Operating segment information is as follows (in millions):

16


 
Three Months Ended June 30, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,019

 
$
—

 
$
—

 
$
—

 
$
1,019

 
$
—

 
$
1,019

Regional
—

 
212

 
—

 
—

 
212

 
—

 
212

Total passenger revenues
1,019

 
212

 
—

 
—

 
1,231

 
—

 
1,231

CPA revenues
—

 
—

 
99

 
(99
)
 
—

 
—

 
—

Freight and mail
28

 
2

 
—

 
—

 
30

 
—

 
30

Other - net
156

 
19

 
1

 
—

 
176

 
—

 
176

Total operating revenues
1,203

 
233

 
100

 
(99
)
 
1,437

 
—

 
1,437

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
645

 
169

 
90

 
(100
)
 
804

 
—

 
804

Economic fuel
232

 
35

 
—

 
—

 
267

 
(6
)
 
261

Total operating expenses
877

 
204

 
90

 
(100
)
 
1,071

 
(6
)
 
1,065

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
5

 
—

 
—

 
1

 
6

 
—

 
6

Interest expense
(7
)
 
—

 
(1
)
 
(3
)
 
(11
)
 
—

 
(11
)
Other
7

 
—

 
(1
)
 
3

 
9

 
—

 
9

 
5

 
—

 
(2
)
 
1

 
4

 
—

 
4

Income before income tax
$
331

 
$
29

 
$
8

 
$
2

 
$
370

 
$
6

 
$
376

 
Three Months Ended June 30, 2014
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
974

 
$
—

 
$
—

 
$
—

 
$
974

 
$
—

 
$
974

Regional
—

 
200

 
—

 
—

 
200

 
—

 
200

Total passenger revenues
974

 
200

 
—

 
—

 
1,174

 
—

 
1,174

CPA revenues
—

 
—

 
87

 
(87
)
 
—

 
—

 
—

Freight and mail
31

 
1

 
—

 
—

 
32

 
—

 
32

Other - net
147

 
20

 
2

 
—

 
169

 
—

 
169

Total operating revenues
1,152

 
221

 
89

 
(87
)
 
1,375

 
—

 
1,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
602

 
151

 
86

 
(87
)
 
752

 
—

 
752

Economic fuel
324

 
49

 
—

 
—

 
373

 
(13
)
 
360

Total operating expenses
926

 
200

 
86

 
(87
)
 
1,125

 
(13
)
 
1,112

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
5

 
—

 
—

 
—

 
5

 
—

 
5

Interest expense
(9
)
 
(1
)
 
(2
)
 
—

 
(12
)
 
—

 
(12
)
Other
9

 
1

 
(1
)
 
—

 
9

 
—

 
9

 
5

 
—

 
(3
)
 
—

 
2

 
—

 
2

Income before income tax
$
231

 
$
21

 
$
—

 
$
—

 
$
252

 
$
13

 
$
265



17


 
Six Months Ended June 30, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items(b)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
1,920

 
—

 
—

 
—

 
1,920

 
—

 
1,920

Regional
—

 
398

 
—

 
—

 
398

 
—

 
398

Total passenger revenues
1,920

 
398

 
—

 
—

 
2,318

 
—

 
2,318

CPA revenues
—

 
—

 
198

 
(198
)
 
—

 
—

 
—

Freight and mail
50

 
3

 
—

 
—

 
53

 
—

 
53

Other-net
298

 
35

 
2

 
—

 
335

 
—

 
335

Total operating revenues
2,268

 
436

 
200

 
(198
)
 
2,706

 
—

 
2,706

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,284

 
333

 
181

 
(198
)
 
1,600

 
—

 
1,600

Economic fuel
436

 
66

 
—

 
—

 
502

 
(6
)
 
496

Total operating expenses
1,720

 
399

 
181

 
(198
)
 
2,102

 
(6
)
 
2,096

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
10

 
—

 
—

 
1

 
11

 
—

 
11

Interest expense
(14
)
 
—

 
(5
)
 
(3
)
 
(22
)
 
—

 
(22
)
Other
14

 
—

 
—

 
3

 
17

 
—

 
17

 
10

 
—

 
(5
)
 
1

 
6

 
—

 
6

Income before income tax
558

 
37

 
14

 
1

 
610

 
6

 
616

 
Six Months Ended June 30, 2014
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating