Alaska Air Group Reports Record Adjusted Fourth Quarter 2015 and Full-Year Results and Raises Dividend 38%

21 Jan, 2016, 08:00 ET from Alaska Air Group

SEATTLE, Jan. 21, 2016 /PRNewswire/ --

Financial Highlights:

  • Reported record fourth quarter net income, excluding special items, of $186 million, a 49% increase over the fourth quarter of 2014. Adjusted diluted earnings per share of $1.46 was a 55% increase over the fourth quarter of 2014. This quarter's results compare to a First Call analyst consensus estimate of $1.40 per share. 
  • 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% increase compared to 2014.
  • Reported net income for the fourth quarter and full year under Generally Accepted Accounting Principles (GAAP) of $191 million, or $1.51 per diluted share, and $848 million, or $6.56 per diluted share, respectively. These results compare to net income of $148 million, or $1.11 per diluted share, and $605 million, or $4.42 per diluted share, respectively, in 2014.
  • 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 at 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 Dec. 31, 2006.
  • Generated nearly $1.6 billion of operating cash flow and $760 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% 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 Dec. 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 Dec. 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 "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 tentative agreements with Horizon's pilots and flight attendants on new contracts that will position Horizon for growth.
  • Signed a four-year agreement with Alaska'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, and announced plans 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 network.
  • 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 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.

Alaska Air Group, Inc. (NYSE: ALK) today reported fourth quarter 2015 GAAP net income of $191 million, or $1.51 per diluted share, compared to GAAP net income of $148 million, or $1.11 per diluted share in 2014. Excluding mark-to-market fuel hedge losses of $1 million ($1 million after tax, or $0.01 per diluted share), a non-cash pension settlement charge and a litigation-related matter of $32 million in aggregate ($20 million after tax, or $0.16 per diluted share), and a tax benefit of $26 million related to amended multiple-year state tax returns, the company recorded fourth quarter 2015 net income of $186 million, or $1.46 per diluted share. This result compares to net income, excluding mark-to-market fuel hedge gains and special items, of $125 million, or $0.94 per diluted share, in 2014.            

The company reported full-year 2015 GAAP net income of $848 million, compared to $605 million in the prior year. Excluding the impact of the items noted in the table below, the company reported record net income of $842 million, or $6.51 per diluted share for 2015, compared to net income of $571 million, or $4.18 per diluted share in 2014.

"These record results reflect our strong performance in the areas that drive long-term value for our business," said CEO Brad Tilden. "We're operating safely and on time, our customer satisfaction ratings remain strong, our customer base is growing at a record pace, and our costs and fares are coming down - all a result of the hard work and dedication of our employees."

"With today's announcement, our dividend has increased by 175% since we initiated it two and one-half years ago.  This increase underscores our confidence in our business and our commitment to return capital to shareholders."

The following table reconciles the Company's adjusted net income and earnings per diluted share (EPS) during the full year and fourth quarters of 2015 and 2014 to amounts as reported in accordance with GAAP:

Three Months Ended December 31,

2015

2014

(in millions, except per share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

Reported GAAP net income

$

191

$

1.51

$

148

$

1.11

Mark-to-market fuel hedge adjustments, net of tax

1

0.01

(4)

(0.03)

Special items, net of tax

20

0.16

(19)

(0.14)

Special tax benefit

(26)

(0.22)

Non-GAAP adjusted income and per share amounts

$

186

$

1.46

$

125

$

0.94

 

Twelve Months Ended December 31,

2015

2014

(in millions, except per share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

Reported GAAP net income

$

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 tax benefit

(26)

(0.20)

Non-GAAP adjusted income and per share amounts

$

842

$

6.51

$

571

$

4.18

 

Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the fourth quarter and full year results will be simulcast via the Internet at 8:30 a.m. Pacific time on Jan. 21, 2016. It can be accessed through the company's Web site at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as "Alaska" and "Horizon," respectively, and together as our "airlines."

This news release may contain forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the company's Annual Report on Form 10-K for the year ended December 31, 2014. Some of these risks include competition, labor costs and relations, general economic conditions, increases in operating costs including fuel, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.

Alaska Airlines, a subsidiary of Alaska Air Group (NYSE: ALK), together with its partner regional airlines, serves more than 100 cities through an expansive network in the United States, Canada, Mexico and Costa Rica. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Airline Satisfaction Study for eight consecutive years from 2008 to 2015. Alaska Airlines' Mileage Plan also ranked "Highest in Customer Satisfaction with Airline Loyalty Rewards Programs" in the J.D. Power 2014 and 2015 Airline Loyalty/Rewards Program Satisfaction Report. For reservations, visit www.alaskaair.com. For more news and information, visit the Alaska Airlines Newsroom at www.alaskaair.com/newsroom.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

Three Months Ended December 31,

Twelve Months Ended December 31,

(in millions, except per share amounts)

2015

2014

Change

2015

2014

Change

Operating Revenues:

Passenger

Mainline

$

962

$

916

5

%

$

3,939

$

3,774

4

%

Regional

216

200

8

%

854

805

6

%

Total passenger revenue

1,178

1,116

6

%

4,793

4,579

5

%

Freight and mail

25

26

(4)

%

108

114

(5)

%

Other - net

174

164

6

%

697

675

3

%

Total Operating Revenues

1,377

1,306

5

%

5,598

5,368

4

%

Operating Expenses:

Wages and benefits

331

304

9

%

1,254

1,136

10

%

Variable incentive pay

30

32

(6)

%

120

116

3

%

Aircraft fuel, including hedging gains and losses

213

306

(30)

%

954

1,418

(33)

%

Aircraft maintenance

71

63

13

%

253

229

10

%

Aircraft rent

27

26

4

%

105

110

(5)

%

Landing fees and other rentals

79

72

10

%

296

279

6

%

Contracted services

57

51

12

%

214

196

9

%

Selling expenses

51

45

13

%

211

199

6

%

Depreciation and amortization

84

76

11

%

320

294

9

%

Food and beverage service

30

25

20

%

113

93

22

%

Third-party regional carrier expense

20

15

33

%

72

58

24

%

Other

97

79

23

%

356

308

16

%

Special items

32

(30)

NM

32

(30)

NM

Total Operating Expenses

1,122

1,064

5

%

4,300

4,406

(2)

%

Operating Income

255

242

5

%

1,298

962

35

%

Nonoperating Income (Expense):

Interest income

5

6

21

21

Interest expense

(10)

(12)

(42)

(48)

Interest capitalized

9

6

34

20

Other - net

1

20

4

14

13

Income Before Income Tax

259

242

7

%

1,312

975

35

%

Income tax expense

68

94

464

370

Net Income

$

191

$

148

29

%

$

848

$

605

40

%

Basic Earnings Per Share:

$

1.52

$

1.12

36

%

$

6.61

$

4.47

48

%

Diluted Earnings Per Share:

$

1.51

$

1.11

36

%

$

6.56

$

4.42

48

%

Shares Used for Computation:

Basic

125.900

132.368

(5)

%

128.373

135.445

(5)

%

Diluted

126.818

133.705

(5)

%

129.372

136.801

(5)

%

Cash dividend declared per share

$

0.200

$

0.125

$

0.800

$

0.500

NM - Not Meaningful

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

Alaska Air Group, Inc.

(in millions)

December 31, 2015

December 31, 2014

Cash and marketable securities

$

1,328

$

1,217

Total current assets

1,663

1,639

Property and equipment-net

4,802

4,299

Other assets

68

126

Total assets

$

6,533

$

6,064

Air traffic liability

669

631

Current portion of long-term debt

115

117

Other current liabilities

1,022

923

Current liabilities

$

1,806

$

1,671

Long-term debt

571

686

Other liabilities and credits

1,745

1,580

Shareholders' equity

2,411

2,127

Total liabilities and shareholders' equity

$

6,533

$

6,064

Debt to Capitalization, adjusted for operating leases(a)

27%:73%

31%:69%

Number of common shares outstanding

125.175

131.481

(a) 

Calculated using the present value of remaining aircraft lease payments for aircraft that are in our operating fleet as of the balance sheet date.

 

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.

Three Months Ended December 31,

Twelve Months Ended December 31,

2015

2014

Change

2015

2014

Change

Consolidated Operating Statistics:(a)

Revenue passengers (PAX) (000)

7,927

7,282

8.9%

31,883

29,278

8.9%

RPMs (000,000) "traffic"

8,526

7,640

11.6%

33,578

30,718

9.3%

ASMs (000,000) "capacity"

10,340

9,156

12.9%

39,914

36,078

10.6%

Load factor

82.5%

83.4%

(0.9) pts

84.1%

85.1%

(1.0) pts

Yield

13.82¢

14.61¢

(5.4)%

14.27¢

14.91¢

(4.3)%

PRASM

11.39¢

12.19¢

(6.6)%

12.01¢

12.69¢

(5.4)%

RASM

13.32¢

14.27¢

(6.7)%

14.03¢

14.88¢

(5.7)%

CASM excluding fuel and special items(b)

8.48¢

8.60¢

(1.4)%

8.30¢

8.36¢

(0.7)%

Economic fuel cost per gallon(c)

$1.62

$2.64

(38.6)%

$1.88

$3.08

(39.0)%

Fuel gallons (000,000)

131

118

11.0%

508

469

8.3%

ASMs per gallon

78.9

77.6

1.7%

78.6

76.9

2.2%

Average number of full-time equivalent employees (FTEs)

14,360

13,059

10.0%

13,858

12,739

8.8%

Employee productivity (PAX/FTEs/months)

184.0

185.9

(1.0)%

191.7

191.5

0.1%

Mainline Operating Statistics:

Revenue passengers (PAX) (000)

5,676

5,177

9.6%

22,869

20,972

9.0%

RPMs (000,000) "traffic"

7,707

6,907

11.6%

30,340

27,778

9.2%

ASMs (000,000) "capacity"

9,303

8,233

13.0%

35,912

32,430

10.7%

Load factor

82.8%

83.9%

(1.1) pts

84.5%

85.7%

(1.2) pts

Yield

12.48¢

13.25¢

(5.8)%

12.98¢

13.58¢

(4.4)%

PRASM

10.34¢

11.12¢

(7.0)%

10.97¢

11.64¢

(5.8)%

RASM

12.28¢

13.18¢

(6.8)%

12.98¢

13.80¢

(5.9)%

CASM excluding fuel and special items(b)

7.54¢

7.70¢

(2.1)%

7.39¢

7.45¢

(0.8)%

Economic fuel cost per gallon(c)

$1.60

$2.64

(39.4)%

$1.87

$3.07

(39.1)%

Fuel gallons (000,000)

113

102

10.8%

439

407

7.9%

ASMs per gallon

82.3

80.7

2.0%

81.8

79.7

2.6%

Average number of FTEs

11,069

10,171

8.8%

10,750

9,910

8.5%

Employee productivity (PAX/FTEs/months)

170.9

169.7

0.7%

177.3

176.4

0.5%

Aircraft utilization

10.7

10.3

3.9%

10.8

10.5

2.9%

Average aircraft stage length

1,225

1,190

2.9%

1,195

1,182

1.1%

Regional Operating Statistics:(d)

Revenue passengers (PAX) (000)

2,253

2,106

7.0%

9,015

8,306

8.5%

RPMs (000,000) "traffic"

819

734

11.6%

3,238

2,940

10.1%

ASMs (000,000) "capacity"

1,037

923

12.4%

4,002

3,648

9.7%

Load factor

79.0%

79.5%

(0.5) pts

80.9%

80.6%

0.3 pts

Yield

26.37¢

27.38¢

(3.7)%

26.37¢

27.40¢

(3.8)%

PRASM

20.83¢

21.76¢

(4.3)%

21.34¢

22.08¢

(3.4)%

(a) 

Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.

(b) 

See a reconciliation of this non-GAAP measure and Note A for a discussion of why these measures may be important to investors in the accompanying pages.

(c) 

See a reconciliation of economic fuel cost in the accompanying pages.

(d) 

Data presented includes information related to flights operated by Horizon Air and third-party carriers.

 

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Three Months Ended December 31, 2015

Alaska

(in millions)

Mainline

Regional

Horizon

Consolidating

Air Group Adjusted(a)

Special Items(b)

Consolidated

Operating revenues

Passenger

Mainline

$

962

$

$

$

$

962

$

$

962

Regional

216

216

216

  Total passenger revenues

962

216

1,178

1,178

Revenue from CPA with Alaska

105

(105)

Freight and mail

24

1

25

25

Other-net

156

17

1

174

174

Total operating revenues

1,142

234

106

(105)

1,377

1,377

Operating expenses

Operating expenses, excluding fuel and special items

702

181

101

(107)

877

32

909

Economic fuel

182

30

212

1

213

Total operating expenses

884

211

101

(107)

1,089

33

1,122

Nonoperating income (expense)

Interest income

4

1

5

5

Interest expense

(7)

(2)

(1)

(10)

(10)

Other

7

1

1

9

9

4

(1)

1

4

4

Income (loss) before income tax

$

262

$

23

$

4

$

3

$

292

$

(33)

$

259

Three Months Ended December 31, 2014

Alaska

(in millions)

Mainline

Regional

Horizon

Consolidating

Air Group Adjusted(a)

Special Items(b)

Consolidated

Operating revenues

Passenger

Mainline

$

916

$

$

$

$

916

$

$

916

Regional

200

200

200

  Total passenger revenues

916

200

1,116

1,116

Revenue from CPA with Alaska

94

(94)

Freight and mail

25

1

26

26

Other-net

144

19

1

164

164

Total operating revenues

1,085

220

95

(94)

1,306

1,306

Operating expenses

Operating expenses, excluding fuel

634

159

92

(97)

788

(30)

758

Economic fuel

271

41

312

(6)

306

Total operating expenses

905

200

92

(97)

1,100

(36)

1,064

Nonoperating income (expense)

Interest income

5

1

6

6

Interest expense

(7)

1

(2)

(4)

(12)

(12)

Other

5

(1)

2

6

6

3

(3)

Income (loss) before income tax

$

183

$

20

$

3

$

$

206

$

36

$

242

 

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

Twelve Months Ended December 31, 2015

Alaska

(in millions)

Mainline

Regional

Horizon

Consolidating

Air Group Adjusted(a)

Special Items(b)

Consolidated

Operating revenues

Passenger

Mainline

$

3,939

$

$

$

$

3,939

$

$

3,939

Regional

854

854

854

  Total passenger revenues

3,939

854

4,793

4,793

Revenue from CPA with Alaska

408

(408)

Freight and mail

103

5

108

108

Other-net

621

72

4

697

697

Total operating revenues

4,663

931

412

(408)

5,598

5,598

Operating expenses

Operating expenses, excluding fuel and special items

2,653

695

375

(409)

3,314

32

3,346

Economic fuel

823

131

954

954

Total operating expenses

3,476

826

375

(409)

4,268

32

4,300

Nonoperating income (expense)

Interest income

19

2

21

21

Interest expense

(28)

(10)

(4)

(42)

(42)

Other

28

1

6

35

35

19

(9)

4

14

14

Income (loss) before income tax

$

1,206

$

105

$

28

$

5

$

1,344

$

(32)

$

1,312

Twelve Months Ended December 31, 2014

Alaska

(in millions)

Mainline

Regional

Horizon

Consolidating

Air Group Adjusted(a)

Special Items(b)

Consolidated

Operating revenues

Passenger

Mainline

$

3,774

$

$

$

$

3,774

$

$

3,774

Regional

805

805

805

  Total passenger revenues

3,774

805

4,579

4,579

Revenue from CPA with Alaska

371

(371)

Freight and mail

109

5

114

114

Other-net

592

78

5

675

675

Total operating revenues

4,475

888

376

(371)

5,368

5,368

Operating expenses

Operating expenses, excluding fuel

2,417

623

349

(371)

3,018

(30)

2,988

Economic fuel

1,251

190

1,441

(23)

1,418

Total operating expenses

3,668

813

349

(371)

4,459

(53)

4,406

Nonoperating income (expense)

Interest income

20

1

21

21

Interest expense

(32)

(12)

(4)

(48)

(48)

Other

39

(1)

2

40

40

27

(1)

(10)

(3)

13

13

Income (loss) before income tax

$

834

$

74

$

17

$

(3)

$

922

$

53

$

975

(a) 

The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain charges. See Note A for further information in the accompanying pages.

(b) 

Includes accounting adjustments related to mark-to-market fuel-hedge accounting charges, and other special items described previously.

 

Alaska Air Group, Inc.

CASM EXCLUDING FUEL RECONCILIATION (unaudited)

Three Months Ended December 31,

Twelve Months Ended December 31,

(in cents)

2015

2014

2015

2014

Consolidated:

CASM

10.85

¢

11.61

¢

10.77

¢

12.21

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

2.06

3.34

2.39

3.93

 Special items

0.31

(0.33)

0.08

(0.08)

CASM excluding fuel

8.48

¢

8.60

¢

8.30

¢

8.36

¢

Mainline:

CASM

9.86

¢

10.56

¢

9.77

¢

11.15

¢

Less the following components:

Aircraft fuel, including hedging gains and losses

1.97

3.22

2.29

3.79

 Special items

0.35

(0.36)

0.09

(0.09)

CASM excluding fuel

7.54

¢

7.70

¢

7.39

¢

7.45

¢

FUEL RECONCILIATIONS (unaudited)

Alaska Air Group, Inc.

Three 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

$

208

$

1.59

$

305

$

2.58

Losses on settled hedges

4

0.03

7

0.06

Consolidated economic fuel expense

$

212

$

1.62

$

312

$

2.64

Mark-to-market fuel hedge adjustments

1

(6)

(0.05)

GAAP fuel expense

$

213

$

1.62

$

306

$

2.59

Fuel gallons

131

118

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

$

954

$

1.88

$

1,418

$

3.03

Fuel gallons

508

469

 

Note A: Pursuant to Regulation G, we are providing reconciliation of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

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

Cost per ASM (CASM) excluding fuel and certain special items 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.

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

Glossary of Terms

Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit

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

ASMs - available seat miles, or "capacity"; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

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

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

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

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

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

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737 jets and all associated revenues and costs

PRASM - passenger revenue per ASM; commonly called "passenger unit revenue"

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir.  In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs).  Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

 

SOURCE Alaska Air Group



RELATED LINKS

https://www.alaskaair.com