News releases

  View printer-friendly version << Back

Alaska Air Group reports third quarter 2019 results

SEATTLE, Oct. 24, 2019 /PRNewswire/ --

Financial Highlights:

  • Reported net income for the third quarter of 2019 under Generally Accepted Accounting Principles (GAAP) of $322 million, or $2.60 per diluted share, compared to net income of $217 million, or $1.75 per diluted share in the third quarter of 2018.
  • Reported net income for the third quarter of 2019, excluding merger-related costs and mark-to-market fuel hedge accounting adjustments, of $326 million, or $2.63 per diluted share, compared to $237 million or $1.91 per diluted share, in the third quarter of 2018. This quarter's adjusted results compare to the First Call analyst consensus estimate of $2.52 per share.
  • Paid a $0.35 per-share cash dividend in the third quarter, a 9% increase over the dividend paid in the third quarter of 2018.
  • Repurchased a total of 874,019 shares of common stock for approximately $53 million in the first nine months of 2019.
  • Generated $1.4 billion of operating cash flow in the first nine months of 2019.
  • Made a voluntary contribution of $65 million to defined benefit pension plans in the third quarter.
  • Held $1.6 billion in unrestricted cash and marketable securities as of Sept. 30, 2019.
  • Reduced debt-to-capitalization ratio to 42% as of Sept. 30, 2019 compared to 47% as of Dec. 31, 2018.

Operational Highlights:

  • Alaska's clerical, office, passenger service, ramp and stores employees, represented by the International Association of Machinists, ratified a new five-year agreement in August.
  • Opened a new 15,000+ square foot flagship lounge in the North Satellite at Sea-Tac International Airport in July.
  • Reallocated flying to expand offerings between the Pacific Northwest and California, increasing network utility and providing more non-stop service on the West Coast.
  • Completed cabin interior renovations of the 25th Airbus aircraft during the third quarter.
  • Installed high-speed satellite Wi-Fi on the 54th mainline aircraft.

Recognition and Awards:

  • Named "Best U.S. Airline" by Condé Nast Traveler for the second consecutive year.
  • Ranked as top U.S. airline in Newsweek's 2020 Best Customer Service awards.
  • Mileage Plan ranked first in the U.S. News & World Report's list of Best Airline Rewards Programs for the fifth consecutive year.
  • Ranked as the top U.S. airline in the Dow Jones Sustainability Index for the third consecutive year.
  • Ranked among Forbes' 2019 global list for "World's Best Employers."

Alaska Air Group Inc. today reported third quarter 2019 GAAP net income of $322 million, or $2.60 per diluted share, compared to $217 million, or $1.75 per diluted share in the third quarter of 2018. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $326 million, or $2.63 per diluted share, compared to $237 million, or $1.91 per diluted share in 2018.

"Our teams at Alaska, Horizon and McGee delivered industry-leading customer service and operational reliability that helped drive strong third quarter results," said Alaska Air Group CEO Brad Tilden. "Our adjusted pretax profit margin of nearly 18% was 3.6 percentage points higher than last year - fueled by our commitment to keep costs low and by the impressive 8% revenue growth that our commercial team delivered. I want to thank our employees for everything they're doing to make Alaska what we are today - and for helping us shape what we're going to be in the future. They are the best in the industry, and I believe these results demonstrate that."

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, 2019 and 2018 to adjusted amounts.

Three Months Ended September 30,

2019

2018

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

322

$

2.60

$

217

$

1.75

Mark-to-market fuel hedge adjustments

—

—

5

0.04

Special items - merger-related costs

5

0.04

22

0.18

Income tax effect of reconciling items above

(1)

(0.01)

(7)

(0.06)

Non-GAAP adjusted net income and diluted EPS

$

326

$

2.63

$

237

$

1.91



Nine Months Ended September 30,

2019

2018

(in millions, except per-share amounts)

Dollars

Diluted EPS

Dollars

Diluted EPS

GAAP net income and diluted EPS

$

588

$

4.74

$

414

$

3.34

Mark-to-market fuel hedge adjustments

(1)

(0.01)

(30)

(0.24)

Special items - merger-related costs

39

0.31

67

0.54

Special items - other

—

—

25

0.20

Income tax effect of reconciling items above

(9)

(0.07)

(15)

(0.12)

Non-GAAP adjusted net income and diluted EPS

$

617

$

4.97

$

461

$

3.72

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 streamed online at 1:30 p.m. Pacific time on Oct. 24, 2019. It can be accessed 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. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, 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, 2018, 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 and its regional partners fly 46 million guests a year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 800 destinations worldwide. Alaska ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Airline Satisfaction Study for 12 consecutive years from 2008 to 2019. Learn about Alaska's award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines and Horizon Air are subsidiaries of Alaska Air Group (NYSE: ALK)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)





Alaska Air Group, Inc.























Three Months Ended September 30,

Nine Months Ended September 30,

(in millions, except per-share amounts)

2019

2018

Change

2019

2018

Change

Operating Revenues:










Passenger revenue

$

2,211

$

2,043

8

%

$

6,038

$

5,724

5

%

Mileage Plan other revenue

118

114

4

%

346

329

5

%

Cargo and other

60

55

9

%

169

147

15

%

Total Operating Revenues

2,389

2,212

8

%

6,553

6,200

6

%

Operating Expenses:










Wages and benefits

608

549

11

%

1,732

1,629

6

%

Variable incentive pay

46

27

70

%

125

104

20

%

Aircraft fuel, including hedging gains and losses

486

513

(5)

%

1,408

1,397

1

%

Aircraft maintenance

106

107

(1)

%

341

320

7

%

Aircraft rent

82

82

—

%

247

233

6

%

Landing fees and other rentals

143

135

6

%

388

371

5

%

Contracted services

72

70

3

%

214

227

(6)

%

Selling expenses

77

79

(3)

%

236

245

(4)

%

Depreciation and amortization

106

99

7

%

317

290

9

%

Food and beverage service

57

53

8

%

159

158

1

%

Third-party regional carrier expense

42

38

11

%

125

114

10

%

Other

137

141

(3)

%

411

423

(3)

%

Special items - merger-related costs

5

22

(77)

%

39

67

(42)

%

Special items - other

—

—

—

%

—

25

NM

Total Operating Expenses

1,967

1,915

3

%

5,742

5,603

2

%

Operating Income

422

297

42

%

811

597

36

%

Nonoperating Income (Expense):










Interest income

11

11

—

%

31

29

7

%

Interest expense

(18)

(22)

(18)

%

(60)

(71)

(15)

%

Interest capitalized

4

5

(20)

%

11

14

(21)

%

Other—net

(3)

(7)

(57)

%

(20)

(20)

—

%

Total Nonoperating Income (Expense)

(6)

(13)

(54)

%

(38)

(48)

(21)

%

Income Before Income Tax

416

284



773

549


Income tax expense

94

67



185

135


Net Income

$

322

$

217



$

588

$

414














Basic Earnings Per Share:

$

2.61

$

1.76



$

4.76

$

3.36


Diluted Earnings Per Share:

$

2.60

$

1.75



$

4.74

$

3.34














Shares Used for Computation:










Basic

123.280

123.224



123.330

123.216


Diluted

124.067

123.864



124.051

123.804














Cash dividend declared per share:

$

0.35

$

0.32



$

1.05

$

0.96


 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


Alaska Air Group, Inc.






(in millions)

September 30, 2019

December 31, 2018

Cash and marketable securities

$

1,619

$

1,236

Other current assets

583

551

Current assets

2,202

1,787

Property and equipment - net

6,834

6,781

Operating lease assets

1,647

—

Goodwill

1,943

1,943

Intangible assets - net

123

127

Other assets

234

274

Total assets

12,983

10,912




Air traffic liability

1,032

788

Current portion of long-term debt

265

486

Current portion of operating lease liabilities

268

—

Other current liabilities

1,781

1,668

Current liabilities

3,346

2,942

Long-term debt

1,444

1,617

Long-term operating lease liabilities

1,376

—

Other liabilities and credits

2,565

2,602

Shareholders' equity

4,252

3,751

Total liabilities and shareholders' equity

$

12,983

$

10,912




Debt-to-capitalization ratio, including operating leases(a)

42

%

47

%




Number of common shares outstanding

123.278

123.194


(a) 

Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

 

OPERATING STATISTICS SUMMARY (unaudited)





Alaska Air Group, Inc.























Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

Change

2019

2018

Change

Consolidated Operating Statistics:(a)










Revenue passengers (000)

12,574

12,128

3.7%

35,018

34,685

1.0%

RPMs (000,000) "traffic"

15,026

14,386

4.4%

42,113

41,272

2.0%

ASMs (000,000) "capacity"

17,519

16,943

3.4%

50,006

49,256

1.5%

Load factor

85.8%

84.9%

0.9 pts

84.2%

83.8%

0.4 pts

Yield

14.71¢

14.20¢

3.6%

14.34¢

13.87¢

3.4%

RASM

13.64¢

13.05¢

4.5%

13.10¢

12.59¢

4.1%

CASMex(b)

8.43¢

8.15¢

3.4%

8.59¢

8.35¢

2.9%

Economic fuel cost per gallon(b)

$2.13

$2.33

(8.6)%

$2.18

$2.26

(3.5)%

Fuel gallons (000,000)

227

218

4.1%

646

631

2.4%

ASM's per gallon

77.2

77.7

(0.6)%

77.4

78.1

(0.9)%

Average number of full-time equivalent employees (FTE)

22,247

21,804

2.0%

22,000

21,575

2.0%

Mainline Operating Statistics:










Revenue passengers (000)

9,655

9,435

2.3%

26,725

27,107

(1.4)%

RPMs (000,000) "traffic"

13,538

13,096

3.4%

37,917

37,677

0.6%

ASMs (000,000) "capacity"

15,702

15,343

2.3%

44,816

44,730

0.2%

Load factor

86.2%

85.4%

0.8 pts

84.6%

84.2%

0.4 pts

Yield

13.66¢

13.18¢

3.6%

13.29¢

12.95¢

2.6%

RASM

12.83¢

12.28¢

4.5%

12.30¢

11.90¢

3.4%

CASMex(b)

7.81¢

7.34¢

6.4%

7.91¢

7.58¢

4.4%

Economic fuel cost per gallon(b)

$2.13

$2.32

(8.2)%

$2.17

$2.25

(3.6)%

Fuel gallons (000,000)

193

189

2.1%

549

549

—%

ASM's per gallon

81.4

81.2

0.2%

81.6

81.5

0.1%

Average number of FTE's

16,789

16,499

1.8%

16,599

16,330

1.6%

Aircraft utilization

11.3

11.4

(0.9)%

10.9

11.4

(4.4)%

Average aircraft stage length

1,281

1,291

(0.8)%

1,298

1,293

0.4%

Operating fleet

238

231

7 a/c

238

231

7 a/c

Regional Operating Statistics:(c)










Revenue passengers (000)

2,919

2,693

8.4%

8,293

7,578

9.4%

RPMs (000,000) "traffic"

1,488

1,290

15.3%

4,196

3,595

16.7%

ASMs (000,000) "capacity"

1,817

1,600

13.6%

5,190

4,526

14.7%

Load factor

81.9%

80.6%

1.3 pts

80.8%

79.4%

1.4 pts

Yield

24.23¢

24.50¢

(1.1)%

23.81¢

23.49¢

1.4%

RASM

20.51¢

20.41¢

0.5%

19.93¢

19.32¢

3.2%

Operating fleet

94

89

5 a/c

94

89

5 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, excluding PenAir.

 

OPERATING SEGMENTS (unaudited)

Alaska Air Group, Inc.


























Three Months Ended September 30, 2019

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

1,850

$

361

$

—

$

—

$

2,211

$

—

$

2,211

CPA revenues

—

—

112

(112)

—

—

—

Mileage Plan other revenue

107

11

—

—

118

—

118

Cargo and other

58

1

—

1

60

—

60

Total operating revenues

2,015

373

112

(111)

2,389

—

2,389

Operating expenses












Operating expenses, excluding fuel

1,226

275

94

(119)

1,476

5

1,481

Economic fuel

411

75

—

—

486

—

486

Total operating expenses

1,637

350

94

(119)

1,962

5

1,967

Nonoperating income (expense)












Interest income

17

—

—

(6)

11

—

11

Interest expense

(18)

—

(7)

7

(18)

—

(18)

Interest capitalized

4

—

—

—

4

—

4

Other - net

(3)

—

—

—

(3)

—

(3)

Total Nonoperating income (expense)

—

—

(7)

1

(6)

—

(6)

Income (loss) before income tax

$

378

$

23

$

11

$

9

$

421

$

(5)

$

416



Three Months Ended September 30, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

1,727

$

316

$

—

$

—

$

2,043

$

—

$

2,043

CPA revenues

—

—

128

(128)

—

—

—

Mileage Plan other revenue

104

10

—

—

114

—

114

Cargo and other

53

—

2

—

55

—

55

Total operating revenues

1,884

326

130

(128)

2,212

—

2,212

Operating expenses












Operating expenses, excluding fuel

1,126

267

118

(131)

1,380

22

1,402

Economic fuel

438

70

—

—

508

5

513

Total operating expenses

1,564

337

118

(131)

1,888

27

1,915

Nonoperating income (expense)












Interest income

15

—

—

(4)

11

—

11

Interest expense

(20)

—

(6)

4

(22)

—

(22)

Interest capitalized

4

—

1

—

5

—

5

Other - net

(5)

(2)

—

—

(7)

—

(7)

Total Nonoperating income (expense)

(6)

(2)

(5)

—

(13)

—

(13)

Income (loss) before income tax

$

314

$

(13)

$

7

$

3

$

311

$

(27)

$

284



Nine Months Ended September 30, 2019

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

5,039

$

999

$

—

$

—

$

6,038

$

—

$

6,038

CPA revenues

—

—

340

(340)

—

—

—

Mileage Plan other revenue

312

34

—

—

346

—

346

Cargo and other

163

2

1

3

169

—

169

Total operating revenues

5,514

1,035

341

(337)

6,553

—

6,553

Operating expenses












Operating expenses, excluding fuel

3,545

817

286

(353)

4,295

39

4,334

Economic fuel

1,191

218

—

—

1,409

(1)

1,408

Total operating expenses

4,736

1,035

286

(353)

5,704

38

5,742

Nonoperating income (expense)












Interest income

50

—

—

(19)

31

—

31

Interest expense

(58)

—

(22)

20

(60)

—

(60)

Interest capitalized

11

—

—

—

11

—

11

Other - net

(20)

—

—

—

(20)

—

(20)

Total Nonoperating income (expense)

(17)

—

(22)

1

(38)

—

(38)

Income (loss) before income tax

$

761

$

—

$

33

$

17

$

811

$

(38)

$

773



Nine Months Ended September 30, 2018

(in millions)

Mainline

Regional

Horizon

Consolidating
& Other

Air Group
Adjusted(a)

Special
Items(b)

Consolidated

Operating revenues












Passenger revenues

$

4,879

$

845

$

—

$

—

$

5,724

$

—

$

5,724

CPA revenues

—

—

375

(375)

—

—

—

Mileage Plan other revenue

301

28

—

—

329

—

329

Cargo and other

142

1

4

—

147

—

147

Total operating revenues

5,322

874

379

(375)

6,200

—

6,200

Operating expenses












Operating expenses, excluding fuel

3,392

755

345

(378)

4,114

92

4,206

Economic fuel

1,237

190

—

—

1,427

(30)

1,397

Total operating expenses

4,629

945

345

(378)

5,541

62

5,603

Nonoperating income (expense)












Interest income

39

—

—

(10)

29

—

29

Interest expense

(64)

—

(16)

9

(71)

—

(71)

Interest capitalized

12

—

2

—

14

—

14

Other - net

(9)

(11)

—

—

(20)

—

(20)

Total Nonoperating income (expense)

(22)

(11)

(14)

(1)

(48)

—

(48)

Income (loss) before income tax

$

671

$

(82)

$

20

$

2

$

611

$

(62)

$

549


(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 excludes certain charges. See Note A in the accompanying pages for further information.

(b)

Includes merger-related costs, an employee bonus awarded in January 2018 in connection with the Tax Cuts and Jobs Act, and mark-to-market fuel hedge accounting adjustments.

 

GAAP TO NON-GAAP RECONCILIATIONS (unaudited)



Alaska Air Group, Inc.














CASM Excluding Fuel and Special Items Reconciliation

Three Months Ended
September 30,

Nine Months Ended

September 30,

2019

2018

2019

2018

Consolidated:






CASM

11.23

¢

11.30

¢

11.48

¢

11.38

¢

Less the following components:






Aircraft fuel, including hedging gains and losses

2.77

3.02

2.82

2.84

Special items - merger-related costs

0.03

0.13

0.07

0.14

Special items - other(a)

—

—

—

0.05

CASM excluding fuel and special items

8.43

¢

8.15

¢

8.59

¢

8.35

¢








Mainline:






CASM

10.46

¢

10.37

¢

10.65

¢

10.49

¢

Less the following components:






Aircraft fuel, including hedging gains and losses

2.62

2.89

2.65

2.70

Special items - merger-related costs

0.03

0.14

0.09

0.15

Special items - other(a)

—

—

—

0.06

CASM excluding fuel and special items

7.81

¢

7.34

¢

7.91

¢

7.58

¢


 (a) 

Special items - other includes special charges associated with the employee tax reform bonus awarded in January 2018.

 

Fuel Reconciliation

Three Months Ended September 30,

2019

2018

(in millions, except for per-gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or "into-plane" fuel cost

$

481

$

2.11

$

520

$

2.38

(Gains) losses on settled hedges

5

0.02

(12)

(0.05)

Consolidated economic fuel expense

486

2.13

508

2.33

Mark-to-market fuel hedge adjustment

—

—

5

0.02

GAAP fuel expense

$

486

$

2.13

$

513

$

2.35

Fuel gallons

227



218











Nine Months Ended September 30,

2019

2018

(in millions, except for per gallon amounts)

Dollars

Cost/Gallon

Dollars

Cost/Gallon

Raw or "into-plane" fuel cost

$

1,397

$

2.16

$

1,450

$

2.30

(Gains) losses on settled hedges

12

0.02

(23)

(0.04)

Consolidated economic fuel expense

$

1,409

$

2.18

$

1,427

$

2.26

Mark-to-market fuel hedge adjustment

(1)

—

(30)

(0.05)

GAAP fuel expense

$

1,408

$

2.18

$

1,397

$

2.21

Fuel gallons

646



631



Debt-to-capitalization, adjusted for operating leases

(in millions)

September 30, 2019

December 31, 2018

Long-term debt

$

1,444

$

1,617

Capitalized operating leases(a)

1,644

1,768

Adjusted debt

3,088

3,385

Shareholders' equity

4,252

3,751

Total Invested Capital

$

7,340

$

7,136




Debt-to-capitalization ratio, including operating leases

42

%

47

%


(a) 

Following the adoption of the new lease accounting standard on January 1, 2019, the ratio is calculated using the total capitalized Operating lease liability, whereas prior year periods were calculated utilizing the present value of aircraft lease payments. This change had no impact to the ratio.

 

Net adjusted debt to earnings before interest, taxes, depreciation, amortization, special items and rent

(in millions)

September 30, 2019

Adjusted debt

$

3,088

Current portion of long-term debt

265

Total adjusted debt

3,353

Less: Cash and marketable securities

(1,619)

Net adjusted debt

$

1,734


(in millions)

Last Twelve Months
Ended September 30,
2019

GAAP Operating Income(a)

$

857

Adjusted for:

Special items

79

Mark-to-market fuel hedge adjustments

51

Depreciation and amortization

425

Aircraft rent

329

EBITDAR

$

1,741


Net adjusted debt to EBITDAR

1.0x


(a)

Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.

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, Airbus 320 and Airbus 321neo family jets and all associated revenues and costs

Net adjusted debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities

Net adjusted debt to EBITDAR - represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes,