Edgar Filing: ALASKA AIR GROUP, INC.

10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K


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

For the fiscal year ended December 31, 2015


£	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

Securities registered pursuant to Section 12(b) of the Act:



Common Stock, $0.01 Par Value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes T No £

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No T

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 £ No T

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. T

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:

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

As of January 31, 2016, shares of common stock outstanding totaled 124,729,056. The aggregate market value of the shares of common stock of Alaska Air Group, Inc. held by nonaffiliates on June 30, 2015, was approximately $8.2 billion (based on the closing price of $64.43 per share on the New York Stock Exchange on that date).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Definitive Proxy Statement relating to 2016 Annual Meeting of Shareholders are incorporated by reference in Part III.

ALASKA AIR GROUP, INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2015

TABLE OF CONTENTS



PART I		4
ITEM 1.	OUR BUSINESS	4
ITEM 1A.	RISK FACTORS	12
ITEM 1B.	UNRESOLVED STAFF COMMENTS	17
ITEM 2.	PROPERTIES	17
ITEM 3.	LEGAL PROCEEDINGS	17
ITEM 4.	MINE SAFETY DISCLOSURES	17
PART II		17
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES	17
ITEM 6.	SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA	18
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	38
ITEM 8.	CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	39
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	69
ITEM 9A.	CONTROLS AND PROCEDURES	69
ITEM 9B.	OTHER INFORMATION	72
PART III		72
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	72
ITEM 11.	EXECUTIVE COMPENSATION	72
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS	72
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	72
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	72
PART IV		72
ITEM 15.	EXHIBITS	72
	SIGNATURES	73

As used in this Form 10-K, 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.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Form 10-K 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.

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 in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our forward-looking statements in light of those risks as you read this report.

Table of Contents

PART I

ITEM 1. OUR BUSINESS

Alaska Air Group ("Air Group") operates Alaska Airlines ("Alaska") and Horizon Air ("Horizon"), which together with its partner regional airlines serve more than 100 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada, Mexico, and Costa Rica. During 2015, we carried an all-time high 32 million passengers and earned record full-year adjusted earnings of $842 million.

Our objective is to be one of the most respected U.S. airlines by our customers, employees, and shareholders. We believe our success depends on our ability to provide safe air transportation, develop relationships with customers by providing exceptional customer service and low fares, and maintain a competitive cost structure to compete effectively. It is important to us that we achieve our objective as a socially responsible company that values not just our performance, but also our people, our community, and our environment.

While aircraft and technology enable us to provide air transportation, we recognize this is fundamentally a people business. Our employees maintain and strengthen our relationships with customers, and our success depends on our employees working together to successfully execute on our strategy. In 2015, Alaska was named one of America's Top 100 Employers by Forbes Magazine. We launched our "Beyond Service" two-day customer service workshop for all of our customer-facing employees to provide them with the framework and tools they need to improve upon our already award-winning customer service. In that vein, in 2015, Alaska Airlines ranked "Highest in Customer Satisfaction among Traditional Network Carriers" by J.D. Power for the eighth year in a row. Alaska Airlines also held the No. 1 spot in the Wall Street Journal's "Middle Seat" scorecard for U.S. airlines for three years in a row. We have been the leader in the industry for on-time performance among major airlines for the past six years. For achieving safety, customer service, operational and financial goals, we rewarded our employees with a record $120 million in incentive pay during 2015.

In support of the communities that we serve, we strive to be an industry leader in environmental and community stewardship. In 2015, Air Group improved fuel efficiency by 2.2% from the prior year, as measured by available seat miles flown per gallon. Air Group donated $12 million to approximately 1,050 charitable organizations and our employees volunteered more than 27,000 hours of community service. Included in this amount are annual contributions of our ongoing multi-year grants to several organizations - we pledged $1.5 million to support job training for workers at Seattle-Tacoma airport through Port Jobs, $2.5 million for Seattle's bike-share program, $1 million for the Alaska Native Science and Engineering Program, and $2.5 million to Seattle's Museum of Flight to guide students toward a future in science, technology, engineering, and math. In 2015, we granted additional support to Washington Information Science Education Consortium, Washington State University, Kupu of Hawaii, University of Hawaii, and pledged $40 million to the the University of Washington, in part, to increase our impact on education supporting specific programs and scholarships.

We earned record financial results in 2015, marking our 12th consecutive annual profit on an adjusted basis. We achieved an after-tax return on invested capital of 25.2%, approximately three times our weighted average cost of capital. Strong earnings improved our cash flow and strengthened our balance sheet resulting in a debt-to-capital ratio of 27%, which compares favorably with other high-quality industrial transport companies and the companies in the S&P 500. Due to our strong financial health, we are one of only two U.S. airlines with investment grade credit ratings. With the cash generated by the continued success we have had in the past decade, we are able to continue to invest in our business for profitable growth and to enhance the customer experience. All of our 737-800/900/900ER aircraft feature innovative Recaro seats with power at every seat, our Wi-Fi enabled in-flight entertainment system, and our branded in-flight experience, Alaska Beyond™.

As we look to the future, we will build on the success of the past few years by executing our strategic plan — the Five Focus Areas:

Safety and Compliance

We have an unwavering commitment to run a safe and compliant operation, and we will not compromise this commitment in the pursuit of other initiatives. Alaska and Horizon are awaiting final FAA certification of our fully-implemented Safety Management System (SMS). SMS helps identify and manage risk and builds a sustainable culture of safety for every Air Group employee. Once again, for 2015, 100% of our Alaska and Horizon aircraft technicians completed the requirements for the FAA's "Diamond Certificate of Excellence" award. This is the 14th consecutive year Alaska Airlines has received the award and the 14th time in the last 16 years for Horizon. In 2014, we launched Ready, Safe, Go - a safety campaign designed to increase safety awareness across the Air Group System. With our Ready, Safe, Go program in its second year, employee

awareness of their individual contributions to a strong culture of safety continues to increase. In 2015, Alaska and Horizon employees made a “Personal Commitment to Safety” during facilitated discussions with company leaders.

People Focus

Our success depends on our employees. Higher employee engagement drives higher productivity, superior execution, and better customer service, which is why we listen to our employees for feedback in shaping our strategy. Employee engagement scores from our annual employee survey are at historical highs. In addition to the "Beyond Service" training for our customer-facing employees, all of Air Group's leaders participated in a multi-day leadership training called "Gear Up 2." This is the second phase of our award-winning leadership training where our leaders spent time focusing on several of our core leadership principles in an effort to give them the tools they need to effectively lead a highly-engaged workforce.

We understand that aligning our employees' goals with the Company's goals is important in achieving success. All employees participate in our Performance-Based Pay (PBP) and Operational Performance Rewards (OPR) programs, which encourage employees to work together to achieve metrics related to safety, profitability, on-time performance, low costs and customer satisfaction. Over the last five years, our incentive programs have paid out on average, over 8.6% of annual pay, or more than one month's pay, for most employees. This is consistent with one of our guiding principles that we want to pay our people well with a goal of reaching the industry’s best productivity over time. To that end, we are currently in long-term agreements with all of our major work groups, which provide the Company, employees, and investors with long-term stability.

Hassle-Free Customer Experience

We want to be the easiest airline to fly. In each step of the customer's journey, from booking a ticket to check-in, from flying in our aircraft to claiming baggage at the final destination, we want to provide a hassle-free experience for our customers. Our industry-leading on-time performance for the past six years reflects the reliable service we provide our customers, and we were the first airline to guarantee checked baggage delivery to the carousel within 20 minutes. Customers can tag their own bags at airport kiosks, or from their homes, and we have fingerprint scan entry to our airport lounges. We lead the travel industry in mobile innovation with a 5-star rated iPhone app, and Android and Microsoft apps that allow passengers to purchase tickets, check-in, upgrade seats, and reserve food for the flight - all with helpful notifications that inform customers when there are changes to their flights. The Transportation Security Administration (TSA) Pre-Check Program is available in 60 of our locations, which allows eligible customers to opt-in for reduced screening requirements. To hear directly from our customers, we have the Alaska Listens survey with five simple questions designed to get timely feedback - and we guarantee a response within 72 hours if there is an issue that needs to be resolved. As passengers take more control of their travel experience, we are able to reduce the time it takes a customer to move from the airport curb to the aircraft.

Energetic and Compelling Brand

We want to be recognized as the preferred airline to fly. In January 2016, we introduced a bold new brand expression, including an updated identity, livery, and look and feel for our digital and physical experiences. We believe there’s an opportunity to deepen the emotional connection with our customers as we continue to expand and grow. Our updated brand expression draws upon our rich heritage while infusing it with additional warmth and energy - to better reflect how customers feel about our brand and the great service that we pride ourselves in delivering.

We continue to invest in a better customer experience. Onboard, customers will continue to enjoy more of what they love with free and premium entertainment direct to their devices, Pacific Northwest-inspired food and beverages and custom leather seats with power outlets for laptops and personal devices and larger overhead bins for carry-on bags. In the fall of 2016, we will introduce a new Premium Class section in the main cabin with increased pitch and other amenities.

We also continue to invest in advertising across markets. We recently renewed our partnership with Seattle Seahawks quarterback Russell Wilson, as our Chief Football Officer. We also announced a ten-year sponsorship with the University of Washington, which includes naming rights to the Alaska Airlines Field at Husky Stadium and the Alaska Airlines Arena at Hec Edmunson Pavillion, among other benefits.

Low Fares, Low Costs and Network Growth

We believe that in order to provide low fares for customers in a growing network of destinations, while returning value to our shareholders, it is imperative for us to maintain a competitive cost structure. In 2015, we lowered our unit costs, excluding fuel, by 0.7% on a consolidated basis, representing the sixth consecutive year of annual reduction. We achieved this through a continued focus on productivity, cost management, and network growth. We increased employee productivity in 2015 and will continue to focus on that metric as we leverage growth. We also manage fuel costs by flying larger, more fuel-efficient aircraft, which have increased our fuel efficiency as measured by available seat miles flown per gallon by 5.6% over the last five years. Additionally, we have added split-scimitar winglets to 94 aircraft, which are expected to increase fuel efficiency by

approximately 1.5% per aircraft. Looking forward, we have committed to purchasing 31 737-900ER and 37 737-MAX aircraft with deliveries from 2016 to 2022, and two Q400 aircraft with deliveries in 2018, although these are subject to change. In addition, we will increase regional capacity by adding 18 E175s with contractual deliveries from 2016 to 2017 and we may order an additional 30 regional jets with delivery beginning in 2017 if we reach acceptable commercial terms. These aircraft deliveries position us for growth and help to ensure that we will continue to operate the most fuel-efficient aircraft available for the foreseeable future.

In 2015, we added 20 new markets to our route structure. We continued to strengthen our Seattle network to offer further utility to our customers by offering non-stop flights to markets like New York (JFK), Charleston, Raleigh-Durham, Nashville, Oklahoma City, and Milwaukee. We also added flying from Los Angeles (LAX) to Liberia and San Jose, Costa Rica and Baltimore. We have grown capacity over 7% annually on average for the past 20 years and we plan to continue to grow between 4% and 8% annually in the next several years. For 2016, we plan to grow capacity approximately 8%.

AIR GROUP

Alaska Air Group is a Delaware corporation incorporated in 1985 and the holding company of Alaska Airlines and Horizon Air. Although Alaska and Horizon both operate as airlines, their business plans, competition, and economic risks differ substantially. Alaska Airlines is an Alaska corporation that was organized in 1932 and incorporated in 1937. Horizon Air Industries is a Washington corporation that first began service and was incorporated in 1981. Horizon was acquired by Air Group in 1986. Alaska operates a fleet of passenger jets (mainline) and contracts with Horizon, SkyWest Airlines, Inc. (SkyWest) and Peninsula Airways, Inc. (PenAir) for regional capacity such that Alaska receives all passenger revenue from those flights. Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase arrangement. The majority of our revenues are generated by transporting passengers. The percentage of revenues by category is as follows:



	2015		2014		2013		2012		2011
Mainline passenger revenue	70	%	70	%	70	%	71	%	69	%
Regional passenger revenue	15	%	15	%	16	%	16	%	17	%
Other revenue	13	%	13	%	12	%	11	%	12	%
Freight and Mail revenue	2	%	2	%	2	%	2	%	2	%
Total	100	%	100	%	100	%	100	%	100	%

We attempt to deploy aircraft into the network in ways that best optimize our revenues and profitability, and reduce our seasonality.

The percentage of our capacity by region is as follows:



	2015		2014		2013		2012		2011
West Coast	36	%	36	%	34	%	35	%	37	%
Transcon/midcon	24	%	22	%	22	%	19	%	19	%
Hawaii	18	%	18	%	19	%	20	%	16	%
Alaska	15	%	15	%	16	%	17	%	18	%
Mexico	6	%	6	%	7	%	7	%	9	%
Canada	1	%	3	%	2	%	2	%	1	%
Total	100	%	100	%	100	%	100	%	100	%

MAINLINE

We offer extensive north/south service within the western U.S., Canada, Mexico, and Costa Rica, as well as passenger and dedicated cargo services to and within the state of Alaska. We also provide long-haul east/west service to Hawaii and cities in the mid-continental and eastern U.S., primarily from Seattle, where we have our largest concentration of departures; although we do offer long-haul departures from other cities as well.

In 2015, we carried 23 million revenue passengers in our mainline operations. At December 31, 2015, Alaska’s operating fleet consisted of 147 Boeing 737 jet aircraft, compared to 137 B737 aircraft as of December 31, 2014.

The percentage of mainline passenger capacity by region and average stage length is presented below:



	2015		2014		2013		2012		2011
West Coast	31	%	31	%	28	%	29	%	31	%
Transcon/midcon	27	%	25	%	25	%	22	%	21	%
Hawaii	20	%	20	%	21	%	22	%	18	%
Alaska	16	%	16	%	18	%	18	%	20	%
Mexico	6	%	7	%	7	%	8	%	8	%
Canada	—	%	1	%	1	%	1	%	2	%
Total	100	%	100	%	100	%	100	%	100	%

Average Stage Length	1,195		1,182		1,177		1,161		1,114

REGIONAL

Our regional operations consist of flights operated by Horizon, SkyWest and PenAir. In 2015, our regional operations carried approximately 9 million revenue passengers, primarily in the states of Washington, Oregon, Idaho and California. Horizon is the largest regional airline in the Pacific Northwest and carries about 85% of Air Group's regional revenue passengers.

Based on 2015 passenger enplanements on regional aircraft, our leading airports are Seattle and Portland. At December 31, 2015, Horizon’s operating fleet consisted of 52 Bombardier Q400 turboprop aircraft. Horizon flights are listed under Alaska's designator code in airline reservation systems, and in customer-facing locations. The regional fleet operated by SkyWest consisted of eight CRJ 700 aircraft and five E175 aircraft.

The percentage of regional passenger capacity by region and average stage length is presented below:



	2015		2014		2013		2012		2011
West Coast	62	%	66	%	66	%	68	%	68	%
Pacific Northwest	19	%	19	%	21	%	20	%	19	%
Canada	7	%	8	%	9	%	9	%	9	%
Alaska	5	%	4	%	2	%	2	%	2	%
Midcon	6	%	2	%	1	%	—	%	—	%
Mexico	1	%	1	%	1	%	1	%	2	%
Total	100	%	100	%	100	%	100	%	100	%

Average Stage Length	348		339		329		332		329

MILEAGE PLAN

The Alaska Airlines Mileage Plan™ program provides a comprehensive suite of frequent flier benefits. Miles can be earned by flying on Alaska or on one of our 16 airline partners, or by using the Alaska Airlines Visa Signature card, or through other non-airline partners. Our extensive list of airline partners includes carriers associated with two of the three major global alliances (Oneworld and SkyTeam), making it easier for our members to earn miles and reach preferred status in our Mileage Plan™, and have access to a large network of travel destinations. Further, members can receive 25,000 bonus miles (30,000 beginning in the Spring of 2016) upon signing up for the Alaska Airlines Visa Signature card and earn triple miles on purchases made on Alaska Airlines flights or on alaskaair.com. Alaska Airlines Visa Signature cardholders also receive an annual companion ticket that allows members to purchase an additional ticket for $99 plus taxes, with no restrictions or black-out dates, and a free first checked bag for all parties in the same itinerary. Earned miles can be redeemed for flights on Alaska Airlines or on any of our partner airlines, or for upgrades to First Class on Alaska Airlines for as low as 15,000 miles. All of these benefits give our Mileage Plan™ members more value for their travel on Alaska Airlines, which led to our Mileage Plan™ receiving the highest ranking by frequent fliers in the first-ever J.D. Power Airline Loyalty/Rewards Program Satisfaction Report in 2014 and again in 2015.

Mileage Plan™ revenues represent approximately 11% of Air Group's total revenues. Furthermore, our Mileage Plan™ helps drive more revenue by attaining new customers and building customer loyalty through the benefits that we provide. The Mileage Plan™ provides more value per dollar spent on the Alaska Airlines Visa Signature card, in comparison to other frequent flier programs in the industry. Summary of the benefits provided in comparison to some of our competitors are as follows:



	Alaska Airlines Signature Visa	Platinum Select AAdvantage	Gold Delta SkyMiles	United Mileage Plus Explorer	Southwest Rapid Rewards Premier

Bonus miles awarded	30,000 after spending $1,000 in 3 months*	30,000 after spending $1,000 in 3 months	30,000 after spending $1,000 in 3 months	30,000 after spending $1,000 in 3 months	50,000 after spending $2,000 in 3 months
Annual fee	$75	$95	$95	$95	$99
Miles for "on" spend	3x	2x	2x	2x	2x
Companion fare	Yes - annual companion fare purchased for $99 plus tax.	No	No	No	No
First bag free	Yes	Yes	Yes	Yes	No bag fees

*Expected launch of 30,000 bonus miles in May 2016. Currently, bonus miles are 25,000.

AGREEMENTS WITH OTHER AIRLINES

Our agreements fall into three different categories: Frequent Flier, Codeshare, and Interline agreements. Frequent Flier agreements offer mileage credits and redemptions for our Mileage Plan™ members. Alaska offers one of the most comprehensive frequent flier programs for our Mileage Plan™ members through our frequent flier partnerships with 16 domestic and international carriers.

Codeshare agreements allow one or more marketing carriers to sell seats on a single operating carrier that services passengers under multiple flight numbers. The sale of codeshare seats can vary depending on the sale arrangement. For example, in a free-sale arrangement, the marketing carrier sells the operating carrier's inventory without any restriction; whereas in a block space arrangement, a fixed amount of seats are sold to the marketing carrier by the operating carrier. The interchangeability of the flight code between carriers provides a greater selection of flights for customers, along with increased flexibility for mileage accrual and redemption.

Interline agreements allow airlines to jointly offer a competitive, single-fare itinerary to customers traveling via multiple carriers to a final destination. An interline itinerary offered by one airline may not necessarily be offered by the other, and the fares collected from passengers are prorated and distributed to interline partners according to preexisting agreements between the carriers. Frequent Flier, Codeshare, and Interline agreements help increase our traffic and revenue by providing more route choices to customers.

We have marketing alliances with a number of airlines that provide frequent flier and codesharing opportunities. Alliances are an important part of our strategy and enhance our revenues by:


•	offering our customers more travel destinations and better mileage credit/redemption opportunities, including elite qualifying miles on all of our major U.S. and international airline partners;


•	giving our Mileage Plan™ program a competitive advantage because of our partnership with carriers from two of the three major global alliances (Oneworld and SkyTeam);


•	giving us access to more connecting traffic from other airlines; and


•	providing members of our alliance partners’ frequent flier programs an opportunity to travel on Alaska and its regional affiliates while earning mileage credit in our partners’ programs.

Most of our codeshare relationships are free-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk. Our marketing agreements have various termination dates, and at any time, one or more may be in the process of renegotiation.

The comprehensive summary of alliances with other airlines is as follows:



	Frequent Flier Agreement	Codeshare — Alaska Flight # on Flights Operated by Other Airline	Codeshare — Other Airline Flight # on Flights Operated by Alaska / Horizon / SkyWest
Major U.S. or International Airlines
Aeromexico	Yes	No	Yes
American Airlines^(a)	Yes	Yes	Yes
Air France	Yes	No	Yes
British Airways	Yes	No	No
Cathay Pacific Airways	Yes	No	Yes
Delta Air Lines^(a)	Yes	Yes	Yes
Emirates	Yes	No	Yes
Icelandair	Yes	No	Yes
Hainan Airlines	Yes	No	No
KLM	Yes	No	Yes
Korean Air	Yes	No	Yes
LAN S.A.	Yes	No	Yes
Fiji Airways^(b)	Yes	No	Yes
Qantas	Yes	No	Yes
Regional Airlines
Rav'n Alaska	Yes	Yes	No
PenAir^(b)	Yes	Yes	No


^(a)	Alaska has codeshare agreements with American and Delta regional affiliate carriers as well.


^(b)	These airlines do not have their own frequent flier program. However, Alaska’s Mileage Plan™ members can earn and redeem miles on these airlines’ route systems.

The following is the financial impact of our marketing alliances:



	2015	2014	2013	2012	2011
Air Group Marketed Revenues	90%	91%	90%	90%	89%

Codeshare Agreements:
American Airlines	4%	3%	2%	3%	3%
Delta Air Lines	2%	2%	4%	3%	4%
Others	1%	1%	1%	1%	1%

Interline Agreements:
Domestic Interline	2%	2%	2%	2%	2%
International Interline	1%	1%	1%	1%	1%
Total Operating Revenue	100%	100%	100%	100%	100%

OTHER REVENUE

Other revenue consists of freight and mail revenue, and ancillary revenue such as bag fees, change fees, on-board food and beverage, and Boardroom membership. Total other revenue, excluding Mileage Plan™ revenue, represents about 7% of our total revenues. In recent years, we have seen growth in our ancillary revenue as we expand services on-board such as Tom Douglas signature meals, in-flight entertainment, and Wi-Fi. Although we do charge bag fees, we offer a 20-minute bag guarantee so that we deliver value to our customers through fast, reliable service. In 2015, we added a free bag as a permanent feature of our affinity credit card. As we focus on ways to better serve our customers, we expect our ancillary revenues will continue to grow.

GENERAL

The airline industry is highly competitive, subject to various uncertainties, and has historically been characterized by low profit margins. Uncertainties include general economic conditions, volatile fuel prices, industry instability, new competition, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation, including taxes and fees, and potential aircraft incidents. Airlines have high fixed costs, primarily for wages, aircraft fuel, aircraft ownership, and facilities rents. Because expenses of a flight do not vary significantly based on the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact on our operating and financial results. Passenger demand and ticket prices are, to a large measure, influenced by the general state of the economy, current global economic and political events, and total available airline seat capacity.

In 2015, the airline industry reported record revenues and profits as the global economy continued to recover and oil prices declined significantly. As the industry strengthens, airlines are now making significant investments in airports, in new planes, and in new services to differentiate their customer service offering. Thus, the level of competition is expected to increase.

FUEL

Our business and financial results are highly affected by the price and, potentially, the availability of aircraft fuel. The cost of aircraft fuel is volatile and outside of our control, and it can have a significant and immediate impact on our operating results. Over the past five years, aircraft fuel expense ranged from 22% to 35% of operating expenses. Fuel prices are impacted by changes in both the price of crude oil and refining margins, and can vary by region in the U.S.

The average annual price of crude oil in the last five years has ranged from a low of $49 per barrel in 2015 from a high of $98 in 2013. For us, a $1 per barrel change in the price of oil equates to approximately $12 million of fuel cost annually. Said another way, a one-cent change in our fuel price per gallon will impact our expected annual fuel cost by approximately $5 million per year.

Refining margins, which represent the price of refining crude oil into aircraft fuel, are a smaller portion of the overall price of jet fuel, but also contributed to the price volatility in recent years. Average annual refining margin prices have fluctuated between $20 per barrel and $36 per barrel in the last five years, and averaged $20 in 2015.

Generally, West Coast jet fuel prices are somewhat higher and more volatile than prices in the Gulf Coast or on the East Coast. Our average raw fuel cost per gallon decreased 39% in 2015, decreased 6% in 2014, and 4% in 2013.

The percentages of our aircraft fuel expense by crude and refining margins, as well as the percentage of our aircraft fuel expense of operating expenses are as follows:



	2015		2014		2013		2012		2011
Crude oil	62	%	72	%	71	%	65	%	70	%
Refining margins	26	%	18	%	19	%	25	%	24	%
Other^(a)	12	%	10	%	10	%	10	%	6	%
Total	100	%	100	%	100	%	100	%	100	%

Aircraft fuel expense	22	%	32	%	34	%	35	%	34	%


^(a)	Other includes gains and losses on settled fuel hedges, unrealized mark-to-market fuel hedge gains or losses, taxes and other into-plane costs.

We use crude oil call options as hedges to decrease our exposure to the volatility of jet fuel prices. Historically, we have had jet fuel refining margin swap contracts, but we discontinued the use of the refining margin swaps in the third quarter of 2014. Call options effectively cap our pricing for crude oil, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With call options, we are hedged against spikes in crude oil prices, and during a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. Currently, we start hedging approximately 18 months in advance of crude oil consumption.

We believe that operating fuel-efficient aircraft is the best hedge against high fuel prices. Alaska operates an all-Boeing 737 fleet and Horizon operates an all-Bombardier Q400 turboprop fleet. Air Group's fuel-efficiency rate expressed in available seat miles flown per gallon (ASMs/g) improved from 74.4 ASMs/g in 2011 to 78.6 ASMs/g in 2015. These improvements have not only reduced our fuel consumption rate, but also the amount of greenhouse gases and other pollutants that our operations emit.

COMPETITION

Competition in the airline industry is intense and unpredictable. Our competitors consist primarily of other airlines and, to a lesser extent, other forms of transportation. Competition can be direct, in the form of another carrier flying the exact non-stop route, or indirect, where a carrier serves the same two cities non-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport. We compete with other domestic airlines, and a limited number of international airlines, on nearly all of our scheduled routes. Our largest competitor is Delta Air Lines, who has significantly increased their capacity in Seattle over the past two years. Approximately 60% of our capacity to and from Seattle competes with Delta. Based on schedules filed with the U.S. Department of Transportation, we expect the amount of competitive capacity overlap with all carriers to increase more than 13% in the first half of 2016, weighted based on our network.

We believe that the following principal competitive factors are important to our customers:


•	Safety record


•	Customer service and reputation

We compete with other airlines in areas of customer service such as on-time performance, passenger amenities - including first class seating, quality of on-board products, aircraft type, and comfort. In 2015, Alaska Airlines ranked “Highest in Customer Satisfaction among Traditional Network Carriers” by J.D. Power and Associates for the eighth year in a row. All of our 2015 mainline aircraft deliveries included the Boeing Sky Interior, our Alaska Beyond™ in-flight experience, which features our streaming in-flight entertainment, gourmet food designed by Tom Douglas, and comfortable seats with additional space and power as part of our exceptional, above and beyond flight experience. In 2015, we introduced Preferred Plus seating and Boeing's new Space Bins^TM. Preferred Plus gives customers the option to upgrade to bulkhead and exit row seats at check-in for a nominal fee and includes early boarding and a free cocktail. Space Bins^TM provide space for up to 50% more carry-on bags on board our aircraft, providing a more hassle-free boarding experience for our passengers. In 2016, we will be launching a Premium Class of service on our airplanes that will provide extra legroom, early boarding, premium snacks and complimentary alcoholic beverages.


•	Fares and ancillary services

The pricing of fares is a significant competitive factor in the airline industry, and the increased availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts. Pricing is driven by a variety of factors including, but not limited to, market-specific capacity, market share per route/geographic area, cost structure, fare vs. ancillary revenue strategies, and demand.

For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors. In addition, traditional network carriers have been able to reduce their operating costs through bankruptcies and mergers, while low-cost carriers have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat one mile), which in turn may enable them to lower their fares. These factors can reduce our pricing power and that of the airline industry as a whole.

Domestic airline capacity is dominated by four large carriers, representing approximately 85% of total seats. Accordingly, if these carriers discount their fares or enter into our core markets, we must match those fares in order to maintain our load factors, often resulting in year-over-year decreases in our yields. We will defend our core markets vigorously and, if necessary, redeploy capacity to better match supply with demand. We believe the restructuring we've completed over the past decade has decreased our costs, enabling us to offer competitive fares while still earning appropriate returns for our shareholders.


•	Routes served, flight schedules, codesharing and interline relationships, and frequent flier programs

We also compete with other airlines based on markets served, the frequency of service to those markets, and frequent flier opportunities. Some airlines have more extensive route structures than we do, and they offer significantly more international routes. In order to expand opportunities for our customers, we enter into codesharing and interline relationships with other airlines that provide reciprocal frequent flier mileage credit and redemption privileges. These relationships allow us to offer our customers access to more destinations than we can on our own, gain exposure in markets we don't serve and allow our customers more opportunities to earn and redeem frequent flier miles. Our Mileage Plan™ offers one of the most comprehensive benefits to our members with the ability to earn and redeem miles on 16 of our partner carriers.

In addition to domestic or foreign airlines that we compete with on most of our routes, we compete with ground transportation in our short-haul markets. Both carriers, to some extent, also compete with technology such as video conferencing and internet-based meeting tools that have changed the need for, or frequency of face-to-face business meetings.

TICKET DISTRIBUTION

Our tickets are distributed through three primary channels:


•	Alaskaair.com: It is less expensive for us to sell through this direct channel and, as a result, we continue to take steps to drive more business to our website. In addition, we believe this channel is preferable from a branding and customer-relationship standpoint in that we can establish ongoing communication with the customer and tailor offers accordingly.

•

Traditional and online travel agencies: Both traditional and online travel agencies typically use Global Distribution Systems (GDS) to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee that is charged to the airline. Many of our large corporate customers require us to use these agencies. Some of our competitors do not use this distribution channel and, as a result, have lower ticket distribution costs.


•	Reservation call centers: These call centers are located in Phoenix, AZ, Kent, WA, and Boise, ID. We generally charge a $15 fee for booking reservations through these call centers.

Our sales by channel are as follows:



	2015		2014		2013		2012		2011
Alaskaair.com	60	%	57	%	55	%	54	%	51	%
Traditional agencies	23	%	25	%	27	%	27	%	28	%
Online travel agencies	11	%	12	%	13	%	13	%	13	%
Reservation call centers	6	%	6	%	5	%	6	%	8	%
Total	100	%	100	%	100	%	100	%	100	%

SEASONALITY AND OTHER FACTORS

Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. Our profitability is generally lowest during the first and fourth quarters due principally to fewer departures and passengers. Profitability typically increases in the second quarter and then reaches its highest level during the third quarter as a result of vacation travel, including increased activity in the state of Alaska. However, we have taken steps over the past few years to better manage the seasonality of our operations by adding flights to leisure destinations, like Hawaii, and expanding to cities in the mid-continental and eastern U.S.

In addition to passenger loads, factors that could cause our quarterly operating results to vary include:


•	general economic conditions and resulting changes in passenger demand,

• changes in fuel costs,


•	pricing initiatives by us or our competitors,


•	increases in competition at our primary airports, and


•	increases or decreases in passenger and volume-driven variable costs.

Many of the markets we serve experience inclement weather conditions in the winter, causing increased costs associated with deicing aircraft, canceling flights, and accommodating displaced passengers. Due to our geographic area of operations, we can be more susceptible to adverse weather conditions, particularly in the state of Alaska and the Pacific Northwest, than some of our competitors, who may be better able to spread weather-related risks over larger route systems.

No material part of our business or that of our subsidiaries is dependent upon a single customer, or upon a few high-volume customers.

EMPLOYEES

Our business is labor intensive. As of December 31, 2015, we employed 15,143 (11,614 at Alaska and 3,529 at Horizon) active full-time and part-time employees. Wages and benefits, including variable incentive pay, represented approximately 41% of our total non-fuel operating expenses in both 2015 and 2014.

Most major airlines, including ours, have employee groups that are covered by collective bargaining agreements. Airlines with unionized work forces generally have higher labor costs than carriers without unionized work forces, and they may not have the ability to adjust labor costs downward quickly enough to respond to new competition or slowing demand. At December 31, 2015, labor unions represented 83% of Alaska’s and 44% of Horizon’s employees. Our relations with U.S. labor organizations are governed by the Railway Labor Act (RLA). Under this act, collective bargaining agreements do not expire but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board (NMB) to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self-help.

Alaska’s union contracts at December 31, 2015 were as follows:



Union	Employee Group	Number of Employees	Contract Status
Air Line Pilots Association International (ALPA)	Pilots	1,697	Amendable 03/31/2018
Association of Flight Attendants (AFA)	Flight attendants	3,660	Amendable 12/17/2019
International Association of Machinists and Aerospace Workers (IAM)	Ramp service and stock clerks	625	Amendable 7/19/2018
IAM	Clerical, office and passenger service	2,921	Amendable 1/1/2019
Aircraft Mechanics Fraternal Association (AMFA)	Mechanics, inspectors and cleaners	665	Amendable 10/17/2016
Mexico Workers Association of Air Transport	Mexico airport personnel	85	Amendable 9/29/2016
Transport Workers Union of America (TWU)	Dispatchers	44	Amendable 3/24/2019

Horizon’s union contracts at December 31, 2015 were as follows:



Union	Employee Group	Number of Employees	Contract Status
International Brotherhood of Teamsters (IBT)	Pilots ⁽¹⁾	643	Amendable 12/14/2018
AFA	Flight attendants ⁽¹⁾	596	Amendable 07/18/2018
IBT	Mechanics and related classifications	272	Amendable 12/16/2020
National Automobile, Aerospace, Transportation and General Workers	Station personnel in Vancouver and Victoria, BC, Canada	42	Amendable 8/26/2018
Transportation Workers Union of America	Dispatchers	17	Amendable 2/14/2016

⁽¹⁾ Horizon pilots and flight attendants ratified new agreements subsequent to December 31, 2015. The Flight Attendant agreement now becomes amendable in July 2019 and the Pilot agreement becomes amendable in December 2024.

EXECUTIVE OFFICERS

The executive officers of Alaska Air Group, Inc. and executive officers of Alaska and Horizon who have significant decision-making responsibilities, their positions and their respective ages are as follows:



Name	Position	Age	Air Group or Subsidiary Officer Since
Bradley Tilden	Chairman, President and Chief Executive Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc. and Chief Executive Officer of Horizon Air Industries, Inc.	55	1994

Benito Minicucci	Executive Vice President/Operations and Chief Operating Officer of Alaska Airlines, Inc.	49	2004

Brandon Pedersen	Executive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc.	49	2003

Andrew Harrison	Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc.	45	2008

David Campbell	President and Chief Operating Officer of Horizon Air Industries, Inc.	54	2014

Herman Wacker	Former Vice President of Legal and General Counsel of Alaska Air Group, Inc. and Alaska Airlines, Inc., and Chief Ethics and Compliance officer at Alaska Air Group, Inc.	67	2014

Kyle Levine	Vice President Legal and General Counsel of Alaska Air Group, Inc. and Alaska Airlines, Inc. and Chief Ethics and Compliance Officer of Alaska Air Group, Inc.	44	2016

Mr. Tilden joined Alaska Airlines in 1991, became Controller of Alaska Air Group and Alaska Airlines in 1994, Vice President/Finance in January 1999, Executive Vice President/Finance and Chief Financial Officer in January 2002, Executive Vice President/Finance and Planning in April 2007, and President of Alaska Airlines in December 2008. He leads Air Group’s Management Executive Committee and was elected to the Air Group Board in 2010. He was elected Chief Executive Officer of Alaska Air Group, Alaska Airlines and Horizon Air in May 2012, and became Chairman of the Board in January 2014.

Mr. Minicucci joined Alaska Airlines in 2004 as Staff Vice President of Maintenance and Engineering and was promoted to Vice President of Seattle Operations in June 2008. He was elected Executive Vice President/Operations and Chief Operating Officer of Alaska Airlines in December 2008. He is a member of Air Group’s Management Executive Committee.

Mr. Pedersen joined Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska Air Group and Alaska Airlines and was elected Vice President/Finance and Controller for both entities in 2006. He was elected Chief Financial Officer of Alaska Air Group and Alaska Airlines in June 2010, and elected as Executive Vice President/Finance and Chief Financial Officer in 2014. He is a member of Air Group's Management Executive Committee.

Mr. Harrison joined Alaska Airlines in 2003 as the Managing Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008. He was elected Senior Vice President of Planning and Revenue Management in 2014. He was elected Executive Vice President and Chief Commercial Officer in February 2015. He is a member of Air Group's Management Executive Committee.

Mr. Campbell joined Horizon Air in 2014 as President and Chief Operating Officer. Prior to joining Horizon Air, Mr. Campbell served more than 25 years in maintenance and flight operations. Most recently, he served as the vice president of maintenance and engineering at jetBlue Airways from January 2014 to August 2014, and prior to that, he served as vice president of safety and operational performance at American Airlines. He joined American in 1988 after serving for four years in the U.S. Air

Force and has overseen maintenance, quality, technical operations and safety. He is a member of Air Group's Management Executive Committee.

Mr. Wacker joined Alaska Airlines in 2007 as Managing Director of Labor & Employment Law and Associate General Counsel. Mr. Wacker was elected Vice President of Legal at Alaska Air Group from February 2014 to December 2015, and General Counsel from October 2014 to December 2015. He was also appointed Chief Ethics and Compliance Officer at Air Group from May 2014 to December 2015. He was a member of Air Group's Management Executive Committee until his retirement in December 2015.

Mr. Levine was elected Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines effective January 1, 2016 and is a member of Air Group’s Management Executive Committee. He joined Alaska Airlines in February 2006 as a Senior Attorney. At Alaska Airlines, he also served as Deputy General Counsel and Managing Director of Legal from February 2011 to January 2016, and as Associate General Counsel and Managing Director Commercial Law and General Litigation from July 2009 to February 2011. He was appointed Assistant Corporate Secretary of Air Group and Alaska Airlines in February 2015.

REGULATION

GENERAL

The airline industry is highly regulated, most notably by the federal government. The Department of Transportation (DOT), the Federal Aviation Administration (FAA) and the Transportation Security Administration (TSA) exercise significant regulatory authority over air carriers.

•

DOT: In order to provide passenger and cargo air transportation in the U.S., a domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U.S. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates. While airlines are permitted to establish their own fares without governmental regulation, the DOT has jurisdiction over the approval of international codeshare agreements, marketing alliance agreements between major domestic carriers, international and some domestic route authorities, Essential Air Service market subsidies, carrier liability for personal or property damage, and certain airport rates and charges disputes. International treaties may also contain restrictions or requirements for flying outside of the U.S. and impose different carrier liability limits than those applicable to domestic flights. The DOT has been active in implementing a variety of “consumer protection” regulations, covering subjects such as advertising, passenger communications, denied boarding compensation and tarmac delay response. Airlines are subject to enforcement actions that are brought by the DOT from time to time for alleged violations of consumer protection and other economic regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.

•

FAA: The FAA, through Federal Aviation Regulations (FARs), generally regulates all aspects of airline operations, including establishing personnel, maintenance and flight operation standards. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA. Pursuant to these regulations we have established, and the FAA has approved, our operations specifications and a maintenance program for each type of aircraft we operate. The maintenance program provides for the ongoing maintenance of such aircraft, ranging from frequent routine inspections to major overhauls. From time to time the FAA issues airworthiness directives (ADs) that must be incorporated into our aircraft maintenance program and operations. All airlines are subject to enforcement actions that are brought by the FAA from time to time for alleged violations of FARs or ADs. At this time, we are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.

•

TSA: Airlines serving the U.S. must operate a TSA-approved Aircraft Operator Standard Security Program (AOSSP), and comply with TSA Security Directives (SDs) and regulations. Airlines are subject to enforcement actions that are brought by the TSA from time to time for alleged violations of the AOSSP, SDs or security regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate. Under TSA authority, we are required to collect a September 11 Security Fee of $5.60 per one-way trip from passengers and remit that sum to the government to fund aviation security measures.

The Department of Justice and DOT have jurisdiction over airline antitrust matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the Railway Labor Act. To the extent we continue to fly to foreign countries and pursue alliances with international carriers, we may be subject to certain regulations of foreign agencies and international treaties.

ENVIRONMENTAL AND OCCUPATIONAL SAFETY MATTERS

We are subject to various laws and government regulations concerning environmental matters and employee safety and health in the U.S. and other countries. U.S. federal laws that have a particular effect on us include the Airport Noise and Capacity Act of 1990, the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, Superfund Amendments and Reauthorization Act, and the Oil Pollution Control Act. We are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection Agency, OSHA, and other federal agencies have been authorized to create and enforce regulations that have an impact on our operations. In addition to these federal activities, various states have been delegated certain authorities under these federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations. We maintain our safety, health and environmental programs in order to meet or exceed these requirements.

We expect there will be legislation in the future to reduce carbon and other greenhouse gas emissions. Alaska and Horizon have transitioned to more fuel-efficient aircraft fleets.

The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have established aircraft noise reduction programs, including the imposition of nighttime curfews. We believe we have sufficient scheduling flexibility to accommodate local noise restrictions.

Although we do not currently anticipate that these regulatory matters, individually or collectively, will have a material effect on our financial condition, results of operations or cash flows, new regulations or compliance issues that we do not currently anticipate could have the potential to harm our financial condition, results of operations or cash flows in future periods.

INSURANCE

We carry insurance of types customary in the airline industry and in amounts deemed adequate to protect our interests and property and to comply both with federal regulations and certain credit and lease agreements. The insurance policies principally provide coverage for Airline Hull, Spares and Comprehensive Legal Liability Insurance, War and Allied Perils, and Workers’ Compensation. In addition, we currently carry a Cyber Liability policy in the event of security breaches from malicious parties.

We believe that our emphasis on safety and our state-of-the-art flight deck safety technology help to control the cost of our insurance.

WHERE YOU CAN FIND MORE INFORMATION

Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website at www.alaskaair.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission. The information contained on our website is not a part of this annual report on Form 10-K.

ITEM 1A. RISK FACTORS

If any of the following occurs, our business, financial condition and results of operations could suffer. In such case, the trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks may emerge and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.

We have adopted an enterprise wide Risk Analysis and Oversight Program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives as well as align these risks with Board oversight. These enterprise-level identified risks have been aligned to the risk factors discussed below.

SAFETY, COMPLIANCE AND OPERATIONAL EXCELLENCE

Our reputation and financial results could be harmed in the event of an airline accident or incident.

An accident or incident involving one of our aircraft or an aircraft operated by one of our codeshare partners or CPA carriers could involve a significant loss of life and result in a loss of confidence in our airlines by the flying public and/or aviation authorities. We could experience significant claims from injured passengers, by-standers and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our codeshare partners and CPA carriers. However, the amount of such coverage may not be adequate to fully cover all claims and we may be forced to bear substantial economic losses from an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured and even if it does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives, which would harm our business.

Our operations are often affected by factors beyond our control, including delays, cancellations, and other conditions, which could harm our business, financial condition and results of operations.

Like other airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.

Other conditions that might impact our operations include:


•	lack of operational approval (e.g. new routes, aircraft deliveries, etc.);


•	congestion and/or space constraints at airports or air traffic control problems;


•	adverse weather conditions;


•	increased security measures or breaches in security;


•	contagious illness and fear of contagion;


•	changes in international treaties concerning air rights;


•	international or domestic conflicts or terrorist activity; and


•	other changes in business conditions.

Due to our concentration of flights in the Pacific Northwest and Alaska, we believe a large portion of our operation is more susceptible to adverse weather conditions. A general reduction in airline passenger traffic as a result of any of the above-mentioned factors could harm our business, financial condition and results of operations.

Changes in government regulation imposing additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions.

Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs. In the last several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA have issued regulations that have required significant expenditures relating to the maintenance and operation of airlines and establishment of consumer protections.

Similarly, there are a number of legislative and regulatory initiatives and reforms at the federal, state, and local level, including increasingly stringent laws protecting the environment, minimum wage requirements, and health care mandates that could affect our relationship with our workforce and the vendors that serve our airlines, and cause our expenses to increase without an ability to pass through these costs.

Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Many airports have increased their rates and charges to air carriers related to higher security costs, increased costs related to updated infrastructures, and other costs. Additional laws, regulations, taxes, and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and view them as “pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business.

The airline industry continues to face potential security concerns and related costs.

Terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a significant negative effect on the airline industry, including us, and could:


•	significantly reduce passenger traffic and yields as a result of a potentially dramatic drop in demand for air travel;


•	significantly increase security and insurance costs;


•	make war risk or other insurance unavailable or extremely expensive;


•	increase fuel costs and the volatility of fuel prices;


•	increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and


•	result in a grounding of commercial air traffic by the FAA.

The occurrence of any of these events would harm our business, financial condition and results of operations.

We rely on third-party vendors for certain critical activities.

We have historically relied on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting, telecommunication systems, and information technology infrastructure and services. As part of our cost-reduction efforts, our reliance on outside vendors has increased and may continue to do so in the future, especially since we rely on timely and effective third-party performance in conjunction with many of our technology-related initiatives.

Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.

STRATEGY

The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on the Company. If we cannot successfully compete in the marketplace, our business, financial condition and operating results will be materially adversely affected.

The U.S. airline industry is characterized by substantial price competition. In recent years, the market share held by low-cost carriers and so-called ultra low-cost carriers has increased significantly and is expected to continue to increase. Airlines also compete for market share by increasing or decreasing their capacity, including route systems and the number of markets served. Several of our competitors have increased their capacity in markets we serve, particularly on the West Coast and in our Seattle hub, therefore increasing competition for those destinations. This increased competition in both domestic and international markets may have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

We continue to strive toward aggressive cost-reduction goals that are an important part of our business strategy of offering the best value to passengers through competitive fares while achieving acceptable profit margins and return on capital. If we are unable to reduce our costs over the long-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns and therefore our financial results may suffer.

The airline industry may undergo further restructuring, consolidation, or the creation or modification of alliances or joint ventures, any of which could have a material adverse effect on our business, financial condition and results of operations.

We continue to face strong competition from other carriers due to restructuring, consolidation, and the creation and modification of alliances and joint ventures. Since deregulation, both the U.S. and international airline industries have experienced consolidation through a number of mergers and acquisitions. Carriers may also improve their competitive positions through airline alliances, slot swaps/acquisitions, and/or joint ventures. Certain airline joint ventures further competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits, achieving many of the benefits of consolidation.

We depend on a few key markets to be successful.

Our strategy is to focus on serving a few key markets, including Seattle, Los Angeles, Anchorage, Portland, and Hawaii . A significant portion of our flights occur to and from our Seattle hub. In 2015, passengers to and from Seattle accounted for 61% of our total passengers.

We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft, and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that if sustained could harm our business, financial condition and results of operations.

Economic uncertainty or another recession would likely impact demand for our product and could harm our financial condition and results of operations.

The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. We are also highly dependent on U.S. consumer confidence and the health of the U.S. economy. Unfavorable U.S. economic conditions have historically driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and shorthaul travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forgo air travel by using communication alternatives such as videoconferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor, and other costs. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations.

We are dependent on a limited number of suppliers for aircraft and parts.

Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon is similarly dependent on Bombardier. Additionally, each carrier is dependent on sole suppliers for aircraft engines. As a result, we are more vulnerable to any problems associated with the supply of those aircraft and parts, including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.

We rely on partner airlines for codeshare and frequent flier marketing arrangements.

Alaska and Horizon are parties to marketing agreements with a number of domestic and international air carriers, or “partners," including, but not limited to, American Airlines and Delta Air Lines. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. In addition, the agreements generally provide that members of Alaska’s Mileage Plan™ program can earn miles on or redeem miles for partner flights and vice versa. We receive revenue from flights sold under codeshare and from interline arrangements. In addition, we believe that the frequent flier arrangements are an important part of our Mileage Plan™ program. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenues or the attractiveness of our Mileage Plan™, which we believe is a source of competitive advantage.

There is ongoing speculation that further airline consolidation or reorganization could occur in the future. We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, frequent flier program enhancements, and may have future discussions with other airlines regarding similar activities. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships.

INFORMATION TECHNOLOGY

We rely heavily on automated systems to operate our business, and a failure to invest in new technology, or a disruption of our current systems or their operators could harm our business.

We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our check-in kiosks, mobile devices and other systems. Substantially all of our tickets are issued to passengers as electronic tickets and the majority of our customers check in using our website or our airport kiosks. We depend on our reservation system to be able to issue, track and accept these electronic tickets. In order for our operations to work efficiently, we must continue to invest in new technology to ensure that our website, reservation system, and check-in systems are able to accommodate a high volume of traffic, maintain secure information, and deliver important flight information. Substantial or repeated website, reservations system or telecommunication systems failures or service disruptions could reduce the attractiveness of our services and cause our customers to do business with another airline. In addition, we rely on other automated systems for crew scheduling, flight dispatch, and other operational needs. In 2016, we expect to migrate to a new crew management system. We also plan to move our primary data center location. Disruptions, failed migration, untimely recovery, or a breach of these systems or the data center could result in the loss of important data, an increase of our expenses, an impact on our operational performance, or a possible temporary cessation of our operations.

If we do not maintain the privacy and security of our information, we could damage our reputation and incur substantial legal and regulatory costs.

We accept, store, and transmit information about our customers, our employees, our business partners and our business. In addition, we frequently rely on third-party hosting sites and data processors, including cloud providers. Our sensitive information relies on secure transmission over public and private networks. A compromise of our systems, the security of our infrastructure, or those of other business partners that result in our information being accessed or stolen by unauthorized persons could adversely affect our operations and our reputation.

FINANCIAL CONDITION AND FINANCIAL MARKETS

Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Significant increases in jet fuel costs would harm our business.

Fuel costs constitute a significant portion of our total operating expenses Future increases in the price of jet fuel may harm our business, financial condition and results of operations, unless we are able to increase fares and fees, or add additional ancillary services to attempt to recover increasing fuel costs.

Certain of the Company’s financing agreements have covenants that impose operating and financial restrictions on the Company and its subsidiaries.

Certain of our credit facilities and indentures governing our secured borrowings impose certain operating and financial covenants on us. Such covenants require us to maintain, depending on the particular agreement, minimum liquidity and/or minimum collateral coverage ratios, and other negative covenants customary for such financings. A decline in the value of collateral could result in a situation where we may not be able to maintain the required collateral coverage ratio.

Our ability to comply with these covenants may be affected by events beyond our control, including the overall industry revenue environment and the level of fuel costs, and we may be required to seek waivers or amendments of covenants, repay all or a portion of the debt or find alternative sources of financing.

Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the maintenance schedules of our aircraft fleet.

As of December 31, 2015, the average age of our NextGen aircraft (B737-800, -900, -900ERs) was approximately 6.4 years, and the average age of our Q400 aircraft was approximately 9 years. Our relatively new aircraft require less maintenance now than they will in the future. Any significant increase in maintenance expenses could have a material adverse effect on our results of operations.

BRAND AND REPUTATION

As we evolve our brand to appeal to a changing demographic and grow into new markets, we will engage in strategic initiatives that may not be favorably received by all customers.

We continue to focus on strategic initiatives designed to increase our brand appeal to a diverse and evolving demographic of airline travelers. These efforts could include significant improvements to our in-airport and on-board environments, increasing our direct customer relationships through improvements to our purchasing portals (digital and mobile), and optimization of our customer loyalty programs.

In pursuit of these efforts we may negatively affect our reputation with some of our existing customer base.

LABOR RELATIONS AND LABOR STRATEGY

A significant increase in labor costs, unsuccessful attempts to strengthen our relationships with union employees, or loss of key personnel could adversely affect our business and results of operations.

Labor costs are a significant component of our total expenses. Each of our represented employee groups has a separate collective bargaining agreement, and could make demands that would increase our operating expenses and adversely affect our financial performance if we agree to them. The same result could apply if we experience a significant increase in vendor labor costs, including wage rate increases, that ultimately flow through to us.

As of December 31, 2015, labor unions represented approximately 83% of Alaska’s and 44% of Horizon’s employees. Although we have been successful in maturing communications, negotiating approaches, and other strategies to enhance workforce engagement in the Company's long-term vision, future uncertainty around open contracts could be a distraction, affecting employee focus in our business and diverting management’s attention from other projects and issues.

We compete against the major U.S. airlines and other businesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, sustain employee engagement in the Company's strategic vision,

or if we are unsuccessful at implementing succession plans for our key staff, we may be unable to grow or sustain our business. In recent years, there have been pilot shortages in the regional market. Attrition beyond normal levels could negatively impact our operating results and our business prospects could be harmed.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

AIRCRAFT

The following table describes the aircraft we operate and their average age at December 31, 2015:



Aircraft Type	Seats	Owned	Leased	Total	Average Age in Years
B737 Freighters & Combis	0/72	6	—	6	22.2
B737-400/700	144/124	17	17	34	17.7
B737-800/900/900ER	163/181/181	97	10	107	6.4
Total Mainline Fleet		120	27	147	9.7
Q400	76	37	15	52	9.0
E175	76	—	5	5	0.5
CRJ-700^(a)	70	2	6	8	13.3
Total Regional Fleet		39	26	65	8.9
Total		159	53	212	9.5


^(a)	In addition to the CRJ-700s in our operating fleet, we have eight leased CRJ-700s currently subleased to a third party operated for other carriers.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations" discusses future orders and options for additional aircraft.

70 of our owned aircraft secure long-term debt arrangements or collateralize our revolving credit facility. See further discussion in “Liquidity and Capital Resources."

Alaska’s leased B737 aircraft have lease expiration dates between 2016 and 2023. Horizon’s leased Q400 aircraft have expiration dates in 2018. The leases on the six CRJ-700 aircraft have expiration dates between 2018 and 2020, and the leased E175 aircraft are through our capacity purchase arrangement with SkyWest. Alaska and Horizon have the option to extend most of the leases for additional periods, or the right to purchase the aircraft at the end of the lease term, usually at the then-fair-market value of the aircraft.

GROUND FACILITIES AND SERVICES

We own terminal buildings in various cities in the state of Alaska and several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac) near Seattle, WA. These include a multi-bay hangar and shops complex (used primarily for line maintenance), a flight operations and training center, an air cargo facility, an information technology office and datacenter, and various other commercial office buildings.

We lease ticket counters, gates, cargo and baggage space, ground equipment, office space, and other support areas at the majority of the airports we serve. We also lease operations, training, and aircraft maintenance facilities in Portland and Spokane, as well as line maintenance stations in Boise, Bellingham, Eugene, San Jose, Medford, Redmond, Seattle, and Spokane. Further, we lease call center facilities in Phoenix and Boise.

ITEM 3. LEGAL PROCEEDINGS

We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

As of December 31, 2015, there were 128,442,099 shares of common stock of Alaska Air Group, Inc. issued and 125,175,325 shares outstanding and 2,348 shareholders of record. In 2015, we paid quarterly dividends of $0.200 per share in March, June, September, and December. Our common stock is listed on the New York Stock Exchange (symbol: ALK). The following table shows the trading range of Alaska Air Group, Inc. common stock on the New York Stock Exchange:



	2015				2014
	High		Low		High		Low
First Quarter	$	70.83	$	57.73	$	46.97	$	36.28
Second Quarter	68.68		58.15		50.47		43.92
Third Quarter	82.75		62.59		50.10		41.85
Fourth Quarter	87.16		73.00		60.93		40.70

SALES OF NON-REGISTERED SECURITIES

None

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS



	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs	Maximum remaining dollar value of shares that can be purchased under the plan (in millions)
October 1, 2015 - October 2, 2015 ^(a)	41,246	$	78.83	41,246
October 3, 2015 – October 31, 2015 ^(b)	531,609	$	76.69	531,609
November 1, 2015 – November 30, 2015 ^(b)	484,454	78.16		484,454
December 1, 2015 – December 31, 2015 ^(b)	501,214	82.44		501,214
Total	1,558,523	$	79.10	1,558,523	$	880

^(a) Purchased pursuant to the completed $650 million repurchase program authorized by the Board of Directors in May 2014.

^(b) Purchased pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.

PERFORMANCE GRAPH

The following graph compares our cumulative total stockholder return since December 31, 2010 with the S&P 500 Index and the Dow Jones U.S. Airlines Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 31, 2010.



ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

	2015			2014			2013			2012			2011
CONSOLIDATED OPERATING RESULTS (audited)
Year Ended December 31 (in millions, except per-share amounts):
Operating Revenues^(a)	$	5,598		$	5,368		$	5,156		$	4,657		$	4,318
Operating Expenses	4,300			4,406			4,318			4,125			3,869
Operating Income	1,298			962			838			532			449
Nonoperating income (expense), net of interest capitalized^(b)	14			13			(22		)	(18		)	(55		)
Income before income tax	1,312			975			816			514			394
Net Income	$	848		$	605		$	508		$	316		$	245
Average basic shares outstanding	128.373			135.445			139.910			141.416			143.510
Average diluted shares outstanding	129.372			136.801			141.878			143.568			146.842
Basic earnings per share	$	6.61		$	4.47		$	3.63		$	2.23		$	1.71
Diluted earnings per share	$	6.56		$	4.42		$	3.58		$	2.20		$	1.66
Cash dividends declared per share	$	0.80		0.50			0.20			—			—
CONSOLIDATED FINANCIAL POSITION (audited)
At End of Period (in millions):
Total assets	$	6,533		$	6,064		$	5,725		$	5,357		$	5,061
Long-term debt, including current portion	$	686		$	803		$	871		$	1,032		$	1,307
Shareholders' equity	$	2,411		$	2,127		$	2,029		$	1,421		$	1,174
OPERATING STATISTICS (unaudited)
Consolidated:^(c)
Revenue passengers (000)	31,883			29,278			27,414			25,896			24,790
Revenue passenger miles (RPM) (000,000) "traffic"	33,578			30,718			28,833			27,007			25,032
Available seat miles (ASM) (000,000) "capacity"	39,914			36,078			33,672			31,428			29,627
Load factor	84.1		%	85.1		%	85.6		%	85.9		%	84.5		%
Yield		14.27	¢		14.91	¢		14.80	¢		14.92	¢		14.81	¢
Passenger revenues per ASM (PRASM)		12.01	¢		12.69	¢		12.67	¢		12.82	¢		12.51	¢
Operating revenues per ASM (RASM)^(d)		14.03	¢		14.88	¢		14.74	¢		14.82	¢		14.57	¢
Operating expenses per ASM, excluding fuel and noted items (CASMex)^(d)		8.30	¢		8.36	¢		8.47	¢		8.48	¢		8.55	¢
Mainline:
Revenue passengers (000)	22,869			20,972			19,737			18,526			17,810
RPMs (000,000) "traffic"	30,340			27,778			26,172			24,417			22,586
ASMs (000,000) "capacity"	35,912			32,430			30,411			28,180			26,517
Load factor	84.5		%	85.7		%	86.1		%	86.6		%	85.2		%
Yield		12.98	¢		13.58	¢		13.33	¢		13.45	¢		13.26	¢
PRASM		10.97	¢		11.64	¢		11.48	¢		11.65	¢		11.29	¢
CASMex^(d)		7.39	¢		7.45	¢		7.54	¢		7.56	¢		7.60	¢
Regional:
Revenue passengers (000)	9,015			8,306			7,677			7,371			6,980
RPMs (000,000) "traffic"	3,238			2,940			2,661			2,590			2,446
ASMs (000,000) "capacity"	4,002			3,648			3,261			3,247			3,110
Load factor	80.9		%	80.6		%	81.6		%	79.8		%	78.6		%
Yield		26.37	¢		27.40	¢		29.20	¢		28.81	¢		29.13	¢
PRASM		21.34	¢		22.08	¢		23.83	¢		22.98	¢		22.94	¢


^(a)	In the third quarter of 2013, the Company adopted Accounting Standards Update 2009-13, "Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force" (ASU 2009-13).


^(b)	Capitalized interest was $34 million, $20 million, $21 million, $18 million, and $12 million for 2015, 2014, 2013, 2012, and 2011, respectively.


^(c)	Includes flights under Capacity Purchase Agreements operated by SkyWest and PenAir.


^(d)	See reconciliation of RASM and CASMex to the most directly related GAAP measure in the "Results of Operations" section.

ITEM 7. 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.” This overview summarizes the MD&A, which includes the following sections:


•	Year in Review—highlights from 2015 outlining some of the major events that happened during the year and how they affected our financial performance.

•

Results of Operations—an in-depth analysis of our revenues by segment and our expenses from a consolidated perspective for the three years presented in our consolidated financial statements. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of 2016.


•	Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, sources and uses of cash, contractual obligations, and commitments and off-balance sheet arrangements.


•	Critical Accounting Estimates—a discussion of our accounting estimates that involve significant judgment and uncertainties.

YEAR IN REVIEW

The Company had a record year in nearly every respect. We posted our 12th consecutive annual profit on an adjusted basis, which is a testament to the hard work of our 15,000 employees and the successful execution of our strategic initiatives. Our 2015 consolidated pretax income was a record $1.3 billion, a significant increase over the $975 million in 2014. The $337 million improvement was driven by an increase of $230 million in revenues and a substantial decrease of $464 million in our fuel expense. Partially offsetting these benefits was an increase in operating expenses, excluding fuel and special items, of $296 million, or 10%, to support the increased capacity of 11%. We recorded $32 million of special charges in the current year related to a non-cash pension expense associated with the buyout of the obligation for certain terminated, vested plan participants, and a litigation-related matter.

The growth in revenues of $230 million was driven by the growth in our business. We launched 20 new markets in 2015, including 10 new cities such as Charleston, Nashville, Raleigh-Durham, Milwaukee as well as San Jose and Liberia in Costa Rica. We now have over 1,000 departures daily across our network on peak days - a significant milestone for our airlines. We are providing more utility than ever before in our primary hub of Seattle, giving our customers substantially more non-stop destinations out of Seattle than any other carrier. The significant decline in fuel expense this year was driven by declines in fuel prices, while the increase in non-fuel operating expenses are primarily growth-related increases as we increased our capacity 11%.

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.

Accomplishments and Highlights

Financial highlights from 2015 include:


•	Reported record full-year net income, excluding special items, of $842 million, a 47% increase over 2014. Adjusted diluted earnings per share of $6.51 was a 56.0% increase compared to 2014. See reconciliation of these non-GAAP measures to comparable GAAP figures in Results of Operations.


•	Announced a 38% increase in the quarterly dividend, from $0.20 per share to $0.275 per share in January 2016. This is the third time the company has raised the dividend since initiating the quarterly dividend in July 2013, with a cumulative increase of 175% since that time.


•	Paid $0.20 per-share quarterly cash dividend in the fourth quarter, bringing total dividend payments in 2015 to $102 million.


•	Repurchased 7,208,328 shares of common stock for an average price of $70 during 2015 for $505 million, or approximately 6% of market capitalization at the beginning of 2015. Since 2007, Air Group has used $1.3 billion to repurchase 56 million shares at an average price of $23.66, representing about 35% of the Company's outstanding shares on December 31, 2006.


•	Generated nearly $1.6 billion of operating cash flow and $753 million of free cash flow in 2015. Since the beginning of 2010 Air Group has generated $5.6 billion of operating cash flow, and $2.6 billion of free cash flow.


•	Grew passenger revenues by 6% compared to the fourth quarter of 2014, and by 5% compared to full-year 2014.


•	Reached a new long term agreement with Bank of America for the Alaska Airlines Visa credit card. The new agreement adds customer benefits, such as no foreign transaction fees, and is expected to generate an incremental $60 million of revenue in 2016.


•	Generated record full-year adjusted pretax margin of 24.0% in 2015, compared to 17.2% in 2014.


•	Achieved return on invested capital of 25.2% in 2015, compared to 18.6% in 2014.


•	Lowered adjusted debt-to-total capitalization ratio to 27% as of December 31, 2015. Air Group currently has no net debt.


•	Lowered consolidated unit costs excluding fuel and special items for the sixth consecutive year, to the lowest level ever. Mainline unit costs excluding fuel have declined 13 of the last 14 years.


•	Held $1.3 billion in unrestricted cash and marketable securities as of December 31, 2015.

2015 Accomplishments and Highlights:

Recognition and Awards


•	Ranked the best airline in the U.S. by The Wall Street Journal's "Middle Seat" scorecard for three consecutive years.


•	Ranked "Highest in Customer Satisfaction Among Traditional Network Carriers" by J.D. Power and Associates for the eighth year in a row.


•	Ranked highest by frequent fliers in the J.D. Power Airline Loyalty/Rewards Program Satisfaction Report for the second year in a row.


•	Rated the #1 Airline Rewards Program by U.S. News and World Report.


•	Named the "Airline Market Leader" by Air Transport World, becoming the only U.S. airline honored by the magazine in its 2016 Industry Achievement Awards.


•	Named No. 1 on-time carrier in North America for the sixth year in a row by FlightStats in January 2016.


•	Named Top Performing Airline among mid-sized carriers worldwide by Aviation Week magazine.


•	Ranked as the most fuel efficient airline for U.S. airlines by the International Council on Clean Transportation for the fifth year in a row.


•	Awarded Fast Travel Platinum status from the International Air Transport Association, which is awarded to airlines offering four or more Fast Travel options to at least 80% of their passengers.


•	Ranked as a top 100 of America's Best Employers by Forbes Magazine.


•	Ranked first in the Leadership 500 Excellence Awards, recognizing the success of Alaska's Gear Up leadership training.

Our People


•	Awarded a record $120 million in incentive pay to employees for 2015, or more than one month's pay for most employees. Over the last five years, employees have earned more than $500 million in incentive pay, averaging 8.6% of annual pay.

•

Reached new long-term agreements with Horizon's pilots and flight attendants on contracts that will position Horizon for future growth. These contracts were ratified in January 2016 subsequent to year end. The flight attendant agreement becomes amendable in 2019 and the pilot agreement becomes amendable in 2024. Each contract includes a signing bonus upon ratification, which is expected to be approximately $3.5 million, in aggregate, in the first quarter of 2016.


•	Signed a four-year agreement with Alaska Airline's dispatchers in December 2015.


•	Completed "Gear Up 2" for over 1,200 leaders at Alaska and Horizon - a continuation of our award-winning leadership training workshop.


•	Delivered our "Beyond Service" customer service training to nearly 9,000 customer-facing employees.


•	Received a perfect score of 100% for workplace equality on the 2016 Corporate Equality Index (CEI).

Our Customers and Product


•	Launched Preferred Plus Seating, providing customers the ability to select bulkhead and exit-row seating 24 hours in advance of the flight. Preferred Plus Seating also includes priority boarding and complimentary beer, wine or cocktail.


•	Announced plans to introduce Premium Class seating in 2016, which will provide customers greater leg room, early boarding, and premium on-board amenities, among other things.


•	Became the launch customer of Boeing's new, innovative, high-capacity 737 Space Bins, which will increase bag capacity in the cabin by 50%.


•	Added a free first checked bag as a permanent feature of the Alaska Airlines Visa Signature affinity credit card.


•	Added 11 Boeing 737-900ERs and one Bombardier Q400 aircraft to the operating fleet in 2015.


•	Added five Embraer 175 (E175) regional jets in 2015, and committed for future positions to grow the number of E175s to 23 by the end of 2017, including E175s that will replace the eight CRJ700 regional jets operating in our regional network. Furthermore, we may order an additional 30 regional jets with deliveries starting in 2017 that will likely be operated by Horizon.


•	Added 20 new markets and 10 new cities to our growing network in 2015.


•	Increased fuel efficiency (as measured by seat-miles per gallon) by 2.2% over 2014.

Our Communities


•	Donated nearly $12 million to support local communities, including job training for workers at the Seattle-Tacoma airport, STEM-focused education programs at Seattle's Museum of Flight, the Alaska Native Science and Engineering Program, and Seattle's bicycle sharing program.


•	Announced a 10-year sponsorship agreement with the University of Washington which includes, among other things, exclusive naming rights for Alaska Airlines Field at Husky Stadium and Alaska Airlines Arena.

Capital Allocation

In 2015, we repurchased 7,208,328 shares of our common stock for $505 million under the share repurchase programs authorized by our Board of Directors. Since 2007, we have repurchased 56 million shares of common stock under such programs for $1.3 billion for an average price of approximately $23.66 per share. In 2015, we increased our quarterly dividend 60% from $0.125 per share to $0.20 per share, and subsequent to December 31, 2015, we announced a 38% increase to $0.275 per share. Overall, we returned $607 million to shareholders during 2015 and expect to exceed that amount in 2016.

Outlook

Our primary focus every year is to run a safe, compliant and reliable operation at our airlines. In addition to our primary objective, we remain focused on providing a hassle-free experience for our customers, and building a compelling brand to support growing our network. We recently enhanced our affinity credit card product offering, and in 2016 we are introducing a new premium class of service on our airplanes. Our refreshed brand and bold new brand expressions will roll out throughout our major airports and on our airplanes in 2016 as well.

Similar to the past several years, we expect to continue our growth plans over the next year. Currently, we expect to grow our system-wide capacity by approximately 8% in 2016, compared to 10.6% in 2015. Over the past few years, we have seen competitive capacity increase significantly in our markets, especially in our hometown of Seattle. We expect to see even more competitive capacity in 2016. Current schedules indicate competitive capacity will be 13% higher in the first quarter and 14% higher in the second quarter of 2016. We believe that our product, our operation, our engaged employees and award-winning service, combined with our strong balance sheet give us the ability to compete vigorously in our markets. Because of our strong financial position, low costs, and high number of unencumbered aircraft, we have an ability to flex our fleet to meet demands and allocate capacity in the markets that meet our return objectives.

With our growth plans and the expectation for lower non-fuel unit costs and steady fuel costs for 2016, we believe our financial performance will continue to be strong.

RESULTS OF OPERATIONS

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

We believe disclosure of earnings excluding the impact of mark-to-market gains or losses or other individual revenues or expenses is useful information to investors because:

•

By eliminating fuel expense and certain special items from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long run, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

•

2013 Operating revenue per ASM (RASM) excludes a favorable, one-time, non-cash Special mileage plan revenue item of $192 million primarily related to our modified affinity card agreement with Bank of America, executed in July 2013. In accordance with accounting standards, we recorded this item in the third quarter of 2013, and it reflects a non-cash adjustment of the value of miles outstanding in the program. We believe it is appropriate to exclude this special revenue item from recurring revenues from operations.


•	Cost per ASM (CASM) excluding fuel and certain special items is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.


•	Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all Air Group employees.


•	CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

•

Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as mark-to-market hedging adjustments, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

•

Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

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.

2015 COMPARED WITH 2014

Our consolidated net income for 2015 was $848 million, or $6.56 per diluted share, compared to net income of $605 million, or $4.42 per diluted share, in 2014.

Excluding the impact of mark-to-market fuel hedge adjustments, and special items, our adjusted consolidated net income for 2015 was $842 million, or $6.51 per diluted share, compared to an adjusted consolidated net income of $571 million, or $4.18 per share, in 2014.



	Twelve Months Ended December 31,
	2015						2014
(in millions, except per-share amounts)	Dollars			Diluted EPS			Dollars			Diluted EPS
Net income and diluted EPS as reported	$	848		$	6.56		$	605		$	4.42
Mark-to-market fuel hedge adjustments, net of tax	—			—			(15		)	(0.11		)
Special items, net of tax	20			0.15			(19		)	(0.13		)
Special income tax benefit	(26		)	(0.20		)	—			—
Non-GAAP adjusted income and per-share amounts	$	842		$	6.51		$	571		$	4.18

Our operating costs per ASM (CASM) are summarized below:



	Twelve Months Ended December 31,
	2015			2014			% Change
Consolidated:
Total operating expenses per ASM (CASM)		10.77	¢		12.21	¢	(11.8	)
Less the following components:
Aircraft fuel, including hedging gains and losses	2.39			3.93			(39.2	)
Special items	0.08			(0.08		)	NM
CASM, excluding fuel and fleet transition costs		8.30	¢		8.36	¢	(0.7	)

Mainline:
Total mainline operating expenses per ASM (CASM)		9.77	¢		11.15	¢	(12.4	)
Less the following components:
Aircraft fuel, including hedging gains and losses	2.29			3.79			(39.6	)
Special items	0.09			(0.09		)	NM
CASM, excluding fuel		7.39	¢		7.45	¢	(0.8	)

NM - Not meaningful

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.

Below are operating statistics we use to measure performance. We often refer to unit revenues and adjusted unit costs, which is a non-GAAP measure.



	Twelve Months Ended December 31,
	2015	2014	Change	2013	Change
Consolidated Operating Statistics:^(a)
Revenue passengers (000)	31,883	29,278	8.9%	27,414	6.8%
RPMs (000,000) "traffic"	33,578	30,718	9.3%	28,833	6.5%
ASMs (000,000) "capacity"	39,914	36,078	10.6%	33,672	7.1%
Load factor	84.1%	85.1%	(1.0) pts	85.6%	(0.5) pts
Yield	14.27¢	14.91¢	(4.3)%	14.80¢	0.7%
PRASM	12.01¢	12.69¢	(5.4)%	12.67¢	0.2%
RASM^(b)	14.03¢	14.88¢	(5.7)%	14.74¢	0.9%
CASM excluding fuel and fleet transition costs^(b)	8.30¢	8.36¢	(0.7)%	8.47¢	(1.3)%
Economic fuel cost per gallon^(b)	$1.88	$3.08	(39.0)%	$3.30	(6.7)%
Fuel gallons (000,000)	508	469	8.3%	447	4.9%
ASM's per gallon	78.6	76.9	2.2%	75.3	2.1%
Average number of full-time equivalent employees (FTEs)	13,858	12,739	8.8%	12,163	4.7%

Mainline Operating Statistics:
Revenue passengers (000)	22,869	20,972	9.0%	19,737	6.3%
RPMs (000,000) "traffic"	30,340	27,778	9.2%	26,172	6.1%
ASMs (000,000) "capacity"	35,912	32,430	10.7%	30,411	6.6%
Load factor	84.5%	85.7%	(1.2) pts	86.1%	(0.4) pts
Yield	12.98¢	13.58¢	(4.4)%	13.33¢	1.9%
PRASM	10.97¢	11.64¢	(5.8)%	11.48¢	1.4%
CASM excluding fuel^(b)	7.39¢	7.45¢	(0.8)%	7.54¢	(1.2)%
Economic fuel cost per gallon^(b)	$1.87	$3.07	(39.1)%	$3.30	(7.0)%
Fuel gallons (000,000)	439	407	7.9%	393	3.6%
ASM's per gallon	81.8	79.7	2.6%	77.4	3.0%
Average number of FTE's	10,750	9,910	8.5%	9,493	4.4%
Aircraft utilization	10.8	10.5	2.9%	10.6	(0.9)%
Average aircraft stage length	1,195	1,182	1.1%	1,177	0.4%
Mainline operating fleet at period-end	147 a/c	137 a/c	10 a/c	131 a/c	6 a/c

Regional Operating Statistics:^(c)
Revenue passengers (000)	9,015	8,306	8.5%	7,677	8.2%
RPMs (000,000) "traffic"	3,238	2,940	10.1%	2,661	10.5%
ASMs (000,000) "capacity"	4,002	3,648	9.7%	3,261	11.9%
Load factor	80.9%	80.6%	0.3 pts	81.6%	(1.0) pts
Yield	26.37¢	27.40¢	(3.8)%	29.20¢	(6.2)%
PRASM	21.34¢	22.08¢	(3.4)%	23.83¢	(7.3)%


^(a)	Except for FTEs, data includes information related to regional CPA flying with Horizon, SkyWest and PenAir.


^(b)	See reconciliation of this measure to the most directly related GAAP measure in the "Results of Operations" section.


^(c)	Data presented includes information related to regional CPAs.

OPERATING REVENUES

Total operating revenues increased $230 million, or 4%, during 2015 compared to the same period in 2014. The changes are summarized in the following table:



	Twelve Months Ended December 31,
(in millions)	2015		2014		% Change
Passenger
Mainline	$	3,939	$	3,774	4
Regional	854		805		6
Total passenger revenue	$	4,793	$	4,579	5
Freight and mail	108		114		(5	)
Other - net	697		675		3
Total operating revenues	$	5,598	$	5,368	4

Passenger Revenue – Mainline

Mainline passenger revenue for 2015 increased by 4% on a 10.7% increase in capacity, partially offset by a 5.8% decrease in PRASM compared to 2014. The increase in capacity was driven by new routes, larger aircraft added to our fleet, and increased utilization of our aircraft. The decrease in PRASM was driven by a 4.4% decrease in ticket yield, combined with a 1.2 point decrease in load factor compared to the prior year. The decline in ticket yield was primarily due to increased competitive capacity in the markets we serve, and our own growth. Furthermore, the significant decline in fuel prices has had an impact on lower ticket prices. The decline in load factor was also a result of increased capacity.

We expect competitive pressures on unit revenues to continue into 2016. However, we expect total passenger revenue will increase from 2015, although likely less than our growth rate in capacity.

Passenger Revenue – Regional

Regional passenger revenue increased by $49 million, or 6%, compared to 2014 due to a 9.7% increase in capacity, partially offset by a 3.4% decrease in PRASM compared to 2014. The increase in capacity is due to an increase in departures, and average aircraft stage length. The decrease in PRASM was due to a 3.8% decrease in ticket yield, partially offset by an increase in load factor of 0.3 points. The decline in yield was due to an increase in competitive capacity in our regional markets and our own growth as we strengthen our network utility in the Pacific Northwest.

We expect Regional passenger revenue to increase in 2016, primarily due to the annualization of new routes introduced in 2015, and additional regional routes scheduled to be added in 2016.

Other – Net

Other—net revenue increased $22 million, or 3%, from 2014, due to increases in Mileage Plan revenue and food and beverage sales, partially offset by lower bag fee revenues. Mileage Plan revenue increased $34 million or 12%, due to increased miles sold. Food and beverage sales were higher due to the 8.9% increase in passengers and selling more premium offerings, such as Tom Douglas signature meals. Bag fee revenue was lower due to promotions launched in January to offer a free first checked bag to our Mileage Plan members, and to all Alaska Airlines Signature Visa credit card holders beginning in February. This decline was partially offset by incremental revenue from our affinity card bank partner.

We expect our Other—net revenue to experience an increase at a pace higher than the expected increase in passengers in 2016, due primarily to the extended agreement with our affinity credit card bank partner effective January 1, 2016. We expect this agreement will result in an incremental $60 million of revenue in 2016.

OPERATING EXPENSES

Total operating expenses decreased $106 million, or 2%, compared to 2014, primarily as a result of lower fuel costs. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:



	Twelve Months Ended December 31,
(in millions)	2015		2014			% Change
Fuel expense	$	954	$	1,418		(33	)
Non-fuel expenses	3,314		3,018			10
Special items	32		(30		)	NM
Total Operating Expenses	$	4,300	$	4,406		(2	)

NM - Not Meaningful

Significant operating expense variances from 2014 are more fully described below.

Wages and Benefits

Wages and benefits increased during 2015 by $118 million, or 10%, compared to 2014. The primary components of wages and benefits are shown in the following table:



	Twelve Months Ended December 31,
(in millions)	2015		2014		% Change
Wages	$	945	$	862	10
Medical and other benefits	153		150		2
Defined contribution plans	60		53		13
Pension - Defined benefit plans	28		9		211
Payroll taxes	68		62		10
Total wages and benefits	$	1,254	$	1,136	10

Wages increased 10%, primarily due to an 8.8% increase in FTEs and the annualization of new labor contracts that included higher rates. The increase in FTEs was to support the growth in our business.

Defined contribution plans increased 13% due to increased contributions throughout all labor groups and an increased matched percentage as a part of recent labor contracts.

Pension expense increased $19 million, compared to the same period in the prior year. The increase is due to higher amortization of actuarial losses from previous years due primarily to a lower discount rate used to value the pension obligation at December 31, 2014.

We expect wages and benefits to be higher in 2016 compared to 2015 on a 4% to 5% increase in FTEs.

Variable Incentive Pay

Variable incentive pay expense increased to $120 million in 2015 from $116 million in 2014. The increase is due to actual results exceeding our targets for financial performance more so than in the prior year, coupled with a higher wage base.

Aircraft Fuel

Aircraft fuel expense includes both raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio included in our consolidated statement of operations as the value of that portfolio increases and decreases. Aircraft fuel expense can be volatile, even between quarters, because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.

Aircraft fuel expense decreased $464 million, or 33% compared to 2014. The elements of the change are illustrated in the following table:



	Twelve Months Ended December 31,
	2015				2014
(in millions, except for per gallon amounts)	Dollars		Cost/Gal		Dollars			Cost/Gal
Raw or "into-plane" fuel cost	$	935	$	1.84	$	1,400		$	2.99
Losses on settled hedges	19		0.04		41			0.09
Consolidated economic fuel expense	$	954	$	1.88	$	1,441		$	3.08
Mark-to-market fuel hedge adjustments	—		—		(23		)	(0.05		)
GAAP fuel expense	$