Alaska Air Group reports second quarter 2017 results
Source: Alaska Airlines
26/07/2017

Financial Highlights:

Operational Highlights:

Recognition and Awards

Alaska Air Group Inc., (NYSE: ALK) today reported second quarter 2017 GAAP net income of $296 million, or $2.38 per diluted share, compared to $260 million, or $2.10 per diluted share in the second quarter of 2016. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $312 million, or $2.51 per diluted share, compared to $263 million, or $2.12 per diluted share, in 2016.

"We had a very solid quarter, driven by a growing customer base and strong revenue performance," said CEO Brad Tilden. "Although we're dealing with a number of operational challenges, our employees continue to deliver excellent service. We are delighted that Alaska and Virgin America received top honors from J.D. Power* and Travel + Leisure* respectively, each for the 10th consecutive year. I want to congratulate our team for receiving these prestigious awards."

The following table reconciles the company's reported GAAP net income and earnings per diluted share ("diluted EPS") for the three and six months ended June 30, 2017, and 2016 to adjusted amounts:

 

Three Months Ended June 30,
 

2017

  

2016

(in millions, except per-share amounts)

Dollars

  

Diluted EPS

  

Dollars

  

Diluted EPS

Reported GAAP net income

$

296

    

$

2.38

    

$

260

    

$

2.10

  

Mark-to-market fuel hedge adjustments

2

    

0.02

    

(10)

    

(0.08)

  

Special items—merger-related costs

24

    

0.19

    

14

    

0.11

  

Income tax effect on special items and fuel hedge adjustments

(10)

    

(0.08)

    

(1)

    

(0.01)

  

Non-GAAP adjusted net income and per-share amounts

$

312

    

$

2.51

    

$

263

    

$

2.12

  
   
 

Six Months Ended June 30,
 

2017

  

2016
 

Dollars

  

Diluted EPS

  

Dollars

  

Diluted EPS

Reported GAAP net income and diluted EPS

$

395

    

$

3.17

    

$

444

    

$

3.56

  

Mark-to-market fuel hedge adjustments

12

    

0.10

    

(12)

    

(0.10)

  

Special items—merger-related costs

64

    

0.51

    

14

    

0.12

  

Income tax effect on special items and fuel hedge adjustments

(28)

    

(0.22)

    

(1)

    

(0.01)

  

Non-GAAP adjusted net income and diluted EPS

$

443

    

$

3.56

    

$

445

    

$

3.57

  

* Alaska Airlines: highest in airline customer satisfaction among traditional carriers in the J.D. Power 2008-2017 North America Airline Satisfaction Study. Virgin America: "Top Domestic Airline" 2017 in Travel + Leisure "World's Best Awards".

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 second quarter results will be simulcast online at 8:30 a.m. Pacific time on July 26, 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 Mexico, Canada, Costa Rica and Cuba. With Alaska and 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. Alaska Mileage Plan ranked "Highest in Customer Satisfaction with Airline Loyalty Rewards Programs" in the J.D. Power 2016 Airline Loyalty/Rewards Program Satisfaction Report for the last three consecutive years. Learn more about Alaska's award-winning service and unmatched reliability 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 six months ended June 30, 2017 but not for the prior periods.
                       
 

Three Months Ended June 30,

  

Six Months Ended June 30,

(in millions, except per-share amounts)

2017

  

2016

  

Change(a)

  

2017

  

2016

  

Change(a)

Operating Revenues:

                      

Passenger

                      

Mainline

$

1,556

    

$

1,036

    

50

%

  

$

2,828

    

$

1,963

    

44

%

Regional

251

    

227

    

11

%

  

463

    

433

    

7

%

Total passenger revenue

1,807

    

1,263

    

43

%

  

3,291

    

2,396

    

37

%

Freight and mail

32

    

27

    

19

%

  

56

    

51

    

10

%

Other—net

263

    

204

    

29

%

  

504

    

394

    

28

%

Total Operating Revenues

2,102

    

1,494

    

41

%

  

3,851

    

2,841

    

36

%
                       

Operating Expenses:

                      

Wages and benefits

469

    

332

    

41

%

  

917

    

668

    

37

%

Variable incentive pay

27

    

32

    

(16)

%

  

58

    

64

    

(9)

%

Aircraft fuel, including hedging gains and losses

344

    

201

    

71

%

  

683

    

368

    

86

%

Aircraft maintenance

96

    

65

    

48

%

  

183

    

133

    

38

%

Aircraft rent

69

    

26

    

165

%

  

134

    

55

    

144

%

Landing fees and other rentals

99

    

63

    

57

%

  

214

    

143

    

50

%

Contracted services

77

    

60

    

28

%

  

158

    

120

    

32

%

Selling expenses

97

    

55

    

76

%

  

178

    

104

    

71

%

Depreciation and amortization

90

    

92

    

(2)

%

  

180

    

180

    

—

%

Food and beverage service

50

    

31

    

61

%

  

95

    

62

    

53

%

Third-party regional carrier expense

27

    

24

    

13

%

  

54

    

47

    

15

%

Special items—merger-related costs

24

    

14

    

71

%

  

64

    

14

    

357

%

Other

140

    

81

    

73

%

  

274

    

175

    

57

%

Total Operating Expenses

1,609

    

1,076

    

50

%

  

3,192

    

2,133

    

50

%

Operating Income

493

    

418

    

18

%

  

659

    

708

    

(7)

%
                       

Nonoperating Income (Expense):

                      

Interest income

9

    

7

        

16

    

13

      

Interest expense

(26)

    

(9)

        

(51)

    

(22)

      

Interest capitalized

4

    

7

        

8

    

15

      

Other—net

(1)

    

(3)

        

(1)

    

(2)

      

Total Nonoperating Income (Expense)

(14)

    

2

        

(28)

    

4

      

Income Before Income Tax

479

    

420

        

631

    

712

      

Income tax expense

183

    

160

        

236

    

268

      

Net Income

$

296

    

$

260

        

$

395

    

$

444

      
                       

Basic Earnings Per Share:

$

2.40

    

$

2.11

        

$

3.19

    

$

3.58

      

Diluted Earnings Per Share:

$

2.38

    

$

2.10

        

$

3.17

    

$

3.56

      
                       

Shares Used for Computation:

                      

Basic

123.573

    

123.250

        

123.534

    

123.900

      

Diluted

124.332

    

123.988

        

124.374

    

124.715

      
                       

Cash dividend declared per share:

$

0.300

    

$

0.275

        

$

0.600

    

$

0.550

      
   

(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)

June 30, 2017

  

December 31, 2016

Cash and marketable securities

$

1,922

    

$

1,580

  
       

Total current assets

2,425

    

2,050

  

Property and equipment—net

6,002

    

5,666

  

Goodwill

1,940

    

1,934

  

Intangible assets

137

    

143

  

Other assets

216

    

169

  

Total assets

10,720

    

9,962

  
       

Air traffic liability

1,255

    

849

  

Current portion of long-term debt

337

    

319

  

Other current liabilities

1,382

    

1,367

  

Current liabilities

2,974

    

2,535

  

Long-term debt

2,469

    

2,645

  

Other liabilities and credits

2,013

    

1,851

  

Shareholders' equity

3,264

    

2,931

  

Total liabilities and shareholders' equity

$

10,720

    

$

9,962

  
       

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

55

%

  

59

%
       

Number of common shares outstanding

123.521

    

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 six months ended June 30, 2017 but not for the prior periods.
                       
 

Three Months Ended June 30,

  

Six Months Ended June 30,
 

2017

  

2016

  

Change(e)

  

2017

  

2016

  

Change(e)

Consolidated Operating Statistics:(a)

                      

Revenue passengers (000)

11,400

  

8,647

  

31.8%

  

21,417

  

16,482

  

29.9%

RPMs (000,000) "traffic"

13,554

  

9,397

  

44.2%

  

25,262

  

17,968

  

40.6%

ASMs (000,000) "capacity"

15,612

  

11,062

  

41.1%

  

30,006

  

21,515

  

39.5%

Load factor

86.8%

  

84.9%

  

1.9 pts

  

84.2%

  

83.5%

  

0.7 pts

Yield

13.33¢

  

13.44¢

  

(0.8)%

  

13.03¢

  

13.34¢

  

(2.3)%

PRASM

11.57¢

  

11.42¢

  

1.3%

  

10.97¢

  

11.14¢

  

(1.5)%

RASM

13.46¢

  

13.51¢

  

(0.4)%

  

12.83¢

  

13.21¢

  

(2.9)%

CASMex(b)

7.94¢

  

7.78¢

  

2.1%

  

8.15¢

  

8.14¢

  

0.1%

Economic fuel cost per gallon(c)

$1.71

  

$1.53

  

11.8%

  

$1.75

  

$1.41

  

24.1%

Fuel gallons (000,000)

201

  

138

  

45.7%

  

385

  

270

  

42.6%

ASM's per gallon

77.7

  

80.2

  

(3.1)%

  

77.9

  

79.7

  

(2.3)%

Average number of full-time equivalent employees (FTE)

19,745

  

14,470

  

36.5%

  

19,214

  

14,414

  

33.3%
                       

Mainline Operating Statistics:

                      

Revenue passengers (000)

8,950

  

6,282

  

42.5%

  

16,733

  

11,925

  

40.3%

RPMs (000,000) "traffic"

12,525

  

8,456

  

48.1%

  

23,352

  

16,172

  

44.4%

ASMs (000,000) "capacity"

14,341

  

9,875

  

45.2%

  

27,602

  

19,229

  

43.5%

Load factor

87.3%

  

85.6%

  

1.7 pts

  

84.6%

  

84.1%

  

0.5 pts

Yield

12.42¢

  

12.25¢

  

1.4%

  

12.11¢

  

12.14¢

  

(0.2)%

PRASM

10.85¢

  

10.49¢

  

3.4%

  

10.25¢

  

10.21¢

  

0.4%

RASM

12.76¢

  

12.61¢

  

1.2%

  

12.13¢

  

12.31¢

  

(1.5)%

CASMex(b)

7.15¢

  

6.88¢

  

3.9%

  

7.33¢

  

7.18¢

  

2.1%

Economic fuel cost per gallon(c)

$1.70

  

$1.52

  

11.8%

  

$1.74

  

$1.40

  

24.3%

Fuel gallons (000,000)

179

  

118

  

51.7%

  

343

  

231

  

48.5%

ASM's per gallon

80.3

  

83.7

  

(4.1)%

  

80.5

  

83.2

  

(3.2)%

Average number of FTE's

15,447

  

11,261

  

37.2%

  

15,227

  

11,192

  

36.1%

Aircraft utilization

11.4

  

10.8

  

5.6%

  

11.1

  

10.7

  

3.7%

Average aircraft stage length

1,294

  

1,177

  

9.9%

  

1,295

  

1,195

  

8.4%

Operating fleet

221

  

152

  

69 a/c

  

221

  

152

  

69 a/c
                       

Regional Operating Statistics:(d)

                      

Revenue passengers (000)

2,450

  

2,365

  

3.6%

  

4,685

  

4,558

  

2.8%

RPMs (000,000) "traffic"

1,030

  

941

  

9.5%

  

1,910

  

1,796

  

6.3%

ASMs (000,000) "capacity"

1,270

  

1,187

  

7.0%

  

2,404

  

2,287

  

5.1%

Load factor

81.1%

  

79.3%

  

1.8 pts

  

79.4%

  

78.5%

  

0.9 pts

Yield

24.30¢

  

24.17¢

  

0.5%

  

24.22¢

  

24.13¢

  

0.4%

PRASM

19.70¢

  

19.16¢

  

2.8%

  

19.24¢

  

18.95¢

  

1.5%

Operating fleet

78

  

69

  

9 a/c

  

78

  

69

  

9 a/c
   

(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 potential importance of this measure 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.

(e)

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 six months ended June 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 June 30,

  

Six Months Ended June 30,
 

2017

2016

      

2017

  

2016

    
 

As Reported

  

Combined(a)

  

Change

  

As Reported

  

Combined(a)

  

Change

Combined Comparative Operating Results

Passenger revenue

$

1,807

    

$

1,647

    

10%

  

$

3,291

    

$

3,109

    

6%

Other revenue

295

    

272

    

8%

  

560

    

520

    

8%

Total Operating Revenues

2,102

    

1,919

    

10%

  

3,851

    

3,629

    

6%

Non-fuel operating expense

1,265

    

1,152

    

10%

  

2,509

    

2,302

    

9%

Fuel expense

344

    

278

    

24%

  

683

    

516

    

32%

Total Operating Expenses

1,609

    

1,430

    

13%

  

3,192

    

2,818

    

13%

Operating Income

493

    

489

    

1%

  

659

    

811

    

(19)%

Nonoperating income (expense)

(14)

    

(3)

    

367%

  

(28)

    

(5)

    

460%

Income Before Tax

479

    

486

    

(1)%

  

631

    

806

    

(22)%

Special items—merger-related costs

24

    

18

    

33%

  

64

    

20

    

220%

Mark-to-market fuel hedge adjustments

2

    

(11)

    

(118)%

  

12

    

(14)

    

(186)%

Adjusted Income Before Tax

$

505

    

$

493

    

2%

  

$

707

    

$

812

    

(13)%
                       

Combined Comparative Operating Statistics

Revenue passengers (000)

11,400

    

10,734

    

6.2%

  

21,417

    

20,336

    

5.3%

RPMs (000,000)

13,554

    

12,562

    

7.9%

  

25,262

    

23,748

    

6.4%

ASMs  (000,000)

15,612

    

14,751

    

5.8%

  

30,006

    

28,470

    

5.4%

Load Factor

86.8

%

  

85.2

%

  

1.6 pts

  

84.2

%

  

83.4

%

  

0.8 pts

PRASM

11.57

¢

  

11.16

¢

  

3.7%

  

10.97

¢

  

10.92

¢

  

0.5%

RASM

13.46

¢

  

13.01

¢

  

3.5%

  

12.83

¢

  

12.75

¢

  

0.6%

CASMex

7.94

¢

  

7.69

¢

  

3.3%

  

8.15

¢

  

8.01

¢

  

1.7%
   

(a)

Refer to our Investor Update issued on April 12, 2017 on Form 8-K for further details of the calculation of the three and six months ended June 30, 2016 combined data.

2016 Combined Comparative Operating Results and Statistics—Other Quarters

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 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 six months ended June 30, 2017 but not for the prior periods.
                           
 

Three Months Ended June 30, 2017

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating
& Other

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

$

1,556

    

$

—

    

$

—

    

$

—

    

$

1,556

    

$

—

    

$

1,556

  

Regional

—

    

251

    

—

    

—

    

251

    

—

    

251

  

   Total passenger revenues

1,556

    

251

    

—

    

—

    

1,807

    

—

    

1,807

  

CPA revenues

—

    

—

    

108

    

(108)

    

—

    

—

    

—

  

Freight and mail

31

    

1

    

—

    

—

    

32

    

—

    

32

  

Other—net

244

    

19

    

1

    

(1)

    

263

    

—

    

263

  

Total operating revenues

1,831

    

271

    

109

    

(109)

    

2,102

    

—

    

2,102

  

Operating expenses

                          

Operating expenses, excluding fuel

1,026

    

206

    

116

    

(107)

    

1,241

    

24

    

1,265

  

Economic fuel

304

    

39

    

—

    

(1)

    

342

    

2

    

344

  

Total operating expenses

1,330

    

245

    

116

    

(108)

    

1,583

    

26

    

1,609

  

Nonoperating income (expense)

                          

Interest income

9

    

—

    

—

    

—

    

9

    

—

    

9

  

Interest expense

(23)

    

—

    

(3)

    

—

    

(26)

    

—

    

(26)

  

Other

3

    

—

    

1

    

(1)

    

3

    

—

    

3

  

Total Nonoperating income (expense)

(11)

    

—

    

(2)

    

(1)

    

(14)

    

—

    

(14)

  

Income (loss) before income tax

$

490

    

$

26

    

$

(9)

    

$

(2)

    

$

505

    

$

(26)

    

$

479

  
   
 

Three Months Ended June 30, 2016

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

$

1,036

    

$

—

    

$

—

    

$

—

    

$

1,036

    

$

—

    

$

1,036

  

Regional

—

    

227

    

—

    

—

    

227

    

—

    

227

  

   Total passenger revenues

1,036

    

227

    

—

    

—

    

1,263

    

—

    

1,263

  

CPA revenues

—

    

—

    

110

    

(110)

    

—

    

—

    

—

  

Freight and mail

26

    

1

    

—

    

—

    

27

    

—

    

27

  

Other—net

184

    

19

    

1

    

—

    

204

    

—

    

204

  

Total operating revenues

1,246

    

247

    

111

    

(110)

    

1,494

    

—

    

1,494

  

Operating expenses

                          

Operating expenses, excluding fuel

679

    

192

    

101

    

(111)

    

861

    

14

    

875

  

Economic fuel

180

    

31

    

—

    

—

    

211

    

(10)

    

201

  

Total operating expenses

859

    

223

    

101

    

(111)

    

1,072

    

4

    

1,076

  

Nonoperating income (expense)

                          

Interest income

6

    

—

    

1

    

—

    

7

    

—

    

7

  

Interest expense

(4)

    

—

    

(4)

    

(1)

    

(9)

    

—

    

(9)

  

Other

3

    

—

    

—

    

1

    

4

    

—

    

4

  

Total Nonoperating income (expense)

5

    

—

    

(3)

    

—

    

2

    

—

    

2

  

Income (loss) before income tax

$

392

    

$

24

    

$

7

    

$

1

    

$

424

    

$

(4)

    

$

420

  
   

(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.

 

 

Six Months Ended June 30, 2017

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

2,828

    

—

    

—

    

—

    

2,828

    

—

    

2,828

  

Regional

—

    

463

    

—

    

—

    

463

    

—

    

463

  

  Total passenger revenues

2,828

    

463

    

—

    

—

    

3,291

    

—

    

3,291

  

Revenue from CPA with Alaska

—

    

—

    

205

    

(205)

    

—

    

—

    

—

  

Freight and mail

54

    

2

    

—

    

—

    

56

    

—

    

56

  

Other—net

466

    

36

    

2

    

—

    

504

    

—

    

504

  

Total operating revenues

3,348

    

501

    

207

    

(205)

    

3,851

    

—

    

3,851

  

Operating expenses

                          

Operating expenses, excluding fuel

2,024

    

406

    

219

    

(204)

    

2,445

    

64

    

2,509

  

Economic fuel

596

    

75

    

—

    

—

    

671

    

12

    

683

  

Total operating expenses

2,620

    

481

    

219

    

(204)

    

3,116

    

76

    

3,192

  

Nonoperating income (expense)

                          

Interest income

16

    

—

    

—

    

—

    

16

    

—

    

16

  

Interest expense

(45)

    

—

    

(5)

    

(1)

    

(51)

    

—

    

(51)

  

Other

6

    

—

    

1

    

—

    

7

    

—

    

7

  

Total Nonoperating income (expense)

(23)

    

—

    

(4)

    

(1)

    

(28)

    

—

    

(28)

  

Income (loss) before income tax

705

    

20

    

(16)

    

(2)

    

707

    

(76)

    

631

  
   
 

Six Months Ended June 30, 2016

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

1,963

    

—

    

—

    

—

    

1,963

    

—

    

1,963

  

Regional

—

    

433

    

—

    

—

    

433

    

—

    

433

  

Total passenger revenues

1,963

    

433

    

—

    

—

    

2,396

    

—

    

2,396

  

Revenue from CPA with Alaska

—

    

—

    

213

    

(213)

    

—

    

—

    

—

  

Freight and mail

49

    

2

    

—

    

—

    

51

    

—

    

51

  

Other—net

356

    

36

    

2

    

—

    

394

    

—

    

394

  

Total operating revenues

2,368

    

471

    

215

    

(213)

    

2,841

    

—

    

2,841

  

Operating expenses

                          

Operating expenses, excluding fuel

1,380

    

378

    

206

    

(213)

    

1,751

    

14

    

1,765

  

Economic fuel

324

    

56

    

—

    

—

    

380

    

(12)

    

368

  

Total operating expenses

1,704

    

434

    

206

    

(213)

    

2,131

    

2

    

2,133

  

Nonoperating income (expense)

                          

Interest income

12

    

—

    

1

    

—

    

13

    

—

    

13

  

Interest expense

(16)

    

—

    

(5)

    

(1)

    

(22)

    

—

    

(22)

  

Other

10

    

—

    

—

    

3

    

13

    

—

    

13

  

Total Nonoperating income (expense)

6

    

—

    

(4)

    

2

    

4

    

—

    

4

  

Income (loss) before income tax

670

    

37

    

5

    

2

    

714

    

(2)

    

712

  
   

(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 six months ended June 30, 2017 but not for the prior period.
               

CASM Excluding Fuel and Special Items Reconciliation

        
 

Three Months Ended June 30,

  

Six Months Ended June 30,
 

2017

  

2016

  

2017

  

2016

Consolidated:

              

CASM

10.31

¢

  

9.73

¢

  

10.64

¢

  

9.91

¢

Less the following components:

              

Aircraft fuel, including hedging gains and losses

2.21

    

1.82

    

2.28

    

1.71

  

Special items—merger-related costs

0.16

    

0.13

    

0.21

    

0.06

  

CASM excluding fuel and special items

7.94

¢

  

7.78

¢

  

8.15

¢

  

8.14

¢
               

Mainline:

              

CASM

9.45

¢

  

8.74

¢

  

9.77

¢

  

8.87

¢

Less the following components:

              

Aircraft fuel, including hedging gains and losses

2.13

    

1.72

    

2.20

    

1.62

  

Special items—merger-related costs

0.17

    

0.14

    

0.23

    

0.07

  

CASM excluding fuel and special items

7.15

¢

  

6.88

¢

  

7.33

¢

  

7.18

¢
 

Fuel Reconciliation
 

Three Months Ended June 30,
 

2017

  

2016

(in millions, except for per-gallon amounts)

Dollars

  

Cost/Gallon

  

Dollars

  

Cost/Gallon

Raw or "into-plane" fuel cost

$

337

    

$

1.69

    

$

207

    

$

1.50

  

Losses on settled hedges

5

    

0.02

    

4

    

0.03

  

Consolidated economic fuel expense

342

    

1.71

    

211

    

1.53

  

Mark-to-market fuel hedge adjustment

2

    

0.01

    

(10)

    

(0.07)

  

GAAP fuel expense

$

344

    

$

1.72

    

$

201

    

$

1.46

  

Fuel gallons

201

        

138

      
               
 

Six Months Ended June 30,
 

2017

  

2016

(in millions, except for per gallon amounts)

Dollars

  

Cost/Gallon

  

Dollars

  

Cost/Gallon

Raw or "into-plane" fuel cost

$

663

    

$

1.73

    

$

372

    

$

1.38

  

Losses on settled hedges

8

    

0.02

    

8

    

0.03

  

Consolidated economic fuel expense

$

671

    

$

1.75

    

$

380

    

$

1.41

  

Mark-to-market fuel hedge adjustment

12

    

0.03

    

(12)

    

(0.04)

  

GAAP fuel expense

$

683

    

$

1.78

    

$

368

    

$

1.37

  

Fuel gallons

385

        

270

      

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:

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

 

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Alaska Air Group reports second quarter 2017 results
Source: Alaska Airlines
26/07/2017

Financial Highlights:

Operational Highlights:

Recognition and Awards

Alaska Air Group Inc., (NYSE: ALK) today reported second quarter 2017 GAAP net income of $296 million, or $2.38 per diluted share, compared to $260 million, or $2.10 per diluted share in the second quarter of 2016. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $312 million, or $2.51 per diluted share, compared to $263 million, or $2.12 per diluted share, in 2016.

"We had a very solid quarter, driven by a growing customer base and strong revenue performance," said CEO Brad Tilden. "Although we're dealing with a number of operational challenges, our employees continue to deliver excellent service. We are delighted that Alaska and Virgin America received top honors from J.D. Power* and Travel + Leisure* respectively, each for the 10th consecutive year. I want to congratulate our team for receiving these prestigious awards."

The following table reconciles the company's reported GAAP net income and earnings per diluted share ("diluted EPS") for the three and six months ended June 30, 2017, and 2016 to adjusted amounts:

 

Three Months Ended June 30,
 

2017

  

2016

(in millions, except per-share amounts)

Dollars

  

Diluted EPS

  

Dollars

  

Diluted EPS

Reported GAAP net income

$

296

    

$

2.38

    

$

260

    

$

2.10

  

Mark-to-market fuel hedge adjustments

2

    

0.02

    

(10)

    

(0.08)

  

Special items—merger-related costs

24

    

0.19

    

14

    

0.11

  

Income tax effect on special items and fuel hedge adjustments

(10)

    

(0.08)

    

(1)

    

(0.01)

  

Non-GAAP adjusted net income and per-share amounts

$

312

    

$

2.51

    

$

263

    

$

2.12

  
   
 

Six Months Ended June 30,
 

2017

  

2016
 

Dollars

  

Diluted EPS

  

Dollars

  

Diluted EPS

Reported GAAP net income and diluted EPS

$

395

    

$

3.17

    

$

444

    

$

3.56

  

Mark-to-market fuel hedge adjustments

12

    

0.10

    

(12)

    

(0.10)

  

Special items—merger-related costs

64

    

0.51

    

14

    

0.12

  

Income tax effect on special items and fuel hedge adjustments

(28)

    

(0.22)

    

(1)

    

(0.01)

  

Non-GAAP adjusted net income and diluted EPS

$

443

    

$

3.56

    

$

445

    

$

3.57

  

* Alaska Airlines: highest in airline customer satisfaction among traditional carriers in the J.D. Power 2008-2017 North America Airline Satisfaction Study. Virgin America: "Top Domestic Airline" 2017 in Travel + Leisure "World's Best Awards".

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 second quarter results will be simulcast online at 8:30 a.m. Pacific time on July 26, 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 Mexico, Canada, Costa Rica and Cuba. With Alaska and 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. Alaska Mileage Plan ranked "Highest in Customer Satisfaction with Airline Loyalty Rewards Programs" in the J.D. Power 2016 Airline Loyalty/Rewards Program Satisfaction Report for the last three consecutive years. Learn more about Alaska's award-winning service and unmatched reliability 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 six months ended June 30, 2017 but not for the prior periods.
                       
 

Three Months Ended June 30,

  

Six Months Ended June 30,

(in millions, except per-share amounts)

2017

  

2016

  

Change(a)

  

2017

  

2016

  

Change(a)

Operating Revenues:

                      

Passenger

                      

Mainline

$

1,556

    

$

1,036

    

50

%

  

$

2,828

    

$

1,963

    

44

%

Regional

251

    

227

    

11

%

  

463

    

433

    

7

%

Total passenger revenue

1,807

    

1,263

    

43

%

  

3,291

    

2,396

    

37

%

Freight and mail

32

    

27

    

19

%

  

56

    

51

    

10

%

Other—net

263

    

204

    

29

%

  

504

    

394

    

28

%

Total Operating Revenues

2,102

    

1,494

    

41

%

  

3,851

    

2,841

    

36

%
                       

Operating Expenses:

                      

Wages and benefits

469

    

332

    

41

%

  

917

    

668

    

37

%

Variable incentive pay

27

    

32

    

(16)

%

  

58

    

64

    

(9)

%

Aircraft fuel, including hedging gains and losses

344

    

201

    

71

%

  

683

    

368

    

86

%

Aircraft maintenance

96

    

65

    

48

%

  

183

    

133

    

38

%

Aircraft rent

69

    

26

    

165

%

  

134

    

55

    

144

%

Landing fees and other rentals

99

    

63

    

57

%

  

214

    

143

    

50

%

Contracted services

77

    

60

    

28

%

  

158

    

120

    

32

%

Selling expenses

97

    

55

    

76

%

  

178

    

104

    

71

%

Depreciation and amortization

90

    

92

    

(2)

%

  

180

    

180

    

—

%

Food and beverage service

50

    

31

    

61

%

  

95

    

62

    

53

%

Third-party regional carrier expense

27

    

24

    

13

%

  

54

    

47

    

15

%

Special items—merger-related costs

24

    

14

    

71

%

  

64

    

14

    

357

%

Other

140

    

81

    

73

%

  

274

    

175

    

57

%

Total Operating Expenses

1,609

    

1,076

    

50

%

  

3,192

    

2,133

    

50

%

Operating Income

493

    

418

    

18

%

  

659

    

708

    

(7)

%
                       

Nonoperating Income (Expense):

                      

Interest income

9

    

7

        

16

    

13

      

Interest expense

(26)

    

(9)

        

(51)

    

(22)

      

Interest capitalized

4

    

7

        

8

    

15

      

Other—net

(1)

    

(3)

        

(1)

    

(2)

      

Total Nonoperating Income (Expense)

(14)

    

2

        

(28)

    

4

      

Income Before Income Tax

479

    

420

        

631

    

712

      

Income tax expense

183

    

160

        

236

    

268

      

Net Income

$

296

    

$

260

        

$

395

    

$

444

      
                       

Basic Earnings Per Share:

$

2.40

    

$

2.11

        

$

3.19

    

$

3.58

      

Diluted Earnings Per Share:

$

2.38

    

$

2.10

        

$

3.17

    

$

3.56

      
                       

Shares Used for Computation:

                      

Basic

123.573

    

123.250

        

123.534

    

123.900

      

Diluted

124.332

    

123.988

        

124.374

    

124.715

      
                       

Cash dividend declared per share:

$

0.300

    

$

0.275

        

$

0.600

    

$

0.550

      
   

(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)

June 30, 2017

  

December 31, 2016

Cash and marketable securities

$

1,922

    

$

1,580

  
       

Total current assets

2,425

    

2,050

  

Property and equipment—net

6,002

    

5,666

  

Goodwill

1,940

    

1,934

  

Intangible assets

137

    

143

  

Other assets

216

    

169

  

Total assets

10,720

    

9,962

  
       

Air traffic liability

1,255

    

849

  

Current portion of long-term debt

337

    

319

  

Other current liabilities

1,382

    

1,367

  

Current liabilities

2,974

    

2,535

  

Long-term debt

2,469

    

2,645

  

Other liabilities and credits

2,013

    

1,851

  

Shareholders' equity

3,264

    

2,931

  

Total liabilities and shareholders' equity

$

10,720

    

$

9,962

  
       

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

55

%

  

59

%
       

Number of common shares outstanding

123.521

    

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 six months ended June 30, 2017 but not for the prior periods.
                       
 

Three Months Ended June 30,

  

Six Months Ended June 30,
 

2017

  

2016

  

Change(e)

  

2017

  

2016

  

Change(e)

Consolidated Operating Statistics:(a)

                      

Revenue passengers (000)

11,400

  

8,647

  

31.8%

  

21,417

  

16,482

  

29.9%

RPMs (000,000) "traffic"

13,554

  

9,397

  

44.2%

  

25,262

  

17,968

  

40.6%

ASMs (000,000) "capacity"

15,612

  

11,062

  

41.1%

  

30,006

  

21,515

  

39.5%

Load factor

86.8%

  

84.9%

  

1.9 pts

  

84.2%

  

83.5%

  

0.7 pts

Yield

13.33¢

  

13.44¢

  

(0.8)%

  

13.03¢

  

13.34¢

  

(2.3)%

PRASM

11.57¢

  

11.42¢

  

1.3%

  

10.97¢

  

11.14¢

  

(1.5)%

RASM

13.46¢

  

13.51¢

  

(0.4)%

  

12.83¢

  

13.21¢

  

(2.9)%

CASMex(b)

7.94¢

  

7.78¢

  

2.1%

  

8.15¢

  

8.14¢

  

0.1%

Economic fuel cost per gallon(c)

$1.71

  

$1.53

  

11.8%

  

$1.75

  

$1.41

  

24.1%

Fuel gallons (000,000)

201

  

138

  

45.7%

  

385

  

270

  

42.6%

ASM's per gallon

77.7

  

80.2

  

(3.1)%

  

77.9

  

79.7

  

(2.3)%

Average number of full-time equivalent employees (FTE)

19,745

  

14,470

  

36.5%

  

19,214

  

14,414

  

33.3%
                       

Mainline Operating Statistics:

                      

Revenue passengers (000)

8,950

  

6,282

  

42.5%

  

16,733

  

11,925

  

40.3%

RPMs (000,000) "traffic"

12,525

  

8,456

  

48.1%

  

23,352

  

16,172

  

44.4%

ASMs (000,000) "capacity"

14,341

  

9,875

  

45.2%

  

27,602

  

19,229

  

43.5%

Load factor

87.3%

  

85.6%

  

1.7 pts

  

84.6%

  

84.1%

  

0.5 pts

Yield

12.42¢

  

12.25¢

  

1.4%

  

12.11¢

  

12.14¢

  

(0.2)%

PRASM

10.85¢

  

10.49¢

  

3.4%

  

10.25¢

  

10.21¢

  

0.4%

RASM

12.76¢

  

12.61¢

  

1.2%

  

12.13¢

  

12.31¢

  

(1.5)%

CASMex(b)

7.15¢

  

6.88¢

  

3.9%

  

7.33¢

  

7.18¢

  

2.1%

Economic fuel cost per gallon(c)

$1.70

  

$1.52

  

11.8%

  

$1.74

  

$1.40

  

24.3%

Fuel gallons (000,000)

179

  

118

  

51.7%

  

343

  

231

  

48.5%

ASM's per gallon

80.3

  

83.7

  

(4.1)%

  

80.5

  

83.2

  

(3.2)%

Average number of FTE's

15,447

  

11,261

  

37.2%

  

15,227

  

11,192

  

36.1%

Aircraft utilization

11.4

  

10.8

  

5.6%

  

11.1

  

10.7

  

3.7%

Average aircraft stage length

1,294

  

1,177

  

9.9%

  

1,295

  

1,195

  

8.4%

Operating fleet

221

  

152

  

69 a/c

  

221

  

152

  

69 a/c
                       

Regional Operating Statistics:(d)

                      

Revenue passengers (000)

2,450

  

2,365

  

3.6%

  

4,685

  

4,558

  

2.8%

RPMs (000,000) "traffic"

1,030

  

941

  

9.5%

  

1,910

  

1,796

  

6.3%

ASMs (000,000) "capacity"

1,270

  

1,187

  

7.0%

  

2,404

  

2,287

  

5.1%

Load factor

81.1%

  

79.3%

  

1.8 pts

  

79.4%

  

78.5%

  

0.9 pts

Yield

24.30¢

  

24.17¢

  

0.5%

  

24.22¢

  

24.13¢

  

0.4%

PRASM

19.70¢

  

19.16¢

  

2.8%

  

19.24¢

  

18.95¢

  

1.5%

Operating fleet

78

  

69

  

9 a/c

  

78

  

69

  

9 a/c
   

(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 potential importance of this measure 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.

(e)

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 six months ended June 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 June 30,

  

Six Months Ended June 30,
 

2017

2016

      

2017

  

2016

    
 

As Reported

  

Combined(a)

  

Change

  

As Reported

  

Combined(a)

  

Change

Combined Comparative Operating Results

Passenger revenue

$

1,807

    

$

1,647

    

10%

  

$

3,291

    

$

3,109

    

6%

Other revenue

295

    

272

    

8%

  

560

    

520

    

8%

Total Operating Revenues

2,102

    

1,919

    

10%

  

3,851

    

3,629

    

6%

Non-fuel operating expense

1,265

    

1,152

    

10%

  

2,509

    

2,302

    

9%

Fuel expense

344

    

278

    

24%

  

683

    

516

    

32%

Total Operating Expenses

1,609

    

1,430

    

13%

  

3,192

    

2,818

    

13%

Operating Income

493

    

489

    

1%

  

659

    

811

    

(19)%

Nonoperating income (expense)

(14)

    

(3)

    

367%

  

(28)

    

(5)

    

460%

Income Before Tax

479

    

486

    

(1)%

  

631

    

806

    

(22)%

Special items—merger-related costs

24

    

18

    

33%

  

64

    

20

    

220%

Mark-to-market fuel hedge adjustments

2

    

(11)

    

(118)%

  

12

    

(14)

    

(186)%

Adjusted Income Before Tax

$

505

    

$

493

    

2%

  

$

707

    

$

812

    

(13)%
                       

Combined Comparative Operating Statistics

Revenue passengers (000)

11,400

    

10,734

    

6.2%

  

21,417

    

20,336

    

5.3%

RPMs (000,000)

13,554

    

12,562

    

7.9%

  

25,262

    

23,748

    

6.4%

ASMs  (000,000)

15,612

    

14,751

    

5.8%

  

30,006

    

28,470

    

5.4%

Load Factor

86.8

%

  

85.2

%

  

1.6 pts

  

84.2

%

  

83.4

%

  

0.8 pts

PRASM

11.57

¢

  

11.16

¢

  

3.7%

  

10.97

¢

  

10.92

¢

  

0.5%

RASM

13.46

¢

  

13.01

¢

  

3.5%

  

12.83

¢

  

12.75

¢

  

0.6%

CASMex

7.94

¢

  

7.69

¢

  

3.3%

  

8.15

¢

  

8.01

¢

  

1.7%
   

(a)

Refer to our Investor Update issued on April 12, 2017 on Form 8-K for further details of the calculation of the three and six months ended June 30, 2016 combined data.

2016 Combined Comparative Operating Results and Statistics—Other Quarters

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 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 six months ended June 30, 2017 but not for the prior periods.
                           
 

Three Months Ended June 30, 2017

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating
& Other

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

$

1,556

    

$

—

    

$

—

    

$

—

    

$

1,556

    

$

—

    

$

1,556

  

Regional

—

    

251

    

—

    

—

    

251

    

—

    

251

  

   Total passenger revenues

1,556

    

251

    

—

    

—

    

1,807

    

—

    

1,807

  

CPA revenues

—

    

—

    

108

    

(108)

    

—

    

—

    

—

  

Freight and mail

31

    

1

    

—

    

—

    

32

    

—

    

32

  

Other—net

244

    

19

    

1

    

(1)

    

263

    

—

    

263

  

Total operating revenues

1,831

    

271

    

109

    

(109)

    

2,102

    

—

    

2,102

  

Operating expenses

                          

Operating expenses, excluding fuel

1,026

    

206

    

116

    

(107)

    

1,241

    

24

    

1,265

  

Economic fuel

304

    

39

    

—

    

(1)

    

342

    

2

    

344

  

Total operating expenses

1,330

    

245

    

116

    

(108)

    

1,583

    

26

    

1,609

  

Nonoperating income (expense)

                          

Interest income

9

    

—

    

—

    

—

    

9

    

—

    

9

  

Interest expense

(23)

    

—

    

(3)

    

—

    

(26)

    

—

    

(26)

  

Other

3

    

—

    

1

    

(1)

    

3

    

—

    

3

  

Total Nonoperating income (expense)

(11)

    

—

    

(2)

    

(1)

    

(14)

    

—

    

(14)

  

Income (loss) before income tax

$

490

    

$

26

    

$

(9)

    

$

(2)

    

$

505

    

$

(26)

    

$

479

  
   
 

Three Months Ended June 30, 2016

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

$

1,036

    

$

—

    

$

—

    

$

—

    

$

1,036

    

$

—

    

$

1,036

  

Regional

—

    

227

    

—

    

—

    

227

    

—

    

227

  

   Total passenger revenues

1,036

    

227

    

—

    

—

    

1,263

    

—

    

1,263

  

CPA revenues

—

    

—

    

110

    

(110)

    

—

    

—

    

—

  

Freight and mail

26

    

1

    

—

    

—

    

27

    

—

    

27

  

Other—net

184

    

19

    

1

    

—

    

204

    

—

    

204

  

Total operating revenues

1,246

    

247

    

111

    

(110)

    

1,494

    

—

    

1,494

  

Operating expenses

                          

Operating expenses, excluding fuel

679

    

192

    

101

    

(111)

    

861

    

14

    

875

  

Economic fuel

180

    

31

    

—

    

—

    

211

    

(10)

    

201

  

Total operating expenses

859

    

223

    

101

    

(111)

    

1,072

    

4

    

1,076

  

Nonoperating income (expense)

                          

Interest income

6

    

—

    

1

    

—

    

7

    

—

    

7

  

Interest expense

(4)

    

—

    

(4)

    

(1)

    

(9)

    

—

    

(9)

  

Other

3

    

—

    

—

    

1

    

4

    

—

    

4

  

Total Nonoperating income (expense)

5

    

—

    

(3)

    

—

    

2

    

—

    

2

  

Income (loss) before income tax

$

392

    

$

24

    

$

7

    

$

1

    

$

424

    

$

(4)

    

$

420

  
   

(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.

 

 

Six Months Ended June 30, 2017

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

2,828

    

—

    

—

    

—

    

2,828

    

—

    

2,828

  

Regional

—

    

463

    

—

    

—

    

463

    

—

    

463

  

  Total passenger revenues

2,828

    

463

    

—

    

—

    

3,291

    

—

    

3,291

  

Revenue from CPA with Alaska

—

    

—

    

205

    

(205)

    

—

    

—

    

—

  

Freight and mail

54

    

2

    

—

    

—

    

56

    

—

    

56

  

Other—net

466

    

36

    

2

    

—

    

504

    

—

    

504

  

Total operating revenues

3,348

    

501

    

207

    

(205)

    

3,851

    

—

    

3,851

  

Operating expenses

                          

Operating expenses, excluding fuel

2,024

    

406

    

219

    

(204)

    

2,445

    

64

    

2,509

  

Economic fuel

596

    

75

    

—

    

—

    

671

    

12

    

683

  

Total operating expenses

2,620

    

481

    

219

    

(204)

    

3,116

    

76

    

3,192

  

Nonoperating income (expense)

                          

Interest income

16

    

—

    

—

    

—

    

16

    

—

    

16

  

Interest expense

(45)

    

—

    

(5)

    

(1)

    

(51)

    

—

    

(51)

  

Other

6

    

—

    

1

    

—

    

7

    

—

    

7

  

Total Nonoperating income (expense)

(23)

    

—

    

(4)

    

(1)

    

(28)

    

—

    

(28)

  

Income (loss) before income tax

705

    

20

    

(16)

    

(2)

    

707

    

(76)

    

631

  
   
 

Six Months Ended June 30, 2016

(in millions)

Mainline

  

Regional

  

Horizon

  

Consolidating

  

Air Group
Adjusted(a)

  

Special
Items(b)

  

Consolidated

Operating revenues

                          

Passenger

                          

Mainline

1,963

    

—

    

—

    

—

    

1,963

    

—

    

1,963

  

Regional

—

    

433

    

—

    

—

    

433

    

—

    

433

  

Total passenger revenues

1,963

    

433

    

—

    

—

    

2,396

    

—

    

2,396

  

Revenue from CPA with Alaska

—

    

—

    

213

    

(213)

    

—

    

—

    

—

  

Freight and mail

49

    

2

    

—

    

—

    

51

    

—

    

51

  

Other—net

356

    

36

    

2

    

—

    

394

    

—

    

394

  

Total operating revenues

2,368

    

471

    

215

    

(213)

    

2,841

    

—

    

2,841

  

Operating expenses

                          

Operating expenses, excluding fuel

1,380

    

378

    

206

    

(213)

    

1,751

    

14

    

1,765

  

Economic fuel

324

    

56

    

—

    

—

    

380

    

(12)

    

368

  

Total operating expenses

1,704

    

434

    

206

    

(213)

    

2,131

    

2

    

2,133

  

Nonoperating income (expense)

                          

Interest income

12

    

—

    

1

    

—

    

13

    

—

    

13

  

Interest expense

(16)

    

—

    

(5)

    

(1)

    

(22)

    

—

    

(22)

  

Other

10

    

—

    

—

    

3

    

13

    

—

    

13

  

Total Nonoperating income (expense)

6

    

—

    

(4)

    

2

    

4

    

—

    

4

  

Income (loss) before income tax

670

    

37

    

5

    

2

    

714

    

(2)

    

712

  
   

(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 six months ended June 30, 2017 but not for the prior period.
               

CASM Excluding Fuel and Special Items Reconciliation

        
 

Three Months Ended June 30,

  

Six Months Ended June 30,
 

2017

  

2016

  

2017

  

2016

Consolidated:

              

CASM

10.31

¢

  

9.73

¢

  

10.64

¢

  

9.91

¢

Less the following components:

              

Aircraft fuel, including hedging gains and losses

2.21

    

1.82

    

2.28

    

1.71

  

Special items—merger-related costs

0.16

    

0.13

    

0.21

    

0.06

  

CASM excluding fuel and special items

7.94

¢

  

7.78

¢

  

8.15

¢

  

8.14

¢
               

Mainline:

              

CASM

9.45

¢

  

8.74

¢

  

9.77

¢

  

8.87

¢

Less the following components:

              

Aircraft fuel, including hedging gains and losses

2.13

    

1.72

    

2.20

    

1.62

  

Special items—merger-related costs

0.17

    

0.14

    

0.23

    

0.07

  

CASM excluding fuel and special items

7.15

¢

  

6.88

¢

  

7.33

¢

  

7.18

¢
 

Fuel Reconciliation
 

Three Months Ended June 30,
 

2017

  

2016

(in millions, except for per-gallon amounts)

Dollars

  

Cost/Gallon

  

Dollars

  

Cost/Gallon

Raw or "into-plane" fuel cost

$

337

    

$

1.69

    

$

207

    

$

1.50

  

Losses on settled hedges

5

    

0.02

    

4

    

0.03

  

Consolidated economic fuel expense

342

    

1.71

    

211

    

1.53

  

Mark-to-market fuel hedge adjustment

2

    

0.01

    

(10)

    

(0.07)

  

GAAP fuel expense

$

344

    

$

1.72

    

$

201

    

$

1.46

  

Fuel gallons

201

        

138

      
               
 

Six Months Ended June 30,
 

2017

  

2016

(in millions, except for per gallon amounts)

Dollars

  

Cost/Gallon

  

Dollars

  

Cost/Gallon

Raw or "into-plane" fuel cost

$

663

    

$

1.73

    

$

372

    

$

1.38

  

Losses on settled hedges

8

    

0.02

    

8

    

0.03

  

Consolidated economic fuel expense

$

671

    

$

1.75

    

$

380

    

$

1.41

  

Mark-to-market fuel hedge adjustment

12

    

0.03

    

(12)

    

(0.04)

  

GAAP fuel expense

$

683

    

$

1.78

    

$

368

    

$

1.37

  

Fuel gallons

385

        

270

      

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:

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

 

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