Alaska Air Group Reports Record Adjusted Third Quarter Results

SEATTLE, Oct. 20, 2011 /PRNewswire/ --

Third quarter highlights with comparison to third quarter 2010:

  • Record third quarter net income, excluding special items, of $131.1 million, or $3.58 per diluted share, compared to net income of $118.1 million, or $3.21 per diluted share. This quarter's results compare to a First Call mean estimate of $3.33 per share.
  • Net income under Generally Accepted Accounting Principles (GAAP) of $77.5 million, or $2.12 per diluted share, compared to net income of $122.4 million, or $3.32 per diluted share.
  • Revenues improved by 12 percent with record load factors and higher yields in each month of the quarter, more than offsetting the 41 percent increase in economic fuel costs.
  • Non-fuel unit costs declined by 2.6 percent.
  • Improved employee productivity by 3.8 percent compared to the third quarter of 2010.
  • Held $1.3 billion in unrestricted cash and marketable securities as of September 30, 2011.
  • Adjusted debt-to-total capitalization ratio of 61 percent, lowest level on record.
  • Twelve-month return on invested capital of 12 percent.
  • Alaska Airlines held the No. 1 spot in U.S. Department of Transportation on-time performance among the 10 largest U.S. airlines for the twelve months ending in August 2011.
  • Reached tentative five-year agreement with the Aircraft Mechanics Fraternal Association ("AMFA") representing the Alaska Airlines aircraft technicians.
  • Won Seattle Business Magazine's 2011 Green Award in the Large Services company category.

Alaska Air Group, Inc. (NYSE: ALK) today reported third quarter 2011 net income of $77.5 million, or $2.12 per diluted share, compared to net income of $122.4 million, or $3.32 per diluted share. Excluding mark-to-market fuel hedge losses of $84.3 million ($52.4 million after tax, or $1.43 per diluted share) and fleet transition charges of $2.0 million ($1.2 million after tax or $0.03 per diluted share), the company reported record third quarter 2011 net income of $131.1 million, or $3.58 per diluted share, compared to net income of $118.1 million, or $3.21 per diluted share, excluding special items.

"We are pleased to report our highest adjusted quarterly profit ever. The outstanding financial performance was driven by a record quarterly load factor of 86.5%, higher yields and record on-time performance of over 91%," said Bill Ayer, chairman and chief executive officer. "These results reflect the hard work and changes we've made as a company over the past several years. As we grow stronger – both financially and operationally – we become better prepared to face challenges that come our way. I am grateful to the 12,000 Air Group employees who helped achieve this quarter's results."

The following table reconciles the company's adjusted net income and earnings per diluted share (EPS) during the third quarters of 2011 and 2010 to amounts as reported in accordance with GAAP (in millions except per-share amounts):



Three Months Ended September 30,


2011


2010


Dollars


Diluted EPS


Dollars


Diluted EPS

Net income and diluted EPS, excluding the items noted below:

$

131.1



$

3.58



$

118.1



$

3.21


Fleet transition costs, net of tax

(1.2)



(0.03)



(6.1)



(0.17)


Adjustments to reflect the timing of gain or loss recognition resulting from mark-to-market fuel-hedge accounting, net of tax

(52.4)



(1.43)



10.4



0.28


Reported GAAP amounts

$

77.5



$

2.12



$

122.4



$

3.32





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 page 4 of this release.

A conference call regarding the third quarter results will be simulcast via the Internet at 8:30 a.m. Pacific time on October 20, 2011. 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 at alaskaair.com/investors.

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, 2010. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, 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 and Horizon Air, subsidiaries of Alaska Air Group (NYSE: ALK), together serve more than 90 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Network Carriers" in the J.D. Power and Associates 2008, 2009, 2010 and 2011 North America Airline Satisfaction Studies(SM). For reservations, visit alaskaair.com. For more news and information, visit the Alaska Airlines/Horizon Air Newsroom at alaskaair.com/newsroom.

Glossary of Terms

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

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

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

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

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

CASM - total operating costs per ASM; this represents all operating expenses including fuel and special items; commonly called "unit cost"

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

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

Mainline - represents flying on Alaska jets and all associated revenues and costs

Regional - represents operations whereby Horizon, SkyWest, and another small carrier in the state of Alaska fly certain routes for Alaska using Horizon's or the other carrier's fleets

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

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

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

























Three Months Ended September 30,


Nine Months Ended September 30,

(in millions, except per share amounts)

2011


2010


Change


2011


2010


Change

Operating Revenues:












Passenger












Mainline

$

887.4



$

779.2



13.9

%


$

2,409.7



$

2,068.5



16.5

%

Regional

213.4



198.1



7.7

%


584.2



547.0



6.8

%

Total passenger revenue

1,100.8



977.3



12.6

%


2,993.9



2,615.5



14.5

%

Freight and mail

29.9



29.4



1.7

%


83.9



80.5



4.2

%

Other - net

67.4



61.3



10.0

%


195.7



177.8



10.1

%

Total Operating Revenues

1,198.1



1,068.0



12.2

%


3,273.5



2,873.8



13.9

%













Operating Expenses:












Wages and benefits

245.1



240.2



2.0

%


737.2



719.1



2.5

%

Variable incentive pay

19.1



23.0



(17.0)

%


53.4



62.5



(14.6)

%

Aircraft fuel, including hedging gains and losses

420.1



220.9



90.2

%


1,012.1



683.2



48.1

%

Aircraft maintenance

49.9



55.3



(9.8)

%


152.3



166.1



(8.3)

%

Aircraft rent

28.8



33.9



(15.0)

%


88.3



106.3



(16.9)

%

Landing fees and other rentals

62.0



59.8



3.7

%


179.8



173.6



3.6

%

Contracted services

46.1



40.7



13.3

%


136.2



121.4



12.2

%

Selling expenses

47.4



44.3



7.0

%


133.0



116.1



14.6

%

Depreciation and amortization

62.2



57.8



7.6

%


184.2



172.0



7.1

%

Food and beverage service

17.6



15.6



12.8

%


49.8



42.2



18.0

%

Other

54.6



49.8



9.6

%


173.5



145.8



19.0

%

Fleet transition costs

2.0



9.8



NM


38.9



13.2



NM

Total Operating Expenses

1,054.9



851.1



23.9

%


2,938.7



2,521.5



16.5

%

Operating Income

143.2



216.9



(34.0)

%


334.8



352.3



(5.0)

%













Nonoperating Income (Expense):












Interest income

4.5



7.6



(40.8)

%


18.4



22.7



(18.9)

%

Interest expense

(25.7)



(29.5)



(12.9)

%


(69.1)



(81.4)



(15.1)

%

Interest capitalized

2.1



1.4



NM


5.5



4.7



17.0

%

Other - net

1.2



1.8



NM


3.4



4.1



(17.1)

%


(17.9)



(18.7)



(4.3)

%


(41.8)



(49.9)



(16.)2

%

Income Before Income Tax

125.3



198.2



(36.8)

%


293.0



302.4



(3.1)

%

Income tax expense

47.8



75.8



(36.9)

%


112.5



116.1



(3.1)

%

Net Income

$

77.5



$

122.4



(36.7)

%


$

180.5



$

186.3



(3.1)

%













Basic Earnings Per Share:

$

2.15



$

3.41





$

5.02



$

5.21




Diluted Earnings Per Share:

$

2.12



$

3.32





$

4.91



$

5.08




Shares Used for Computation:












Basic

35.977



35.898





35.984



35.755




Diluted

36.619



36.830





36.725



36.706





NM - Not Meaningful






CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)




Alaska Air Group, Inc.








(in millions)

September 30, 2011


December 31, 2010





Cash and marketable securities

$

1,265.8



$

1,208.2






Total current assets

1,726.3



1,662.0


Property and equipment-net

3,350.1



3,148.4


Other assets

183.8



206.2


Total assets

$

5,260.2



$

5,016.6






Current liabilities

$

1,518.3



$

1,424.7


Long-term debt

1,178.8



1,313.0


Other liabilities and credits

1,298.8



1,173.5


Shareholders' equity

1,264.3



1,105.4


Total liabilities and shareholders' equity

$

5,260.2



$

5,016.6






Debt to Capitalization, adjusted for operating leases

61%:39%


67%:33%





Number of common shares outstanding

35.645



35.924






OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.















Three Months Ended September 30,


Nine Months Ended September 30,

Mainline Operating Statistics:

2011


2010


Change



2011


2010


Change


Revenue passengers (000)

4,839



4,562



6.1

%



13,479



12,373



8.9

%


RPMs (000,000) "traffic"

6,035



5,580



8.2

%



17,011



15,124



12.5

%


ASMs (000,000) "capacity"

6,936



6,544



6.0

%



19,991



18,197



9.9

%


Passenger load factor

87.0

%


85.3

%


1.7


pts 


85.1

%


83.1

%


2.0


pts 

Yield per passenger mile (in cents)

14.70



13.96



5.3

%



14.17



13.68



3.6

%


Passenger revenue per ASM (PRASM) (in cents)

12.79



11.91



7.4

%



12.05



11.37



6.0

%


Operating revenue per ASM (RASM) (in cents)

14.15



13.25



6.8

%



13.40



12.73



5.3

%


Cost per ASM excluding fuel(f) (in cents)

7.27



7.52



(3.3)

%



7.50



7.88



(4.8)

%


Economic fuel cost per gallon(b)

$

3.23



$

2.37



36.3

%



$

3.13



$

2.30



36.1

%


Fuel gallons (000,000)

90.6



85.5



6.0

%



260.8



237.4



9.9

%


Average number of full-time equivalent employees

8,960



8,737



2.6

%



8,914



8,631



3.3

%


Aircraft utilization (blk hrs/day)

10.7



10.4



2.9

%



10.5



9.9



6.1

%


Average aircraft stage length (miles)

1,105



1,089



1.5

%



1,109



1,078



2.9

%


Mainline operating fleet at period-end

117



115



2


a/c


117



115



2


a/c















Regional Operating Statistics:(c)














RPMs (000,000) "traffic"

668



679



(1.6)

%



1,838



1,889



(2.7)

%


ASMs (000,000) "capacity"

812



850



(4.5)

%



2,338



2,512



(6.9)

%


Passenger load factor

82.3

%


79.9

%


2.4


pts 


78.6

%


75.2

%


3.4


pts 

PRASM (in cents)

26.28



23.31



12.7

%



24.99



21.78



14.7

%
















Consolidated Operating Statistics:(d)














Revenue passengers (000)

6,709



6,389



5.0

%



18,707



17,489



7.0

%


RPMs (000,000) "traffic"

6,703



6,259



7.1

%



18,849



17,013



10.8

%


ASMs (000,000) "capacity"

7,748



7,394



4.8

%



22,329



20,709



7.8

%


Passenger load factor

86.5

%


84.6

%


1.9


pts 


84.4

%


82.2

%


2.2


pts 

PRASM (in cents)

14.21



13.22



7.5

%



13.41



12.63



6.2

%


RASM (in cents)

15.46



14.44



7.1

%



14.66



13.88



5.6

%


CASM excluding fuel and fleet transition costs(a)(f) (in cents)

8.17



8.39



(2.6)

%



8.45



8.81



(4.1)

%


Economic fuel cost per gallon(b)

$

3.24



$

2.37



36.7

%



$

3.13



$

2.31



35.5

%


Fuel gallons (000,000)

103.8



100.3



3.5

%



299.8



281.1



6.7

%


Average number of full-time equivalent employees

11,859



11,722



1.2

%



11,850



11,712



1.2

%
















Horizon Air Operating Statistics:(e)














ASMs (000,000) "capacity"

664



835



(20.5)

%



2,097



2,461



(14.8)

%


CASM excluding fuel(f) (in cents)

12.48



14.67



NM

(a)


12.25



15.05



NM

(a)

(a)    See page 9 for a reconciliation of this non-GAAP measure.

(b)    See page 10 for a reconciliation of economic fuel cost.

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

(d)    Except for revenue passengers and full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.

(e)    Data presented separately for information purposes and is included in Regional Operating Statistics.

(f)    See Note A on page 11 for a discussion of why these measures may be important to investors.




ALASKA AIRLINES NON-GAAP FINANCIAL DATA (unaudited)










Three Months Ended September 30,


Nine Months Ended September 30,

(in millions)

2011


2010


2011


2010

Operating Revenues:








Passenger








Mainline

$

887.4



$

779.2



$

2,409.7



$

2,068.5


Regional

213.4



88.9



584.2



247.6


Total passenger revenue

1,100.8



868.1



2,993.9



2,316.1


Other revenue

95.3



88.0



273.3



250.1


Total Operating Revenues

1,196.1



956.1



3,267.2



2,566.2










Operating Expenses:








Mainline operating expenses, excluding fuel

504.1



491.8



1,500.2



1,433.5


Mainline economic fuel(a)

292.4



202.1



816.0



547.4


Regional expense - paid to Horizon Air under CPA

91.2



69.0



279.3



202.8


Other regional operating expense, excluding fuel

45.3



5.7



128.7



18.7


Regional economic fuel(a)

43.4





122.9




Total Adjusted Operating Expenses(b)

976.4



768.6



2,847.1



2,202.4



219.7



187.5



420.1



363.8


Nonoperating Expense

(13.8)



(14.5)



(29.4)



(36.2)


Adjusted Income before Income Tax(b)

$

205.9



$

173.0



$

390.7



$

327.6










HORIZON AIR NON-GAAP FINANCIAL DATA (unaudited)










Three Months Ended September 30,


Nine Months Ended September 30,

(in millions)

2011


2010


2011


2010

Operating Revenues:








Passenger








Brand revenue

$



$

109.2



$



$

299.4


Revenue from CPA with Alaska Airlines

91.2



69.0



279.3



202.8


Total passenger revenue

91.2



178.2



279.3



502.2


Other revenue

2.0



2.7



6.3



8.2


Total Operating Revenues

93.2



180.9



285.6



510.4










Operating Expenses:








Landing fees, rents & selling expenses(c)



32.2





93.2


All other non-fuel operating expenses

82.9



90.3



256.9



277.3


Non-fuel operating expenses

82.9



122.5



256.9



370.5


Economic fuel costs(a)



35.5





102.4


Total Adjusted Operating Expenses(b)

82.9



158.0



256.9



472.9



10.3



22.9



28.7



37.5


Nonoperating expense

(3.9)



(4.1)



(12.1)



(13.5)


Adjusted Income Before Income Tax(b)

$

6.4



$

18.8



$

16.6



$

24.0


(a)    See page 10 for a reconciliation of economic fuel cost.

(b)    See Note A on page 11 for a discussion about why this measure may be important to investors.  "Adjusted" refers to these measures excluding certain items.  See page 9 and 10 for reconciliation between adjusted amounts and the most directly comparable GAAP amount.  

(c)    See Note B on page 11 for a discussion regarding Horizon Air's CPA agreement with Alaska Airlines.




ALASKA AIR GROUP CONSOLIDATED FINANCIAL AND STATISTICAL DATA (unaudited)









Reconciliation of operating revenues:


Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010

Alaska Airlines operating revenues

$

1,196.1



$

956.1



$

3,267.2



$

2,566.2


Horizon Air operating revenues

93.2



180.9



285.6



510.4


Elimination of intercompany revenue

(91.2)



(69.0)



(279.3)



(202.8)


Consolidated operating revenues

$

1,198.1



$

1,068.0



$

3,273.5



$

2,873.8


















Reconciliation of operating expenses:


Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010

Alaska Airlines adjusted operating expenses

$

976.4



$

768.6



$

2,847.1



$

2,202.4


Horizon Air adjusted operating expenses

82.9



158.0



256.9



472.9


Parent company expenses

0.5



0.4



1.9



2.4


Intercompany eliminations

(91.2)



(69.0)



(279.3)



(202.8)


Adjusted consolidated operating expenses

968.6



858.0



2,826.6



2,474.9


Fleet transition costs

2.0



9.8



38.9



13.2


Mark-to-market fuel-hedge (gains) losses

84.3



(16.7)



73.2



33.4


Consolidated operating expenses - GAAP

$

1,054.9



$

851.1



$

2,938.7



$

2,521.5










Reconciliation of income before income taxes:


Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010

Alaska Airlines adjusted income before income taxes

$

205.9



$

173.0



$

390.7



$

327.6


Horizon Air adjusted income before income taxes

6.4



18.8



16.6



24.0


Parent company expenses

(0.7)



(0.5)



(2.2)



(2.6)


Adjusted income before income taxes

211.6



191.3



405.1



349.0


Fleet transition costs

(2.0)



(9.8)



(38.9)



(13.2)


Mark-to-market fuel-hedge gains (losses)

(84.3)



16.7



(73.2)



(33.4)


Income before income taxes - GAAP

$

125.3



$

198.2



$

293.0



$

302.4










Reconciliation of consolidated CASM, excluding fuel:


Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010

Adjusted consolidated operating expenses

$

968.6



$

858.0



$

2,826.6



$

2,474.9


Less: economic fuel

335.8



237.6



938.9



649.8


Adjusted consolidated operating expenses, excluding fuel

$

632.8



$

620.4



$

1,887.7



$

1,825.1


Consolidated ASMs

7,748



7,394



22,329



20,709


CASM, excluding fuel and fleet transition costs (in cents)

8.17



8.39



8.45



8.81






FUEL RECONCILIATIONS (unaudited)








Alaska Air Group, Inc.
















(in millions, except for per gallon amounts)

Three Months Ended September 30,


2011


2010


Dollars


Cost/Gal


Dollars


Cost/Gal

Raw or "into-plane" fuel cost

$

337.4



$

3.25



$

233.8



$

2.33


Minus gains, or plus the losses, during the period on settled hedges

(1.6)



(0.01)



3.8



0.04


Economic fuel expense

$

335.8



$

3.24



$

237.6



$

2.37


Adjustments to reflect timing of (gain) or loss recognition resulting from mark-to-market accounting

84.3



0.81



(16.7)



(0.17)


GAAP fuel expense

$

420.1



$

4.05



$

220.9



$

2.20


Fuel gallons

103.8





100.3












(in millions, except for per gallon amounts)

Nine Months Ended September 30,


2011


2010


Dollars


Cost/Gal


Dollars


Cost/Gal

Raw or "into-plane" fuel cost

$

969.5



$

3.23



$

651.9



$

2.32


Minus gains, or plus the losses, during the period on settled hedges

(30.6)



(0.10)



(2.1)



(0.01)


Economic fuel expense

$

938.9



$

3.13



$

649.8



$

2.31


Adjustments to reflect timing of (gain) or loss recognition resulting from mark-to-market accounting

73.2



0.25



33.4



0.12


GAAP fuel expense

$

1,012.1



$

3.38



$

683.2



$

2.43


Fuel gallons

299.8





281.1












Breakout of Fuel Expense:








(in millions, except for per gallon amounts)

Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010

Mainline economic fuel expense

$

292.4



$

202.1



$

816.0



$

547.4


Regional economic fuel expense

43.4



35.5



122.9



102.4


Consolidated economic fuel expense

$

335.8



$

237.6



$

938.9



$

649.8










Mainline Economic Cost per Gallon Reconciliation:








(in millions, except for per gallon amounts)

Three Months Ended September 30,


Nine Months Ended September 30,


2011


2010


2011


2010

Mainline economic fuel expense

$

292.4



$

202.1



$

816.0



$

547.4


Mainline fuel gallons

90.6



85.5



260.8



237.4


Mainline economic cost per gallon

$

3.23



$

2.37



$

3.13



$

2.30





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

  • By eliminating fuel expense and certain special items from our cost and unit cost metrics, we believe that we have better visibility into the results of 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 Taxes and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all Air Group employees.
  • CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.
  • Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as fleet transition costs, 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's operations are treated as an integrated route network intended to maximize the results of the company. However, the Company has historically had two primary operating and reporting segments, consisting of Alaska Airlines and Horizon Air, for which separate financial information is available and regularly evaluated by our chief operating decision maker in deciding how to allocate resources and assess performance.

Alaska operates a fleet of passenger jets ("mainline operations") and contracts with affiliated (Horizon) and non-affiliated third party carriers for regional capacity under which 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 Horizon CPA). The Horizon CPA reflects what the Company believes are current market rates received by other regional carriers for similar flying. Amounts paid by Alaska to Horizon are available to pay for various Horizon operating expenses such as crew expenses, maintenance, and aircraft ownership costs.  

Effective January 1, 2011, Horizon's business model changed such that 100% of its capacity is sold to Alaska under the Horizon CPA. As is typical for similar arrangements, certain costs such landing fees, selling and distribution costs, and fuel costs directly related to regional flights operated by Horizon are now recorded by Alaska. Because of this change, Horizon's revenues and expenses and Alaska's Regional revenues and expenses have changed significantly on a year over year basis.

All inter-company revenues and expenses are eliminated in consolidated, and these changes have no impact on our consolidated results.

SOURCE Alaska Air Group, Inc.



RELATED LINKS
http://www.alaskaair.com

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