UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1995.
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from . . . . . . to . . . . . .
Commission file number 1-8957
ALASKA AIR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1292054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19300 Pacific Highway South, Seattle, Washington 98188
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 431-7040
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant has 13,440,986 common shares, par value $1.00, outstanding at
June 30, 1995.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Attached are the following Alaska Air Group, Inc. (the Company or Air Group)
unaudited financial statements: (i) consolidated balance sheets as of June 30,
1995 and December 31, 1994; (ii) consolidated statements of income for the
quarters and six months ended June 30, 1995 and 1994; (iii) consolidated
statement of shareholders' equity for the six months ended June 30, 1995; and,
(iv) consolidated statements of cash flows for the six months ended June 30,
1995 and 1994. Also attached are the accompanying notes to the Company's
consolidated financial statements that have changed significantly during the six
months ended June 30, 1995. These statements, which should be read in
conjunction with the financial statements in the Company's annual report on Form
10-K for the year ended December 31, 1994, include all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for
the interim periods. The adjustments made were of a normal recurring nature.
Air Group is a holding company incorporated in Delaware in 1985. Its principal
subsidiaries are Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc.
(Horizon).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Second Quarter 1995 Compared with Second Quarter 1994 The consolidated net
income for the second quarter of 1995 was $7.0 million, or $.52 per primary
share and $.48 per fully diluted share, compared with net income of $9.7
million, or $.72 per primary share and $.61 per fully diluted share, in 1994.
Operating income for the second quarter of 1995 was $24.5 million, the same as
in 1994. A discussion of operating revenues and expenses for the two airlines
follows.
Alaska Airlines Operating revenues increased 9.1% to $292.9 million. Passenger
revenues, which accounted for 87% of total operating revenues, increased 8.4% on
a 17.9% rise in passenger traffic. Capacity increased 20.1%, primarily due to
increases in the Pacific Northwest to California markets. The load factor
dropped from 62.4% in 1994 to 61.3% in 1995. Passenger yields declined 8.1% to
11.9 cents in 1995, reflecting increased competition on the West Coast.
However, yields increased 6.3% when compared against the first quarter of 1995.
MarkAir, a significant competitor in the Alaska marketplace since 1992, filed
for Chapter 11 bankruptcy for the second time on April 14, 1995. Since then, it
has withdrawn from all Alaska markets.
Freight and mail revenues increased 7.9% due to higher freight and mail volumes,
resulting in part from the withdrawl of MarkAir from all Alaska markets. Other-
net revenues rose 23.6% primarily due to increased revenues from travel partners
in Alaska's frequent flyer program.
The table below shows the major operating expense elements on a cost per
available seat mile (ASM) basis, for Alaska for the second quarters of 1995 and
1994.
Alaska Airlines Operating Expenses Per ASM (In Cents)
%
1995 1994 Change Change
Wages and benefits 2.48 2.82 (.34) (12)
Aircraft fuel 1.06 1.02 .04 4
Aircraft maintenance .33 .41 (.08) (20)
Aircraft rent .98 1.16 (.18) (16)
Commissions .57 .66 (.09) (14)
Depreciation & amortization .42 .41 .01 2
Other 1.86 2.09 (.23) (11)
Alaska Airlines Total 7.70 8.57 (.87) (10)
Alaska's lower unit costs were due to continuing cost reduction efforts and
better utilization of aircraft. Average daily aircraft utilization increased 7%
from 10.1 block hours to 10.8 block hours. Wages and benefits per ASM decreased
12% primarily due to improved productivity. The number of full-time equivalent
employees increased 8% while capacity increased 20% and traffic increased 18%.
Fuel expense per ASM increased 4%, due to an 8% increase in the price of fuel,
offset by the greater use of more fuel-efficient aircraft.
Aircraft maintenance per ASM decreased 20% due to increased aircraft utilization
and lower than average engine repair work. Aircraft rent per ASM decreased 16%
due to an increase in aircraft utilization, and a restructuring of B737-400
aircraft leases that resulted in lower rents.
Commission expense per ASM decreased 14% because passenger revenues, upon which
commissions are paid, did not keep pace with ASM growth.
Depreciation and amortization expense per ASM increased 2%, in spite of a 20%
increase in ASMs, primarily due to: (a) the reduction in estimated salvage value
from 20% to 5% (effective January 1, 1995) for all MD-80 aircraft; and (b)
depreciation on three B737-400 aircraft that were on operating leases in 1994.
Other expense per ASM decreased 11% due to lower unit costs for building
rentals, food, landing fees and outside services expenses.
Horizon Air Operating revenues increased 11.9% to $70.2 million. Passenger
revenues, which accounted for 95% of total operating revenues, increased 11.6%
on a 21.6% rise in passenger traffic. Capacity increased 30.4% due to the
addition of larger capacity Fokker F-28 jets and Dornier 328 turboprop aircraft.
The load factor dropped from 61.5% in 1994 to 57.3% in 1995. Passenger yields
declined 8.3% to 32.3 cents in 1995, reflecting increased competition and longer
passenger trips. However, yields were up slightly when compared against the
first quarter of 1995.
Freight, mail and other revenues increased 19.0% due to increased freight and
mail volumes as well as increased revenues from providing services to other
airlines.
The table below shows the major operating expense elements on cost per ASM basis
for Horizon for the second quarters of 1995 and 1994.
Horizon Air Operating Expenses Per ASM (In Cents)
%
1995 1994 Change Change
Wages and benefits 5.98 6.62 (.64) (10)
Aircraft fuel 1.84 1.70 .14 8
Aircraft maintenance 2.29 2.15 .14 7
Aircraft rent 2.38 2.60 (.22) (8)
Commissions 1.37 1.64 (.27) (16)
Depreciation & amortization .64 .82 (.18) (22)
Other 4.59 4.94 (.35) (7)
Horizon Air Total 19.09 20.47 (1.38) (7)
Horizon's cost per ASM declined 7% to 19.09 cents due to the acquisition of
higher capacity aircraft and cost reduction efforts.
Other Income (Expense) Non-operating expense increased $4.7 million to $11.5
million expense due to: (a) $1.3 million more interest expense resulting from
higher interest rates on variable debt and higher average debt balances; (b)
$1.8 million of vendor credits included in 1994; and (c) $1.5 million of gains
on debt retirements included in 1994.
Six Months 1995 Compared with Six Months 1994 The consolidated net loss for the
six months ended June 30, 1995 was $9.3 million, or $.70 per share, compared
with net income of $3.4 million, or $.25 per share, in 1994. Operating income
for the first half of 1995 was $6.2 million compared to operating income of
$21.6 million in 1994. A discussion of operating revenues and expenses for the
two airlines follows.
Alaska Airlines Operating revenues increased 6.0% to $525.6 million, primarily
due to a 17.4% rise in passenger traffic. Capacity increased 22.2%, primarily
due to increases in the Pacific Northwest to California markets. The load
factor dropped from 61.4% in 1994 to 58.9% in 1995. Passenger yields declined
10.4% to 11.53 cents in 1995, reflecting increased competition on the West
Coast.
Operating expenses increased 8.0% to $516.3 million on a capacity increase of
22.2%. Unit costs decreased 11.6%, generally for the same reasons as noted
above in the second quarter comparison.
Horizon Air Operating revenues increased 14.2% to $133.0 million, primarily due
to a 25.4% rise in passenger traffic. Capacity increased 32.0% due to the
addition of larger capacity Fokker F-28 jets and Dornier 328 turboprop aircraft.
The load factor dropped from 60.5% in 1994 to 57.5% in 1995. Passenger yields
declined 9.4% to 32.1 cents in 1995, reflecting increased competition and longer
passenger trips.
Operating expenses increased 21.1% to $135.5 million on a capacity increase of
32.0%. Unit costs decreased 8%, generally for the same reasons as noted above
in the second quarter comparison.
Other Income (Expense) Non-operating expense increased $8.2 million to $23.2
million for the same reasons as noted above in the second quarter comparison.
Income Tax Credit Accounting standards require the Company to provide for
income taxes each quarter based on its estimate of the effective tax rate for
the full year. The volatility of air fares and the seasonality of the Company's
business make it very difficult to estimate full-year pretax results. In
addition, a relatively small change in pretax results can cause a significant
change in the effective tax rate due to the magnitude of nondeductible expenses,
such as goodwill amortization and employee per diem costs. In estimating the
45.2% tax rate for the first half of 1995, the Company considered a variety of
factors, including the 45.0% tax rate used for full year 1994. This rate is
evaluated each quarter and adjustments are made if necessary.
Liquidity and Capital Resources
The table below presents the major indicators of financial condition and
liquidity.
June 30, 1995 December 31, 1994 Change
(In millions, except debt-to-equity and per share amounts)
Cash and marketable securities $230.8 $ 104.9 $125.9
Working capital (deficit) (40.5) (147.1) 106.6
Long-term debt 699.6 589.9 109.7
Shareholders' equity 183.2 191.3 (8.1)
Book value per common share $13.63 $ 14.27 $(.64)
Debt-to-equity 79%:21% 76%:24% NA
In June 1995, the Company issued $132.3 million of 6-1/2% convertible senior
debentures due 2005. Each debenture is convertible into 46.512 shares of common
stock, reflecting a conversion price of $21.50 per share. During the third
quarter of 1995, the Company will redeem all of it's 7-1/4% zero coupon,
convertible subordinated notes, which are due in 2006 but which contain an
option whereby the holder can put the notes to the Company in April 1996.
The Company's cash and marketable securities portfolio increased by $126 million
during the first six months of 1995. Operating activities provided $74 million
of cash during this period. An additional $129 million of cash was provided by
the issuance of new long-term debt. Cash was used for airframe and engine
overhauls and other capital expenditures ($35 million), the repayment of debt
($27 million), and the net repayment of short-term borrowings ($25 million).
The working capital deficit decreased by $107 million primarily due to proceeds
from issuance of long-term debt, offset by debt repayments.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a)Air Group's annual meeting of stockholders was held on May 16, 1995.
(b)Not applicable.
(c)Three directors were elected with the following results:
Votes Against Broker
Director Votes For or Withheld Non-Votes
W.H. Clapp 12,037,261 84,128 0
R.F. Cosgrave 12,036,731 84,658 0
R.M. Langland 12,031,034 90,355 0
ITEM 5. Other Information
In May 1995, Alaska's clerical, office and passenger service employees approved
an amended four-year contract between the International Association of
Machinists (IAM) and Alaska.
In April 1995, Horizon's mechanics and related classifications of the Transport
Workers Union of America ratified a new three-year contract.
ITEM 6. Exhibits and Reports on Form 8-K
(a)Exhibit 11 - Statement regarding computation of per-share earnings.
Exhibit 27 - Financial data schedule.
(b)Registrant filed a Current Report on Form 8-K, dated June 8, 1995, in
respect to the sale of its 6-1/2% convertible senior debentures due 2005.
Exhibits related to the underwriters, trustee and accountants were filed
(Item 7).
Signitures
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ALASKA AIR GROUP, INC.
Registrant
Date: July 31, 1995
/s/ John F. Kelly
John F. Kelly
Chairman, President and Chief Executive Officer
/s/ Harry G. Lehr
Harry G. Lehr
Senior Vice President/Planning and Finance
(Principal Financial Officer)
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
ASSETS
June 30, Dec 31,
(In Thousands) 1995 1994
Current Assets
Cash and cash equivalents $128,641 $11,605
Marketable securities 102,125 93,337
Receivables - net 89,780 70,055
Inventories and supplies 42,891 40,250
Prepaid expenses and other assets 54,857 57,396
Total Current Assets 418,294 272,643
Property and Equipment
Flight equipment 796,150 776,551
Other property and equipment 213,265 208,502
Deposits for future flight equipment 42,117 52,885
1,051,532 1,037,938
Less accum. depreciation and amort. 285,937 260,001
765,595 777,937
Capital leases
Flight and other equipment 103,076 103,076
Less accumulated amortization 23,901 21,676
79,175 81,400
Total Property and Equipment - Net 844,770 859,337
Intangible Assets - Subsidiaries 64,651 65,671
Other Assets 128,539 118,120
Total Assets $1,456,254 $1,315,771
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
Alaska Air Group, Inc.
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, Dec 31,
(In Thousands) 1995 1994
Current Liabilities
Accounts payable $55,407 $48,592
Accrued aircraft rent 42,319 43,762
Other accrued liabilities 70,024 59,591
Accrued wages and related 43,377 47,364
Short-term borrowings - 25,000
Air traffic liability 175,490 123,433
Current portion of long-term debt and
capital lease obligations 72,127 72,005
Total Current Liabilities 458,744 419,747
Long-Term Debt and Capital Lease
Obligations 699,648 589,904
Other Liabilities and Credits
Deferred income taxes 22,831 28,585
Deferred income 21,163 23,018
Other liabilities 70,639 63,239
114,633 114,842
Shareholders' Equity
Common stock, $1 par value
Authorized: 30,000,000 shares
Issued: 1995 - 16,594,579 shares
1994 - 16,553,679 shares 16,595 16,554
Capital in excess of par value 153,386 152,756
Treasury stock, at cost:
1995-3,153,593; 1994-3,153,589 sh (71,807) (71,807)
Deferred compensation (4,098) (4,697)
Retained earnings 89,153 98,472
183,229 191,278
Total Liabilities and
Shareholders' Equity $1,456,254 $1,315,771
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Quarter Ended June 30
(In Thousands except Per share Amounts) 1995 1994
Operating Revenues
Passenger $320,795 $294,245
Freight and mail 24,386 22,359
Other - net 17,011 13,871
Total Operating Revenues 362,192 330,475
Operating Expenses
Wages and benefits 108,477 100,334
Aircraft fuel 43,860 34,415
Aircraft maintenance 19,680 17,869
Aircraft rent 42,985 41,104
Commissions 24,986 23,654
Depreciation and amortization 16,992 14,276
Other 80,743 74,332
Total Operating Expenses 337,723 305,984
Operating Income 24,469 24,491
Other Income (Expense)
Interest income 1,950 1,711
Interest expense (13,069) (11,810)
Interest capitalized - 95
Loss on sale of assets (693) (327)
Other - net 266 3,442
(11,546) (6,889)
Income before income tax 12,923 17,602
Income tax expense 5,902 7,921
Net Income $7,021 $9,681
Primary Earnings Per Share $0.52 $0.72
Fully Diluted Earnings Per Share $0.48 $0.61
Shares used for computation:
Primary 13,446 13,366
Fully diluted 19,255 19,740
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
Alaska Air Group, Inc.
Six Months Ended June 30
(In Thousands except Per share Amounts) 1995 1994
Operating Revenues
Passenger $580,177 $542,466
Freight and mail 45,484 42,595
Other - net 31,104 25,796
Total Operating Revenues 656,765 610,857
Operating Expenses
Wages and benefits 208,288 193,129
Aircraft fuel 83,078 67,342
Aircraft maintenance 40,319 34,670
Aircraft rent 84,681 80,512
Commissions 45,273 43,651
Depreciation and amortization 33,930 27,203
Other 155,028 142,787
Total Operating Expenses 650,597 589,294
Operating Income 6,168 21,563
Other Income (Expense)
Interest income 3,311 3,135
Interest expense (26,398) (21,687)
Interest capitalized - 198
Loss on sale of assets (706) (502)
Other - net 611 3,883
(23,182) (14,973)
Income (loss) before income tax (17,014) 6,590
Income tax expense (credit) (7,695) 3,222
Net Income (Loss) $(9,319) $3,368
Earnings (Loss) Per Share $(0.70) $0.25
Shares used for computation 13,405 13,364
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Alaska Air Group, Inc.
Common Stock
Capital in Treasury Deferred
$1 Par Excess of Stock Compen- Retained
(In Thousands) Value Par Value at Cost sation Earnings Total
Balances at December 31, 1994 $16,554 $152,756 $(71,807) $(4,697) $98,472 $191,278
Net loss for the six months
ended June 30, 1995 (9,319) (9,319)
Stock issued under stock plans 41 630 671
Employee Stock Ownership Plan
shares allocated 599 599
Balances at June 30, 1995 $16,595 $153,386 $(71,807) $(4,098) $89,153 $183,229
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Alaska Air Group, Inc.
Six Months Ended June 30 (In Thousands) 1995 1994
Cash and cash equivalents at
beginning of period $11,605 $27,179
Cash flows from operating activities:
Net income (loss) (9,319) 3,368
Adjustments to reconcile net income (loss) to cash:
Depreciation and amortization 33,930 27,203
Amortization of airframe and engine ovhls 12,230 10,268
Loss (gain) on disposition of assets
and debt retirement 648 (1,043)
Deferred income taxes (5,754) 2,749
Increase in accounts receivable (19,725) (8,002)
Decrease (increase) in other current assets (102) 4,687
Increase in air traffic liability 52,057 44,885
Increase in other current liabilities 11,818 23,197
Interest on zero coupon notes 4,536 5,089
Leased acft return payments and other-net (5,867) (12,319)
Net cash provided by operating activities 74,452 100,082
Cash flows from investing activities:
Proceeds from disposition of assets 1,492 3,501
Purchases of marketable securities (42,542) (28,217)
Sales and maturities of marketable securities 33,754 24,137
Restricted deposits (1,658) (5,254)
Flight equipment deposits returned 8,883 3,115
Additions to flight equipment deposits - (826)
Additions to property and equipment (34,949) (128,837)
Net cash used in investing activities (35,020) (132,381)
Cash flows from financing activities:
Proceeds from short-term borrowings 4,000 -
Repayment of short-term borrowings (29,000) (20,000)
Proceeds from issuance of long-term debt 128,795 104,000
Long-term debt and capital lease payments (26,920) (31,981)
Proceeds from issuance of common stock 671 274
Gain on debt retirement 58 1,545
Net cash provided by financing activities 77,604 53,838
Net increase in cash and cash equivalents 117,036 21,539
Cash and cash equivalents at end of period $128,641 $48,718
Supplemental disclosure of cash paid
(received) during the period for:
Interest (net of amount capitalized) $28,059 $20,896
Income taxes (refunds) (1,943) (6,715)
Noncash investing and financing activities: None None
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE CHANGED
SIGNIFICANTLY DURING THE SIX MONTHS ENDED JUNE 30, 1995
Alaska Air Group, Inc.
Note 1. Summary of Significant Accounting Policies (See Note 1 to
Consolidated Financial Statements at December 31, 1994)
Property, Equipment and Depreciation
Effective January 1, 1995, the estimated salvage value of MD-80 flight
equipment was changed to 5% from 20%. The new estimate was adopted to
recognize the lower expected salvage values for this aircraft type. The
effect of the change on the three months and six months ending June 30,
1995 was to decrease net income $757,000 ($.06 per share) and $1.5
million ($.11 per share), respectively.
Note 2. Long-Term Debt and Capital Lease Obligations (See Note 4 to
Consolidated Financial Statements at December 31, 1994)
In June 1995, the Company issued $132.3 million of 6-1/2% convertible
senior debentures due 2005. Each debenture is convertible to 46.512
shares of common stock, reflecting a conversion price of $21.50 per
share.
During the third quarter of 1995, the Companys plans to repurchase all
of it's 7-1/4% zero coupon, convertible subordinated notes.
Note 3. Commitments (See Note 5 to Consolidated Financial Statements at
December 31, 1994)
During the second quarter of 1995, Alaska took delivery of two new MD-83
aircraft under 16-year operating leases. At June 30, 1995, total
aircraft commitments were approximately $223 million.
Alaska Air Group, Inc. EXHIBIT 11
Computation of Earnings Per Common Share
(In thousands, except per share)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1995 1994 1995 1994
------ ------ ------ ------
Primary -
Net income $7,021 $9,681 ($9,319) $3,368
====== ====== ====== ======
Average number of shares outstanding 13,411 13,359 13,405 13,354
Assumed exercise of stock options reduced
by the number of shares purchased with
the proceeds from exercise of such options 35 7 - 10
------ ------ ------ ------
Average shares as adjusted 13,446 13,366 13,405 13,364
====== ====== ====== ======
Earnings per common share $0.52 $0.72 ($0.70) $0.25
====== ====== ====== ======
Fully Diluted -
Net income $7,021 $9,681 ($9,319) $3,368
After tax interest on convertible securities 2,206 2,396 4,314 4,744
------ ------ ------ ------
Income applicable to common shares $9,227 $12,077 ($5,005) $8,112
====== ====== ====== ======
Average number of shares outstanding 13,411 13,359 13,405 13,354
Assumed exercise of stock options 83 8 57 10
Assumed conversion of 6.5% debentures 203 0 102 0
Assumed conversion of 7.75% debentures 508 512 508 515
Assumed conversion of 6.875% debentures 1,608 1,708 1,608 1,750
Assumed conversion of 7.25% zero coupon notes 3,442 4,153 3,503 4,214
Assumed conversion of preferred shares 0 0 0 0
------ ------ ------ ------
Average shares as adjusted 19,255 19,740 19,183 19,843
====== ====== ====== ======
Earnings per Common Share $0.48 $0.61 ($0.26) $0.41
====== ====== ====== ======
* *
* Anti-dilutive
5
1000
6-MOS
DEC-31-1995
JUN-30-1995
128641
102125
89780
0
42891
418294
1154608
309838
1456254
458744
699648
16595
0
0
166634
1456254
656765
656765
650597
650597
0
0
26398
(17014)
(7695)
(9319)
0
0
0
(9319)
(.70)
.00
