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Oct 25, 2017 9:40 PM ET

Alaska Air Group reports Third Quarter 2017 results

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iCrowdNewswire - Oct 25, 2017

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Financial Highlights:

  • Reported net income for the third quarter under Generally Accepted Accounting Principles (“GAAP”) of $266 million or $2.14 per diluted share, compared to net income of $256 million, or $2.07 per diluted share in 2016. As the acquisition of Virgin America Inc. (“Virgin America”) closed on Dec. 14, 2016, third quarter 2017 information reflects the results of Virgin America, including the impacts associated with purchase accounting. Third quarter 2016 results do not include Virgin America.
  • Reported third quarter net income, excluding merger-related costs and mark-to-market fuel hedging adjustments, of $278 million, compared to $272 million in the third quarter of 2016. Adjusted diluted earnings per share were $2.24, compared to $2.20 in the third quarter of 2016.
  • Virgin America results were accretive to EPS in the three and nine months ending Sept. 30, 2017.
  • Paid $0.30 per-share quarterly cash dividend in the third quarter, a 9% increase over the dividend paid in the third quarter of 2016.
  • Repurchased approximately 0.6 million shares of common stock for $50 million in the first nine months of 2017.
  • Generated approximately $1.4 billion of operating cash flow and used approximately $840 million for capital expenditures, resulting in approximately $520 million of free cash flow in the first nine months of 2017.
  • Held $1.7 billion in unrestricted cash and marketable securities as of Sept. 30, 2017.
  • Reduced debt-to-capitalization ratio to 53% as of Sept. 30, 2017, compared to 59% as of Dec. 31, 2016.

Operational Highlights:

  • Launched twenty new routes during the quarter, continuing the most significant network expansion in Alaska Air Group’s 85-year history, bringing the total new markets since the merger to 37. 
  • Overall, the integration of Virgin America is going well and a number of significant milestones are expected to be achieved in the next seven months.
  • Announced a seven-year partnership to be the official airline of the San Francisco Giants which includes, among other things, exclusive naming rights to the AT&T Park Club Level which will now be called the “Alaska Airlines Club Level.”
  • Signed an exclusive multi-year partnership with Golden State Warriors star, Kevin Durant, and named him our “Advisor to the CEO.”
  • Added Singapore Airlines as a global Mileage Plan partner.
  • Selected Gogo to provide next-generation satellite-based Wi-Fi across the entire Boeing and Airbus fleets, providing guests a faster and more-reliable internet connection.
  • Dropped fees for bikes, golf clubs, skis, surfboards, and other sporting equipment that exceed Alaska’s normal checked baggage weight and dimensions to $25.
  • Took delivery of four Embraer 175 jets, bringing the total operated by Horizon to ten as of Sept. 30, 2017.
  • Placed the world’s first Boeing 737-700 converted from a passenger plane to a freighter into service.

Recognition and Awards:

  • Ranked as the top U.S. airline in the Dow Jones Sustainability Index (DJSI), receiving perfect scores for “efficiency” and “reliability”.
  • Mileage Plan ranked first in the U.S. News & World Report’s list of Best Airline Rewards Programs for the third consecutive year.
  • Virgin America named “Best U.S. Airline” by Condé Nast Traveler in their 2017 Reader’s Choice Awards for the 10th year in a row.
  • Ranked Best Airline in Customer Service in the 2017 worldwide SimpliFlying Awards for Excellence in Social Media.
  • Named Favorite Airline in North America for the second consecutive year by Trazee Travel.
  • Mileage Plan ranked Best Airline Elite Status Program in the U.S. by The Points Guy.
  • Recognized by the Puget Sound Business Journal as the 2017 Board Diversity Champion, for diversifying Air Group’s board composition over the last five years.
  • Named one of the overall five-star major regional airlines at the Passenger Choice Awards during the APEX EXPO. Virgin America received a five-star rating for low-cost carrier, and received a top honor with a Passenger Choice Award for “Best Seat Comfort.”

Alaska Air Group, Inc., (NYSE: ALK) today reported third quarter 2017 GAAP net income of $266 million, or $2.14 per diluted share, compared to $256 million, or $2.07 per diluted share in the third quarter of 2016. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $278 million, or $2.24 per diluted share, compared to $272 million, or $2.20 per diluted share, in 2016.

“Our people delivered very strong results again this quarter,” said CEO Brad Tilden. “At roughly the halfway point in our integration with Virgin America, and despite some unrelated challenges in our regional operation, our business is performing well, and we are very happy with the response we’ve seen in California and throughout the West to our expanding network, our focus on hospitality, and to our industry-leading mileage plan. I want to thank our talented people for their commitment and dedication.”

The following table reconciles the company’s reported GAAP net income and earnings per diluted share (“diluted EPS”) for the three and nine months ended Sept. 30, 2017, and 2016 to adjusted amounts:

 

 

Three Months Ended September 30,

 

2017

 

2016

(in millions, except per-share amounts)

Dollars

 

Diluted EPS

 

Dollars

 

Diluted EPS

Reported GAAP net income and diluted EPS

$

266

  

$

2.14

  

$

256

  

$

2.07

 

Mark-to-market fuel hedge adjustments

(5)

  

(0.04)

  

3

  

0.02

 

Special items—merger-related costs

24

  

0.20

  

22

  

0.18

 

Income tax effect on special items and fuel hedge adjustments

(7)

  

(0.06)

  

(9)

  

(0.07)

 

Non-GAAP adjusted net income and diluted EPS

$

278

  

$

2.24

  

$

272

  

$

2.20

 
  
 

Nine Months Ended September 30,

 

2017

 

2016

(in millions, except per-share amounts)

Dollars

 

Diluted EPS

 

Dollars

 

Diluted EPS

Reported GAAP net income and diluted EPS

$

661

  

$

5.31

  

$

700

  

$

5.63

 

Mark-to-market fuel hedge adjustments

7

  

0.06

  

(9)

  

(0.07)

 

Special items—merger-related costs

88

  

0.70

  

36

  

0.29

 

Income tax effect on special items and fuel hedge adjustments

(35)

  

(0.28)

  

(10)

  

(0.08)

 

Non-GAAP adjusted net income and diluted EPS

$

721

  

$

5.79

  

$

717

  

$

5.77

 

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 third quarter results will be simulcast online at 8:30 a.m. Pacific time on October 25, 2017. It can be accessed through the company’s website at www.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., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as “Alaska,” “Horizon,” and “Virgin America” 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 Dec. 31, 2016, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. 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, together with Virgin America and its regional partners, flies 40 million guests a year to 118 destinations with an average of 1,200 daily flights across the United States and to MexicoCanadaCosta Rica and Cuba. With Alaskaand Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Carriers in North America” in the J.D. Power North America Satisfaction Study for 10 consecutive years from 2008 to 2017. Learn more about Alaska’s award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines, Virgin America and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK).

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

            

As the acquisition closed on December 14, 2016, amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior periods.

            
 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions, except per-share amounts)

2017

 

2016

 

Change(a)

 

2017

 

2016

 

Change(a)

Operating Revenues:

           

Passenger

           

Mainline

$

1,562

  

$

1,073

  

46

%

 

$

4,390

  

$

3,036

  

45

%

Regional

262

  

249

  

5

%

 

725

  

682

  

6

%

Total passenger revenue

1,824

  

1,322

  

38

%

 

5,115

  

3,718

  

38

%

Freight and mail

32

  

31

  

3

%

 

88

  

82

  

7

%

Other—net

264

  

213

  

24

%

 

768

  

607

  

27

%

Total Operating Revenues

2,120

  

1,566

  

35

%

 

5,971

  

4,407

  

35

%

            

Operating Expenses:

           

Wages and benefits

475

  

340

  

40

%

 

1,392

  

1,008

  

38

%

Variable incentive pay

40

  

31

  

29

%

 

98

  

95

  

3

%

Aircraft fuel, including hedging gains and losses

368

  

225

  

64

%

 

1,051

  

593

  

77

%

Aircraft maintenance

88

  

64

  

38

%

 

271

  

197

  

38

%

Aircraft rent

70

  

25

  

180

%

 

204

  

80

  

155

%

Landing fees and other rentals

124

  

89

  

39

%

 

338

  

232

  

46

%

Contracted services

76

  

63

  

21

%

 

234

  

183

  

28

%

Selling expenses

91

  

58

  

57

%

 

269

  

162

  

66

%

Depreciation and amortization

95

  

101

  

(6)%

  

275

  

281

  

(2)%

 

Food and beverage service

50

  

31

  

61

%

 

145

  

93

  

56

%

Third-party regional carrier expense

30

  

25

  

20

%

 

84

  

72

  

17

%

Special items—merger-related costs

24

  

22

  

9

%

 

88

  

36

  

144

%

Other

150

  

92

  

63

%

 

424

  

267

  

59

%

Total Operating Expenses

1,681

  

1,166

  

44

%

 

4,873

  

3,299

  

48

%

Operating Income

439

  

400

  

10

%

 

1,098

  

1,108

  

(1)%

 
            

Nonoperating Income (Expense):

           

Interest income

9

  

7

    

25

  

20

   

Interest expense

(26)

  

(11)

    

(77)

  

(33)

   

Interest capitalized

5

  

6

    

13

  

21

   

Other—net

  

    

(1)

  

(2)

   

Total Nonoperating Income (Expense)

(12)

  

2

    

(40)

  

6

   

Income Before Income Tax

427

  

402

    

1,058

  

1,114

   

Income tax expense

161

  

146

    

397

  

414

   

Net Income

$

266

  

$

256

    

$

661

  

$

700

   
            

Basic Earnings Per Share:

$

2.15

  

$

2.08

    

$

5.35

  

$

5.66

   

Diluted Earnings Per Share:

$

2.14

  

$

2.07

    

$

5.31

  

$

5.63

   
            

Shares Used for Computation:

           

Basic

123.467

  

123.149

    

123.501

  

123.648

  

Diluted

124.220

  

123.833

    

124.341

  

124.393

  
            

Cash dividend declared per share:

$

0.300

  

$

0.275

    

$

0.900

  

$

0.825

   

 

  

(a)

See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

   

Alaska Air Group, Inc.

   
    

(in millions)

September 30, 2017

 

December 31, 2016

Cash and marketable securities

$

1,740

  

$

1,580

 
    

Total current assets

2,214

  

2,050

 

Property and equipment—net

6,230

  

5,666

 

Goodwill

1,934

  

1,934

 

Intangible assets

135

  

143

 

Other assets

226

  

169

 

Total assets

10,739

  

9,962

 
    

Air traffic liability

1,103

  

849

 

Current portion of long-term debt

334

  

319

 

Other current liabilities

1,328

  

1,367

 

Current liabilities

2,765

  

2,535

 

Long-term debt

2,367

  

2,645

 

Other liabilities and credits

2,116

  

1,851

 

Shareholders’ equity

3,491

  

2,931

 

Total liabilities and shareholders’ equity

$

10,739

  

$

9,962

 
    

Debt-to-capitalization ratio, adjusted for operating leases(a)

53

%

 

59

%

    

Number of common shares outstanding

123.387

  

123.328

 

 

  

(a)

Calculated using the present value of remaining aircraft lease payments.

 

OPERATING STATISTICS SUMMARY (unaudited)

Alaska Air Group, Inc.

            

As the acquisition closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior periods.

            
 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2017

 

2016

 

Change(d)

 

2017

 

2016

 

Change(d)

Consolidated Operating Statistics:(a)

           

Revenue passengers (000)

11,645

 

9,054

 

28.6%

 

33,063

 

25,536

 

29.5%

RPMs (000,000) “traffic”

13,811

 

9,601

 

43.8%

 

39,073

 

27,569

 

41.7%

ASMs (000,000) “capacity”

16,164

 

11,212

 

44.2%

 

46,170

 

32,728

 

41.1%

Load factor

85.4%

 

85.6%

 

(0.2) pts

 

84.6%

 

84.2%

 

0.4 pts

Yield

13.21¢

 

13.77¢

 

(4.1)%

 

13.09¢

 

13.49¢

 

(3.0)%

PRASM

11.29¢

 

11.79¢

 

(4.2)%

 

11.08¢

 

11.36¢

 

(2.5)%

RASM

13.12¢

 

13.97¢

 

(6.1)%

 

12.93¢

 

13.47¢

 

(4.0)%

CASMex(b)

7.98¢

 

8.20¢

 

(2.7)%

 

8.09¢

 

8.16¢

 

(0.9)%

Economic fuel cost per gallon(b)

$1.80

 

$1.58

 

13.9%

 

$1.76

 

$1.47

 

19.7%

Fuel gallons (000,000)

207

 

140

 

47.9%

 

592

 

410

 

44.4%

ASM’s per gallon

78.1

 

80.1

 

(2.5)%

 

78.0

 

79.8

 

(2.3)%

Average number of full-time equivalent employees (FTE)

20,743

 

14,674

 

41.4%

 

19,723

 

14,500

 

36.0%

            

Mainline Operating Statistics:

           

Revenue passengers (000)

9,142

 

6,507

 

40.5%

 

25,875

 

18,432

 

40.4%

RPMs (000,000) “traffic”

12,694

 

8,595

 

47.7%

 

36,046

 

24,767

 

45.5%

ASMs (000,000) “capacity”

14,796

 

9,987

 

48.2%

 

42,398

 

29,216

 

45.1%

Load factor

85.8%

 

86.1%

 

(0.3) pts

 

85.0%

 

84.8%

 

0.2 pts

Yield

12.31¢

 

12.49¢

 

(1.4)%

 

12.18¢

 

12.26¢

 

(0.7)%

PRASM

10.56¢

 

10.75¢

 

(1.8)%

 

10.36¢

 

10.39¢

 

(0.3)%

RASM

12.40¢

 

12.96¢

 

(4.3)%

 

12.22¢

 

12.53¢

 

(2.5)%

CASMex(b)

7.28¢

 

7.28¢

 

—%

 

7.32¢

 

7.21¢

 

1.5%

Economic fuel cost per gallon(b)

$1.79

 

$1.57

 

14.0%

 

$1.76

 

$1.46

 

20.5%

Fuel gallons (000,000)

183

 

119

 

53.8%

 

526

 

350

 

50.3%

ASM’s per gallon

80.9

 

83.9

 

(3.6)%

 

80.6

 

83.5

 

(3.5)%

Average number of FTE’s

15,862

 

11,397

 

39.2%

 

15,439

 

11,260

 

37.1%

Aircraft utilization

16.1

 

10.6

 

51.9%

 

15.7

 

10.7

 

46.7%

Average aircraft stage length

1,300

 

1,203

 

8.1%

 

1,296

 

1,218

 

6.4%

Operating fleet

218

 

154

 

64 a/c

 

218

 

154

 

64 a/c

            

Regional Operating Statistics:(c)

           

Revenue passengers (000)

2,503

 

2,547

 

(1.7)%

 

7,188

 

7,105

 

1.2%

RPMs (000,000) “traffic”

1,117

 

1,006

 

11.0%

 

3,027

 

2,801

 

8.1%

ASMs (000,000) “capacity”

1,368

 

1,225

 

11.7%

 

3,772

 

3,512

 

7.4%

Load factor

81.7%

 

82.1%

 

(0.4) pts

 

80.2%

 

79.8%

 

0.4 pts

Yield

23.48¢

 

24.75¢

 

(5.1)%

 

23.95¢

 

24.35¢

 

(1.6)%

PRASM

19.17¢

 

20.32¢

 

(5.7)%

 

19.22¢

 

19.43¢

 

(1.1)%

Operating fleet

83

 

69

 

14 a/c

 

83

 

69

 

14 a/c

 

  

(a)

Except for FTEs, 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 potential importance of this measure to investors in the accompanying pages.

(c)

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

(d)

See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.

SUPPLEMENTARY COMBINED COMPARATIVE FINANCIAL AND OPERATING INFORMATION (unaudited)

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The table below provides “Combined Comparative” results for the three and nine months ended September 30, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America’s financial information has been conformed to reflect Air Group’s historical financial statement presentation for each period presented. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions, except operating statistics)

 

2017

As Reported

 

 

2016

Combined

 

Change

 

 

 

2017
As Reported

 

 

 

2016
Combined

 

Change

Combined Comparative Operating Results

Passenger revenue

$

1,824

  

$

1,724

  

6%

 

$

5,115

  

$

4,833

  

6%

Other revenue

296

  

288

  

3%

 

856

  

808

  

6%

Total Operating Revenues

2,120

  

2,012

  

5%

 

5,971

  

5,641

  

6%

Non-fuel operating expense

1,313

  

1,216

  

8%

 

3,822

  

3,518

  

9%

Fuel expense

368

  

306

  

20%

 

1,051

  

822

  

28%

Total Operating Expenses

1,681

  

1,522

  

10%

 

4,873

  

4,340

  

12%

Operating Income

439

  

490

  

(10)%

 

1,098

  

1,301

  

(16)%

Nonoperating income (expense)

(12)

  

(3)

  

300%

 

(40)

  

(8)

  

400%

Income Before Tax

427

  

487

  

(12)%

 

1,058

  

1,293

  

(18)%

Special items—merger-related costs

24

  

24

  

—%

 

88

  

44

  

100%

Mark-to-market fuel hedge adjustments

(5)

  

3

  

(267)%

 

7

  

(11)

  

(164)%

Adjusted Income Before Tax

$

446

  

$

514

  

(13)%

 

$

1,153

  

$

1,326

  

(13)%

            

Combined Comparative Operating Statistics

Revenue passengers (000)

11,645

 

11,229

 

3.7%

 

33,063

 

31,565

 

4.7%

RPMs (000,000)

13,811

 

12,922

 

6.9%

 

39,073

 

36,670

 

6.6%

ASMs  (000,000)

16,164

 

15,079

 

7.2%

 

46,170

 

43,549

 

6.0%

Load Factor

85.4%

 

85.7%

 

(0.3) pts

 

84.6%

 

84.2%

 

0.4 pts

PRASM

11.29¢

 

11.43¢

 

(1.2)%

 

11.08¢

 

11.10¢

 

(0.2)%

RASM

13.12¢

 

13.34¢

 

(1.6)%

 

12.93¢

 

12.95¢

 

(0.2)%

CASMex

7.98¢

 

7.90¢

 

1.0%

 

8.09¢

 

7.98¢

 

1.4%

2016 Combined Comparative Operating Results and Statistics

Refer to our Investor Update issued on April 12, 2017 on Form 8-K for combined comparative operating results and statistics for each of the quarters, including the the calculation of the three and nine months ended September 30, 2016 combined data, and full year 2016.

 

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.

             
              

As the acquisition closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior periods.

              
 

Three Months Ended September 30, 2017

(in millions)

Mainline

 

Regional

 

Horizon

 

Consolidating
& Other

 

Air Group
Adjusted(a)

 

Special
Items(b)

 

Consolidated

Operating revenues

             

Passenger

             

Mainline

$

1,562

  

$

  

$

  

$

  

$

1,562

  

$

  

$

1,562

 

Regional

  

262

  

  

  

262

  

  

262

 

  Total passenger revenues

1,562

  

262

  

  

  

1,824

  

  

1,824

 

CPA revenues

  

  

112

  

(112)

  

  

  

 

Freight and mail

30

  

1

  

1

  

  

32

  

  

32

 

Other—net

242

  

21

  

1

  

  

264

  

  

264

 

Total operating revenues

1,834

  

284

  

114

  

(112)

  

2,120

  

  

2,120

 

Operating expenses

             

Operating expenses, excluding fuel

1,077

  

219

  

105

  

(112)

  

1,289

  

24

  

1,313

 

Economic fuel

328

  

45

  

  

  

373

  

(5)

  

368

 

Total operating expenses

1,405

  

264

  

105

  

(112)

  

1,662

  

19

  

1,681

 

Nonoperating income (expense)

             

Interest income

11

  

  

  

(2)

  

9

  

  

9

 

Interest expense

(23)

  

  

(4)

  

1

  

(26)

  

  

(26)

 

Other

5

  

  

  

  

5

  

  

5

 

Total Nonoperating income (expense)

(7)

  

  

(4)

  

(1)

  

(12)

  

  

(12)

 

Income (loss) before income tax

$

422

  

$

20

  

$

5

  

$

(1)

  

$

446

  

$

(19)

  

$

427

 
  
 

Three Months Ended September 30, 2016

(in millions)

Mainline

 

Regional

 

Horizon

 

Consolidating
& Other

 

Air Group
Adjusted(a)

 

Special
Items(b)

 

Consolidated

Operating revenues

             

Passenger

             

Mainline

$

1,073

  

$

  

$

  

$

  

$

1,073

  

$

  

$

1,073

 

Regional

  

249

  

  

  

249

  

  

249

 

  Total passenger revenues

1,073

  

249

  

  

  

1,322

  

  

1,322

 

CPA revenues

  

  

109

  

(109)

  

  

  

 

Freight and mail

30

  

1

  

  

  

31

  

  

31

 

Other—net

190

  

21

  

1

  

1

  

213

  

  

213

 

Total operating revenues

1,293

  

271

  

110

  

(108)

  

1,566

  

  

1,566

 

Operating expenses

             

Operating expenses, excluding fuel

727

  

202

  

99

  

(109)

  

919

  

22

  

941

 

Economic fuel

188

  

34

  

  

  

222

  

3

  

225

 

Total operating expenses

915

  

236

  

99

  

(109)

  

1,141

  

25

  

1,166

 

Nonoperating income (expense)

             

Interest income

7

  

  

  

  

7

  

  

7

 

Interest expense

(7)

  

  

(2)

  

(2)

  

(11)

  

  

(11)

 

Other

5

  

  

  

1

  

6

  

  

6

 

Total Nonoperating income (expense)

5

  

  

(2)

  

(1)

  

2

  

  

2

 

Income (loss) before income tax

$

383

  

$

35

  

$

9

  

$

  

$

427

  

$

(25)

  

$

402

 

 

  

(a)    

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

(b) 

Includes merger-related costs and mark-to-market fuel hedge accounting adjustments.

 

 

Nine Months Ended September 30, 2017

(in millions)

Mainline

 

Regional

 

Horizon

 

Consolidating
& Other

 

Air Group
Adjusted(a)

 

Special
Items(b)

 

Consolidated

Operating revenues

             

Passenger

             

Mainline

$

4,390

  

$

  

$

  

$

  

$

4,390

  

$

  

$

4,390

 

Regional

  

725

  

  

  

725

  

  

725

 

  Total passenger revenues

4,390

  

725

  

  

  

5,115

  

  

5,115

 

CPA revenues

  

  

317

  

(317)

  

  

  

 

Freight and mail

84

  

3

  

1

  

  

88

  

  

88

 

Other—net

708

  

57

  

3

  

  

768

  

  

768

 

Total operating revenues

5,182

  

785

  

321

  

(317)

  

5,971

  

  

5,971

 

Operating expenses

             

Operating expenses, excluding fuel

3,101

  

625

  

324

  

(316)

  

3,734

  

88

  

3,822

 

Economic fuel

924

  

120

  

  

  

1,044

  

7

  

1,051

 

Total operating expenses

4,025

  

745

  

324

  

(316)

  

4,778

  

95

  

4,873

 

Nonoperating income (expense)

             

Interest income

27

  

  

  

(2)

  

25

  

  

25

 

Interest expense

(68)

  

  

(9)

  

  

(77)

  

  

(77)

 

Other

11

  

  

1

  

  

12

  

  

12

 

Total Nonoperating income (expense)

(30)

  

  

(8)

  

(2)

  

(40)

  

  

(40)

 

Income (loss) before income tax

$

1,127

  

$

40

  

$

(11)

  

$

(3)

  

$

1,153

  

$

(95)

  

$

1,058

 
  
 

Nine Months Ended September 30, 2016

(in millions)

Mainline

 

Regional

 

Horizon

 

Consolidating
& Other

 

Air Group
Adjusted(a)

 

Special
Items(b)

 

Consolidated

Operating revenues

             

Passenger

             

Mainline

$

3,036

  

$

  

$

  

$

  

$

3,036

  

$

  

$

3,036

 

Regional

  

682

  

  

  

682

  

  

682

 

  Total passenger revenues

3,036

  

682

  

  

  

3,718

  

  

3,718

 

CPA revenues

  

  

322

  

(322)

  

  

  

 

Freight and mail

79

  

3

  

  

  

82

  

  

82

 

Other—net

546

  

57

  

3

  

1

  

607

  

  

607

 

Total operating revenues

3,661

  

742

  

325

  

(321)

  

4,407

  

  

4,407

 

Operating expenses

             

Operating expenses, excluding fuel

2,107

  

580

  

305

  

(322)

  

2,670

  

36

  

2,706

 

Economic fuel

512

  

90

  

  

  

602

  

(9)

  

593

 

Total operating expenses

2,619

  

670

  

305

  

(322)

  

3,272

  

27

  

3,299

 

Nonoperating income (expense)

             

Interest income

19

  

  

1

  

  

20

  

  

20

 

Interest expense

(23)

  

  

(7)

  

(3)

  

(33)

  

  

(33)

 

Other

15

  

  

  

4

  

19

  

  

19

 

Total Nonoperating income (expense)

11

  

  

(6)

  

1

  

6

  

  

6

 

Income (loss) before income tax

$

1,053

  

$

72

  

$

14

  

$

2

  

$

1,141

  

$

(27)

  

$

1,114

 

 

  

(a)     

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

(b)   

Includes merger-related costs and mark-to-market fuel hedge accounting adjustments.

 

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)

Alaska Air Group, Inc.

       
        

As the acquisition closed on December 14, 2016, amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior period.

        

CASM Excluding Fuel and Special Items Reconciliation

    
 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2017

 

2016

 

2017

 

2016

Consolidated:

       

CASM

10.40

¢

 

10.40

¢

 

10.55

¢

 

10.08

¢

Less the following components:

       

Aircraft fuel, including hedging gains and losses

2.27

  

2.01

  

2.27

  

1.81

 

Special items—merger-related costs

0.15

  

0.19

  

0.19

  

0.11

 

CASM excluding fuel and special items

7.98

¢

 

8.20

¢

 

8.09

¢

 

8.16

¢

        

Mainline:

       

CASM

9.63

¢

 

9.41

¢

 

9.72

¢

 

9.06

¢

Less the following components:

       

Aircraft fuel, including hedging gains and losses

2.19

  

1.91

  

2.19

  

1.72

 

Special items—merger-related costs

0.16

  

0.22

  

0.21

  

0.13

 

CASM excluding fuel and special items

7.28

¢

 

7.28

¢

 

7.32

¢

 

7.21

¢

 

Fuel Reconciliation

 

Three Months Ended September 30,

 

2017

 

2016

(in millions, except for per-gallon amounts)

Dollars

 

Cost/Gallon

 

Dollars

 

Cost/Gallon

Raw or “into-plane” fuel cost

$

368

  

$

1.78

  

$

218

  

$

1.55

 

Losses on settled hedges

5

  

0.02

  

4

  

0.03

 

Consolidated economic fuel expense

373

  

1.80

  

222

  

1.58

 

Mark-to-market fuel hedge adjustment

(5)

  

(0.02)

  

3

  

0.02

 

GAAP fuel expense

$

368

  

$

1.78

  

$

225

  

$

1.60

 

Fuel gallons

207

    

140

   
        
 

Nine Months Ended September 30,

 

2017

 

2016

(in millions, except for per gallon amounts)

Dollars

 

Cost/Gallon

 

Dollars

 

Cost/Gallon

Raw or “into-plane” fuel cost

$

1,030

  

$

1.74

  

$

590

  

$

1.44

 

Losses on settled hedges

14

  

0.02

  

12

  

0.03

 

Consolidated economic fuel expense

$

1,044

  

$

1.76

  

$

602

  

$

1.47

 

Mark-to-market fuel hedge adjustment

7

  

0.01

  

(9)

  

(0.02)

 

GAAP fuel expense

$

1,051

  

$

1.77

  

$

593

  

$

1.45

 

Fuel gallons

592

    

410

   

Note A: Pursuant to Regulation G, we are providing reconciliations 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 (including merger-related costs) 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, such as merger-related costs, 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, which covers the majority of 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 merger-related costs and 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.

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 (“EPS”) 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

Free Cash Flow – total operating cash flow generated less cash paid for capital expenditures

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 and Airbus 320 family 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, 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, 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

Contact Information:

Alaska Air Group, Inc.

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