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2: EX-4.20 Instrument Defining the Rights of Security Holders HTML 88K
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5: EX-4.23 Instrument Defining the Rights of Security Holders HTML 535K
6: EX-4.24 Instrument Defining the Rights of Security Holders HTML 639K
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8: EX-10.2 Material Contract HTML 649K
9: EX-10.3 Material Contract HTML 57K
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20: R1 Cover HTML 71K
21: R2 Condensed Consolidated Balance Sheets HTML 132K
22: R3 Condensed Consolidated Balance Sheets HTML 36K
(Parentheticals)
23: R4 Condensed Consolidated Statements of Operations HTML 119K
24: R5 Condensed Consolidated Statements of Comprehensive HTML 65K
Operations
25: R6 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS HTML 102K
EQUITY Statement
26: R7 Condensed Consolidated Statements of Cash Flows HTML 98K
27: R8 Condensed Consolidated Statements of Cash Flows HTML 28K
(Parenthetical)
28: R9 General and Summary of Significant Accounting HTML 24K
Policies
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Ticker Symbol
Name of each exchange on which registered
iCommon stock, $0.01 par value
iiALK/
iNew
York Stock Exchange
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYes☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”"accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer (Do not check if a smaller reporting company)
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes i☐ No
☒
As used in this Form 10-Q, the terms “Air Group,” the “Company,”“our,”“we” and "us" refer to Alaska Air Group, Inc.
and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon” and together as our “airlines.”
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of 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. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions
to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. For a discussion of our risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2019, and Item 1A. "Risk Factors" of Part II of this Form 10-Q. Please consider our forward-looking statements in light of those risks as you read this report.
(a)Represents
the opening balance sheet adjustment recorded as a result of the adoption of the new lease accounting standard.
9
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30,
(in millions)
2020
2019
Cash
flows from operating activities:
Net income (Loss)
$
(i877)
$
i588
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
i320
i317
Stock-based
compensation and other
i14
i20
Special
items - impairment charges and other
i350
i—
Special
items - restructuring charges
i322
i—
Payroll
support program grant wage offset
(i760)
i—
Changes
in certain assets and liabilities:
Payroll support program grant funding
i753
i—
Changes
in deferred tax provision
(i220)
i187
Increase
in air traffic liability
i171
i244
Increase
in deferred revenue
i193
i97
Pension
contribution
i—
(i65)
Other
- net
(i150)
(i7)
Net
cash provided by operating activities
i116
i1,381
Cash
flows used in investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits
(i61)
(i286)
Other
flight equipment
(i49)
(i125)
Other
property and equipment
(i94)
(i116)
Total
property and equipment additions, including capitalized interest
(i204)
(i527)
Purchases
of marketable securities
(i2,092)
(i1,446)
Sales
and maturities of marketable securities
i1,520
i1,228
Other
investing activities
i9
i37
Net
cash used in investing activities
(i767)
(i708)
Cash
flows from financing activities:
Proceeds from issuance of debt
i2,581
i356
Common
stock repurchases
(i31)
(i752)
Dividends
paid
(i45)
(i53)
Long-term
debt payments
(i238)
(i129)
Other
financing activities
i19
i40
Net
cash provided by (used in) financing activities
i2,286
(i538)
Net
increase in cash, cash equivalents, and restricted cash
i1,635
i135
Cash,
cash equivalents, and restricted cash at beginning of year
i232
i114
Cash,
cash equivalents, and restricted cash at end of the period
$
i1,867
$
i249
Cash
paid during the period for:
Interest (net of amount capitalized)
$
i38
$
i48
Income
taxes
i—
i2
Reconciliation
of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents
$
i1,855
$
i237
Restricted
cash included in Prepaid expenses, assets held-for-sale and other current assets
i12
i12
Total
cash, cash equivalents, and restricted cash at end of the period
$
i1,867
$
i249
10
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1. iGENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Organization
and Basis of Presentation
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. The condensed consolidated financial statements also include McGee Air Services (McGee), a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2020 and the results of operations for the three and nine months ended September 30, 2020 and 2019. Such adjustments were of a normal recurring nature.
In
preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses, including impairment charges. Due to the impacts of the novel coronavirus (COVID-19) pandemic on the Company's business, these estimates and assumptions require more judgment than they would otherwise given the uncertainty of the future demand for air travel, among other considerations. Further, due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30,
2020 are not necessarily indicative of operating results for the entire year.
Recently Adopted Accounting Pronouncement
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU requires the use of an "expected credit loss model" on certain financial instruments. The ASU also amends the impairment model for available-for-sale debt securities, and requires the estimation of credit losses to be recorded as allowances instead of reductions to amortized cost. The ASU was effective for the Company beginning January 1, 2020, and was adopted prospectively, but it
did not have a significant impact on the Company's financial statements and disclosures.
NOTE 2. iCOVID-19 PANDEMIC
The public health and economic crises resulting from the outbreak of COVID-19 beginning in the first quarter of 2020 has had an unprecedented impact on the
Company. Travel restrictions, event cancellations and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March. Although the Company has experienced several months of modest improvement in demand, traffic remains well below 2019 levels. It is uncertain when the impacts of the crisis may resolve and when demand may return to normal levels.
In response to the COVID-19 pandemic, the Company implemented a "Peace-of-Mind" waiver, which allows travelers to book tickets for travel for a specified period of time that can be changed or canceled without incurring change fees. In the third quarter, the waiver was extended
to cover all ticketed travel purchased through December 31, 2020, and beginning in 2021, all change fees will be eliminated for first class and main cabin fares. Cancellations and postponement of travel exceeded new bookings in March and April, and had a material impact on second and third quarter passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.
The Company has taken decisive action to reduce costs and preserve cash and liquidity. In the first quarter, the Company implemented a company-wide hiring freeze, reduced salaries of senior management and hours for management employees, suspended annual pay increases and solicited voluntary leaves
of absence. In addition to these payroll saving measures, the Company has actively negotiated with vendor partners to reduce contractual minimums and spending in line with the reduction in demand. In the third quarter, management made the difficult decision to reduce the Company's workforce through voluntary and involuntary leaves.
11
With demand dramatically depressed, the Company has significantly reduced its planned flying capacity. As a result, many aircraft have been parked or removed from
service. As of September 30, 2020, i64 mainline aircraft were temporarily grounded. The Company made the decision in the first quarter of 2020 to permanently remove i12
Airbus aircraft from the operating fleet. In the third quarter of 2020, an additional ieight Airbus aircraft were permanently removed from the operating fleet. As of September 30, 2020, all operating regional aircraft were in service.
Valuation of long-lived assets
The Company reviews its long-lived assets for impairment whenever events
or changes indicate that the total carrying amount of an asset or asset group may not be recoverable.
To determine if impairment exists, a recoverability test is performed comparing the sum of estimated undiscounted future cash flows expected to be directly generated by the assets to the asset carrying value. Assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company developed estimates of future cash flows utilizing historical results, adjusted for the current operating environment, including the impact of parked aircraft.
Given the temporary and permanent parking of certain aircraft described above, the
Company performed impairment tests on certain long-lived assets in each of the quarters of 2020. All individual fleets passed the recoverability test, except for the Q400 fleet and the permanently parked Airbus aircraft, which did not pass in the first and third quarters of 2020.
In the first quarter, the Company recorded an impairment charge of $i83 million for the i12
permanently parked Airbus aircraft, which was comprised of operating lease right of use assets, estimable return costs, and related leasehold improvements. In the second quarter, the Company identified additional estimable return costs relating to those permanently parked aircraft, and recorded an additional $i70 million charge.
Also in the first quarter, the
Company recorded an impairment charge of $i58 million reflecting the amount for which carrying value exceeded fair value of the Q400 fleet. The Company also recorded additional impairment charges relating to itwo
non-operating Q400 aircraft, which remain parked and held-for-sale, in the first quarter of 2020.
In the third quarter, the Company determined that ten owned Airbus A320 aircraft were impaired, as those aircraft have been specifically identified for retirement prior to the end of their expected useful lives. The Company decided to permanently park eight of these aircraft as of September 30, 2020. As such, the Company recorded an impairment charge of $i121 million,
representing the amount by which carrying value exceeded fair value for the aircraft and related capital improvements and spare parts inventory. The adjusted net book value of $i219 million for the ieight
aircraft that have been permanently parked and the itwo Q400 aircraft mentioned above has been transferred to held-for-sale assets in Other current assets on the condensed consolidated balance sheet.
i
A
summary of the impairment charges recorded for aircraft and other flight equipment for the nine months ended September 30, 2020 is as follows (in millions):
Airbus Aircraft
Q400 Aircraft
Total Impairment
Aircraft
and other flight equipment, net
$
i132
$
i58
$
i190
Operating
lease assets
i62
i—
i62
Inventory
and supplies - net
i2
i—
i2
Prepaid
expenses and other current assets
i—
i3
i3
Other
accrued liabilities
i78
i—
i78
Total
impairment charges - Long-lived assets
$
i274
$
i61
$
i335
/
The Company will continue to evaluate the need for further impairment of long-lived assets as expectations of future demand, market conditions and fleet decisions evolve.
Valuation of intangible assets and goodwill
The Company reviews definite- and indefinite-lived intangible assets and goodwill for impairment on an annual basis in the fourth quarter, or more frequently should events or circumstances indicate that an impairment may exist.
12
Given
the strain in the general economic environment and a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types at the end of each quarter in 2020. As a result of these analyses, indefinite-lived intangible assets and goodwill were deemed recoverable, and no impairment charges were recorded. Of the company’s definite-lived intangibles, leased gates at Dallas-Love Field (DAL Gates) were deemed not recoverable and an impairment charge of $i10 million
was recorded in the first quarter. No additional impairment charges were identified for definite-lived intangibles as a result of the second and third quarter impairment tests.
Workforce restructuring
The Company expects that demand will remain depressed into 2021 and expects to rebuild capacity levels to approximately 80% by summer 2021. Accordingly, the Company reduced its workforce in the third quarter of 2020 to better align with the expected size of the business. To mitigate the need for involuntary furloughs, various early-out and voluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots
and mechanics. Through these programs over 600 employees took permanent early-outs, and over 3,300 employees took voluntary or incentive leaves. As a result of the participation in these mitigation programs, the involuntary furloughs that became effective October 1, 2020 were limited to approximately 400 employees. The Company recalled approximately 220 flight attendants on November 1, 2020. In addition to these furloughs, the Company permanently eliminated approximately 300 non-union management positions.
As a result of these programs, the Company recorded
expense of $i322 million to Special items - restructuring charges in the condensed consolidated statement of operations in the third quarter of 2020. The charge is primarily comprised of wages for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage, and lump-sum termination payments.
Other considerations
The Company evaluated outstanding receivable
balances for risk of non-payment. The Company identified a $i5 million receivable from a vendor that filed for bankruptcy during the first quarter. The Company expects to file a bankruptcy claim but, as the note is unsecured, management determined that collectability is not probable. Therefore, the full $i5 million
was reserved and charged to Special items - impairment charges and other in the condensed consolidated statement of operations in the first quarter.
For the three and nine months ended September 30, 2020, the Company concluded that the use of a year-to-date effective tax rate estimate was more appropriate than the annual effective tax rate method as estimates of the Company's full-year tax loss are not reliable at this time given the uncertainty of the travel demand environment.
Although it is not certain when the impacts of COVID-19 will subside and demand for air travel will return, the
Company has implemented meaningful plans to reduce expenses, build liquidity and preserve cash. At September 30, 2020, given the balance of cash, cash equivalents and marketable securities, as well as anticipated access to liquidity and cash flows from future operations, the Company expects it will meet all cash obligations, as well as remain in compliance with the financial debt covenants in its existing financing arrangements, for the next 12 months. Refer to Note 5. Long-Term Debt for further information regarding liquidity obtained in response to the COVID-19 crisis.
CARES Act Funding
During the second quarter, Alaska, Horizon, and McGee finalized agreements with the U.S. Department of the Treasury (the
Treasury) through the payroll support program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under the PSP and associated agreements, Alaska and Horizon received $i992 million in the second quarter. In the third quarter of 2020, Alaska and Horizon were informed by the Treasury of $i29 million
in additional funds available under the PSP. Similarly, McGee entered into an agreement to receive a total of $i30 million, which was received in three installments in the second and third quarters.
Total funds of approximately $i1.1 billion
are to be used exclusively toward continuing to pay employee salaries, wages and benefits. Upon receipt of the funds, the Company is subject to various conditions, including, but not limited to, refraining from conducting involuntary furloughs or reducing employee rates of pay through September 30, 2020 and placing limits on executive compensation. Other conditions also prohibit the Company from repurchasing common stock and from paying dividends until September 30, 2021, and required the Company to continue to maintain essential air service as directed by the U.S. Department of Transportation through September
30, 2020.
13
The funds received took the form of debt, warrants and a grant. The unsecured debt portion of $i290 million was recorded at par, and warrants of $i8 million
were recorded on the condensed consolidated balance sheet at fair value determined using the Black-Scholes model. The residual amount of $i753 million was recorded as grant proceeds. The grant will be recognized into earnings as eligible wages, salaries and benefits are incurred. During the three and nine months ended September 30, 2020, the Company recognized $i398
million and $i760 million of the PSP grant proceeds as a wage offset. Included within the third quarter total offset is approximately $i17 million in credits for employer taxes,
as stipulated in the CARES Act. The Company expects to record an additional $i10 million in wage offset in the fourth quarter.
In the third quarter of 2020, the Company reached an agreement with the Treasury to participate in the CARES Act loan program. The loan agreement provides for a secured term loan facility, which allows Alaska to borrow up to $i1.3 billion.
In October 2020, the amount of the loan available was increased to $i1.9 billion. In September the Company borrowed $i135 million
under the loan facility. Refer to Note 5. Long-Term Debt and Note 8. Shareholders' Equity for further details regarding terms of the CARES loan agreement.
NOTE 3. iREVENUE
Ticket revenue is recorded as Passenger revenue, and represents the primary source of the
Company's revenue. Also included in Passenger revenue are passenger ancillary revenues, such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. In the third quarter of 2020, the Company announced beginning on January 1, 2021 it would no longer collect change fees from those guests traveling on main cabin or first class fares. Mileage Plan other revenue includes brand and marketing revenue from the Company's co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
The
Company disaggregates revenue by segment in Note 9. The details within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
i
Passenger revenue recognized in the
condensed consolidated statements of operations (in millions):
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of$i484 million and $i582
million from the prior year-end air traffic liability balance for the nine months ended September 30, 2020 and 2019.
Given the reduction in demand for air travel stemming from the COVID-19 pandemic, advance bookings and associated cash receipts have been significantly depressed. The Company also experienced elevated cancellations beginning in March 2020, which led to cash refunds or the issuance of credits for future travel. Since March, the Company has issued cash refunds of approximately $i475 million
and credits for future travel of $i850 million. At September 30, 2020, such credits, which are included in the air traffic liability balance, totaled $i617 million,
net of breakage. In April 2020, the Company announced updated expiration terms for these credits, extending to July 2021. At this time, the Company is unable to estimate how and when the air traffic liability will be recognized in earnings given ongoing uncertainty around the return in demand for air travel.
Mileage PlanTM assets and liabilities
The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The
Company had $i45 million of such receivables as of September 30, 2020 and $i105 million as of December 31,
2019. Consistent with the significant cancellation activity outlined above, the Company experienced incremental redeposits in the third quarter. Given the uncertainty around the return in demand for air travel, the Company is unable to determine how and when mileage credits will be recognized in earnings.
i
The table below presents a roll forward of the total frequent
flyer liability (in millions):
Travel
miles and companion certificate redemption - Passenger revenue
(i272)
(i511)
Miles
redeemed on partner airlines - Other revenue
(i21)
(i84)
Increase
in liability for mileage credits issued
i486
i692
Total
Deferred Revenue balance at Sept 30
$
i2,183
$
i1,971
/
NOTE 4. iFAIR VALUE MEASUREMENTS
In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated
using significant unobservable inputs.
Fair Value of Financial Instruments on a Recurring Basis
As of September 30, 2020, total cost basis for all marketable securities was $i1.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.
15
i
Fair
values of financial instruments on the consolidated balance sheet (in millions):
The
Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily
available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.
Activity and Maturities for Marketable Securities
Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on its evaluation of available
information as of September 30, 2020.
i
Maturities for marketable securities (in millions):
The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.
Cash, Cash Equivalents and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.
The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs
or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.
Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of September 30, 2020, the Company uses the income approach by discounting cash flows or estimation using quoted market prices, utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the
fixed-rate debt is Level 2, except for $i732 million, which is classified as Level 3, as certain inputs used are unobservable.
Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
Non-recurring
purchase price accounting fair value adjustment
i2
i2
Total
fixed-rate debt
$
i1,891
$
i475
Estimated
fair value
$
i1,960
$
i483
Assets
and Liabilities Measured at Fair Value on Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, operating lease assets, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. Refer to Note 2 for discussion regarding impairment charges recorded during the three and nine months ended September 30, 2020. No material impairment charges were recorded during the three and nine months ended September 30, 2019.
NOTE 5. LONG-TERM DEBT
i
Long-term
debt obligations on the condensed consolidated balance sheet (in millions):
Less
debt issuance costs and unamortized debt discount
(i35)
(i8)
Total
debt
i3,822
i1,499
Less
current portion
i1,150
i235
Long-term
debt, less current portion
$
i2,672
$
i1,264
Weighted-average
fixed-interest rate
i4.3
%
i3.3
%
Weighted-average
variable-interest rate
i1.9
%
i2.9
%
/
17
Approximately
$i642 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2020.
During the nine months ended September 30, 2020, the Company obtained proceeds from issuance of debt of $i2.6
billion from multiple lenders and sources. New proceeds are comprised of $i1.2 billion in Enhanced Equipment Trust Certificates (EETC), $i589 million from secured debt financing
backed by a total of i32 aircraft, $i290 million in an unsecured loan from the PSP, and $i135 million
from the CARES Act loan program. Also included in proceeds from issuance of debt is $i400 million drawn on existing lines of credit. Details around these issuances are more fully described below. Issuances of debt are offset by $i238 million
in debt payments.
In the third quarter of 2020, the Company obtained $i1.2 billion in private funding through the issuance of Enhanced Equipment Trust Certificates (EETC). The EETC are collateralized by i42
Boeing 737 aircraft and i19 Embraer E175 aircraft. Principal and interest payments are due semiannually, beginning on February 15, 2021.
The $i290 million
PSP note is an unsecured senior term loan with a 10-year term, bearing an interest rate of i1% in years 1 through 5, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus i2%
in years 6 through 10. The loan is prepayable at par at any time. Alaska and Horizon PSP proceeds were deposited into an account which will be drawn down over time for payroll expenses. That account and the balance of the proceeds will serve as the only collateral for the loan.
CARES Act Loan Program
In the third quarter of 2020, the Company finalized an agreement with the Treasury to obtain up to $i1.3 billion
via a secured term loan facility. In October 2020, the Company was informed by the Treasury that the total loan available would increase to $i1.9 billion. Following the October upsize, obligations of the Company under the loan agreement are secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM
frequent flyer program, as well as by i34 aircraft and i15 spare engines.
As of September 30, 2020, the Company has drawn $i135 million
available under the agreement, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021, after a required initial draw of 10%. All proceeds drawn must be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act.
In conjunction with the initial draw, the Company granted the Treasury i427,080
warrants to purchase ALK common stock at a strike price of $i31.61. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $i6 million
was recorded in stockholders' equity, with an offsetting debt discount to the CARES Loan issuance.
Debt Maturity
i
At September 30, 2020 long-term debt principal payments for the next five years and thereafter are as follows (in millions):
Total
Remainder
of 2020
$
i73
2021
i1,201
2022
i393
2023
i357
i2024
i265
Thereafter
i1,568
Total
$
i3,857
/
Bank
Lines of Credit
The Company has ithree credit facilities with availability totaling $i461
million as of September 30, 2020. All ithree facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $i250
million expires in June 2021 and is secured by aircraft. A second credit facility, which was renegotiated in September 2020, resulting in decreased capacity from $i150 million to $i120
million, expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The third credit facility for $i91 million expires in June 2021, with a mechanism for annual renewal, and is secured by aircraft.
18
During the nine months ended September 30,
2020, the Company drew $i400 million on the first itwo
existing facilities, of which a total of $i37 million has since been repaid. The Company has an outstanding balance of $i363 million
from the first two facilities, and the outstanding balance is classified as short-term on the condensed consolidated balance sheet. The Company also has secured letters of credit against the $i91 million facility. All ithree
credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $i500 million. The Company was in compliance with this covenant at September 30, 2020.
NOTE 6.
iEMPLOYEE BENEFIT PLANS
i
Net periodic benefit costs for qualified defined-benefit plans include the following
(in millions):
Pension
expense included in Nonoperating Income (Expense)
$
(i1)
$
i7
$
(i1)
$
i22
/
In
the third quarter of 2020, the Company also recorded $i16 million of pension expense within Special items - restructuring charges for those pilots accepting certain furlough mitigation programs, which is not reflected in the table above.
19
NOTE 7.
iCOMMITMENTS AND CONTINGENCIES
i
Future
minimum payments for commitments as of September 30, 2020 (in millions):
Aircraft
Commitments(a)
Capacity Purchase Agreements (b)
Aircraft Maintenance Deposits
Remainder of 2020
$
i343
$
i36
$
i7
2021
i549
i166
i35
2022
i333
i174
i45
2023
i192
i179
i24
2024
i21
i184
i6
Thereafter
i25
i880
i2
Total
$
i1,463
$
i1,619
$
i119
(a)Includes
non-cancelable contractual commitments for aircraft and engines, aircraft maintenance and parts management.
/
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.
During the nine months ended September 30, 2020the Company renegotiated scheduled payments with certain lessors and vendor partners, including the reduction of minimum obligations and rates. The impact of those negotiations on our leases was not material to the operating lease liability. The
Company has also deferred the payment of remaining 2020 contractual aircraft commitments, including those related to the B737 MAX9, to periods beyond 2020.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 2020, Alaska had commitments to purchase i32
B737 MAX9 aircraft, with contracted deliveries between 2020 and 2023. As a result of the grounding order mandated by the FAA on March 13, 2019, the delivery schedule for these MAX aircraft is subject to change. Future minimum contractual payments for these aircraft have been updated to reflect the possible delivery timing, but are also subject to change. Horizon also has commitments to purchase ithree E175 aircraft with deliveries in
2023. Alaska has cancelable purchase commitments for i30 Airbus A320neo aircraft with deliveries from 2024 through 2026. In addition, Alaska has options to purchase i37
B737 MAX aircraft, and Horizon has options to purchase i30 E175 aircraft. Alaska also has the option to increase capacity flown by SkyWest with ieight
additional E175 aircraft with deliveries in 2022.
The cancelable purchase commitments and option payments are not reflected in the table above. Given the COVID-19 pandemic, the Company is in discussion with aircraft manufacturers regarding these purchase commitments and delivery timelines.
Contingencies
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In
2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $i78
million. It did not award injunctive relief against Alaska Airlines.
The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no
loss has been accrued.
20
In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend the lawsuit.
The Company is involved in other litigation around the application of state
and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
This forward-looking statement is based on management's current understanding of the relevant laws and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
NOTE 8. iSHAREHOLDERS'
EQUITY
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $i1 billion share repurchase program. As of September 30, 2020, the Company has repurchased i7.6
million shares for $i544 million under this program. In March 2020, the Company suspended the share repurchase program indefinitely.
CARES Act Warrant Issuance
As additional taxpayer protection required under the PSP, during the nine months ended September 30, 2020the
Company granted the Treasury a total of i915,930 warrants to purchase Alaska Air Group (ALK) common stock at a strike price of $i31.61,
based on the closing price on April 9, 2020. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska's option, and have a five year term.
Additionally, in connection with the execution of the CARES Act loan agreement, the Company agreed to issue warrants to the Treasury to purchase up to an aggregate of i4,115,786
shares of ALK common stock (the Warrant Agreement). Under the Warrant Agreement, warrants will be granted to the Treasury in conjunction with each new borrowing under the Agreement. Warrants to purchase shares shall be equal to 10% of each borrowing, divided by $i31.61, the closing price of Air Group common stock on April 9, 2020. Pursuant to the Warrant Agreement, on the closing date, Air Group granted the Treasury i427,080
warrants to purchase ALK common stock at a strike price of $i31.61. Upon upsize of the loan agreement in October 2020, an additional i1,983,550
warrants were added to the aggregate.
i
Components of accumulated other comprehensive loss, net of tax (in millions):
Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, 2020 and 2019, anti-dilutive shares excluded from the calculation of EPS were not material.
NOTE 9. iOPERATING
SEGMENT INFORMATION
Alaska Air Group has two operating airlines—Alaska and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with SkyWest, under which Alaska receives all passenger revenues.
Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions.
21
Financial performance for the operating airlines and CPAs is managed and reviewed by the
Company's CODM as part of ithree reportable operating segments:
•Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for
passengers across a shorter distance network within the U.S. under a CPA. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial
business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
22
i
Operating
segment information is as follows (in millions):
(a)Includes
consolidating entries, Air Group parent company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain income and charges.
(c)Includes payroll support program grant wage offsets, special items and mark-to-market fuel hedge accounting adjustments.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our company, segment operations and the present business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes. All statements in the following discussion that are not statements of historical information or descriptions of current accounting policy are forward-looking
statements. Please consider our forward-looking statements in light of the risks referred to in this report’s introductory cautionary note and the risks mentioned in "Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, and in Item 1A. "Risk Factors" of Part II of this Form 10-Q. This overview summarizes the MD&A, which includes the following sections:
•Third Quarter Review—highlights from the third quarter of 2020 outlining some of the major events that happened during the period and how they affected our financial performance.
•Results of Operations—an in-depth analysis of our revenues by segment and our expenses
from a consolidated perspective for the three and nine months ended September 30, 2020. To the extent material to the understanding of segment profitability, we more fully describe the segment expenses per financial statement line item. Financial and statistical data is also included here. This section includes forward-looking statements regarding our view of the remainder of 2020.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRD QUARTER REVIEW
COVID-19
Impacts and Response
The impacts of COVID-19 on our business have been unprecedented, and have presented us with some of the greatest challenges in our 88-year history. The cancellation of large public events, suspension of business travel, closure of popular tourist destinations and implementation of stay-at-home orders throughout the country beginning in March 2020 has driven demand for air travel to historic lows.
Although we have seen slow improvements in demand through the second and third quarters of 2020 as daily passenger counts have grown from a low of 5,000 per day to approximately 40,000 in September, we remain well below prior-year traffic levels. Some targeted promotions, including a "Buy the Row" sale, have provided meaningful cash bookings and positive reactions from guests, indicating that there is underlying demand for air
travel when the time is right. Based on several recent studies performed on the safety of air travel during the pandemic, we strongly believe air travel is, and has been, safe and we stand ready as our guests return to travel over the coming months.
However, as we expect recovery to be slow and we face the reality that our airlines are, and will be, significantly smaller than we were a year ago, we had to make the difficult decision to reduce our workforce at the end of the third quarter. We initiated various early-out and furlough mitigation programs for frontline work groups, as well as incentive leaves for Alaska pilots and aircraft mechanics. These leaves were accepted by approximately 4,000 employees, including over 600 employees volunteering for early-out separation from the Company. In addition, we reduced our non-union
management positions by approximately 300 positions. As a result of these actions, we were able to reduce the number of involuntary furloughs to approximately 400. Costs of $322 million associated with these programs were recorded in the third quarter. We expect these workforce reductions will result in permanent annual savings of approximately $130 million.
These and other structural cost reduction measures are critical to reaching our monthly cash preservation goals. We believe getting to a zero cash burn position will be a leading indicator of industry health and recovery, and we believe we will be the first airline to reach this goal. Our capacity and cash bookings planning assumptions do not represent guidance, and we will adjust our plans if demand trends do not support these assumptions.
26
Looking
forward, we are planning for capacity in the fourth quarter to be approximately 40% below the same period in 2019. We expect to see continued increases in passenger counts from the holiday travel season and as Hawai'i reopens to tourism travel. However, we do expect load factors to be in the range of 45% to 55% given our decision to block middle seats on the majority of our mainline flights through January 6, 2021.
Currently, by the summer of 2021, our planning assumption is that capacity will be approximately 80% of the summer of 2019. Although, that is subject to change given the ever-changing dynamic of the COVID-19 pandemic and the demand for air travel. We will remain flexible as the situation changes and are committed to take advantage of opportunities that may arise as the industry begins to recover.
Maintaining
a significant liquidity balance is also paramount to preserving our financial strength. In addition to the $1 billion in CARES Act funding obtained in the second quarter of 2020, we have also sourced $589 million in secured financing, drawn $400 million from our existing credit facilities, and issued $1.2 billion in EETCs. We also have available to us $1.9 billion in CARES Act loans, from which we have drawn $135 million to support general business operations. As of November 3, 2020, our cash and marketable securities balance was approximately $3.5 billion.
Guest and employee safety
Our commitment to the health and safety of our guests and employees remains our top priority. In response to the crisis, we have partnered with experts to build our Next-Level Care initiative. In doing so, we have added
layers of safety with over 100 safety measures through all stages of travel. Some examples of measures that are helping our guests build confidence include:
•Making the pre-flight experience as contactless as possible, including the addition of a health agreement during check-in;
•Requiring masks for both guests aged 2 and older and employees, and empowering our crews to enforce the policy with the ability to issue a formal warning to any guest who refuses to do so;
•Using the latest air filtration technology and hospital grade filters to remove particulates and fully recycle air in the cabin every 2 to 3 minutes;
•Exceeding
CDC cleaning guidelines and using high grade disinfectants to reduce the risk of transmission on board, and;
•Providing for adequate social distancing in our airports and on-board, including blocking middle seats on mainline aircraft through January 6, 2021.
oneworld Invitation
In July 2020, we received our formal invitation to join the oneworld alliance. Upon entrance to the alliance, Alaska guests will be able to access the full range of customer services and benefits, and Mileage Plan members will be able to earn and redeem rewards on all oneworld member airlines.
The Company is working to accelerate its timeline for entrance into the alliance, with a focus on completion by the end of the first quarter of 2021.
Financial Overview
Our consolidated pretax loss was $589 million during the third quarter of 2020, compared to pretax profit of $416 million in the third quarter of 2019. The shift to pretax loss was driven primarily by a decrease in operating revenues of $1.7 billion stemming from the sharp decline in demand, $322 million in restructuring costs, and $121 million in special charges from asset impairment, offset by a decrease in non-fuel operating expenses of $334 million, including wage offsets from the payroll support program of the CARES Act of $398 million. Pretax loss was also offset by a decrease in fuel expense
of $361 million.
See “Results of Operations” below for further discussion of changes in revenues and operating expenses and our reconciliation of non-GAAP measures to the most directly comparable GAAP measure. A glossary of financial terms can be found at the end of this Item 2.
27
RESULTSOF OPERATIONS
ADJUSTED (NON-GAAP) RESULTS ANDPER-SHARE
AMOUNTS
We believe disclosure of earnings excluding the impact of the payroll support program grant wage offset, impairment and other charges, merger-related costs, mark-to-market gains or losses or other individual special revenues or expenses is useful information to investors because:
•By excluding fuel expense and certain special items (including the payroll support program grant wage offset, impairment and restructuring charges and merger-related costs) from our unit metrics, we believe that we have better visibility into the results of operations as we focus on cost-reduction initiatives emerging from the COVID-19 pandemic. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can lead to 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 the payroll support program grant wage offset, impairment and restructuring charges and 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 annual cash incentive plan, which covers the majority of employees within the Air Group organization.
•CASM excluding fuel and certain special items is a measure commonly used by industry analysts and we believe it is an important metric by which they have historically compared our airline 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 these items as noted above 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 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.
Although
we are presenting these non-GAAP amounts for the reasons above, investors and other readers should not necessarily conclude that these amounts are non-recurring, infrequent, or unusual in nature.
28
OPERATING STATISTICS SUMMARY (unaudited)
Below are operating statistics we use to measure operating performance. We often refer to unit revenues and adjusted unit costs, which are non-GAAP measures.
Our consolidated net loss for the three months ended September 30, 2020 was $431 million, or $3.49 per
diluted share, compared to net income of $322 million, or $2.60 per diluted share, for the three months ended September 30, 2019.
Excluding the impact of the payroll support program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net loss for the third quarter of 2020 was $399 million, or $3.23 per diluted share, compared to adjusted net income of $326 million, or $2.63 per diluted share, in the third quarter of 2019. The following tables reconcile our adjusted net income and adjusted earnings per diluted share (EPS) to amounts as reported in accordance with GAAP:
Non-GAAP
adjusted net income (loss) and diluted EPS
$
(399)
$
(3.23)
$
326
$
2.63
CASM reconciliation is summarized below:
Three
Months Ended September 30,
(in cents)
2020
2019
% Change
Consolidated:
CASM
16.16
¢
11.23
¢
44
%
Less
the following components:
Payroll support program grant wage offset
(5.06)
—
NM
Aircraft fuel, including hedging gains and losses
1.59
2.77
(43)
%
Special
items - merger-related costs
0.01
0.03
(67)
%
Special items - impairment charges and other
1.53
—
NM
Special items - restructuring charges
4.09
—
NM
CASM
excluding fuel and special items
14.00
¢
8.43
¢
66
%
Mainline:
CASM
16.80
¢
10.46
¢
61
%
Less
the following components:
Payroll support program grant wage offset
(5.56)
—
NM
Aircraft fuel, including hedging gains and losses
1.43
2.62
(45)
%
Special
items - merger-related costs
0.02
0.03
(33)
%
Special items - impairment charges and other
1.93
—
NM
Special
items - restructuring charges
5.10
—
NM
CASM excluding fuel and special items
13.88
¢
7.81
¢
78
%
30
OPERATING
REVENUES
Total operating revenues decreased $1.7 billion, or 71%, during the third quarter of 2020 compared to the same period in 2019. The changes are summarized in the following table:
Three Months Ended September 30,
(in millions)
2020
2019
%
Change
Passenger revenue
$
572
$
2,211
(74)
%
Mileage Plan other revenue
84
118
(29)
%
Cargo
and other
45
60
(25)
%
Total operating revenues
$
701
$
2,389
(71)
%
Passenger Revenue
On
a consolidated basis, Passenger revenue for the third quarter of 2020 decreased by $1.6 billion, or 74%, on a 75% decline in traffic. Decreased revenue year-over-year is driven by the significant ongoing reductions in demand caused by the COVID-19 pandemic. Impacts to demand began in March 2020, and continued through the third quarter. Although third quarter results show sequential improvement from the prior quarter as more guests return to flying, capacity was reduced 55% of that flown in the third quarter of 2019, with a 37 point reduction in system-wide load factors.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue decreased $34 million, or 29%, as compared to the same prior-year period primarily on a reduction in miles purchased by our affinity card partner, consistent with an overall reduction in consumer spending.
Cargo and Other Revenue
On a consolidated basis, Cargo and other revenue for the third quarter of 2020 decreased by $15 million, or 25%, as compared to the same prior-year period. The decrease is primarily due to reduced belly cargo activity driven by the schedule reductions for passenger aircraft, as well as continued capacity limitations in our freighters due to design issues that we are working to address with our third-party vendor.
OPERATING EXPENSES
Total operating expenses decreased $695 million, or 35%, compared to the third quarter of 2019. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
Three
Months Ended September 30,
(in millions)
2020
2019
% Change
Fuel expense
$
125
$
486
(74)
%
Non-fuel operating expenses, excluding special items
1,101
1,476
(25)
%
Payroll
support program grant wage offset
(398)
—
NM
Special items - merger-related costs
1
5
(80)
%
Special
items - impairment charges and other
121
—
NM
Special items - restructuring charges
322
—
NM
Total operating expenses
$
1,272
$
1,967
(35)
%
31
Fuel
Expense
Aircraft fuel expense includes raw fuel expense (as defined below) plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. Our aircraft fuel expense can be volatile because it includes these gains or losses in the value of the underlying instrument as crude oil prices and refining margins increase or decrease. Raw fuel expense is defined as the price that we generally pay at the airport, or the “into-plane” price, including taxes and fees. Raw fuel prices are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.
Aircraft
fuel expense decreased $361 million, or 74%, compared to the third quarter of 2019. The elements of the change are illustrated in the following table:
Raw fuel expense per gallon for the three months ended September 30, 2020 decreased by approximately 40% due to lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil and refining margins associated with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during the third quarter of 2020 was primarily driven by a 27% decrease in crude oil prices and a 79% decrease in refining margins, when compared
to the prior year. Crude oil prices have been dramatically impacted by the COVID-19 pandemic and the related reduction in demand. The decrease is also due to a year-over-year decline in consumption of 130 million gallons, or 57%, primarily on a significant reduction in scheduled departures.
We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the premium expense that we paid for those contracts. A key difference between aircraft fuel expense and economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When
we refer to economic fuel expense, we include gains and losses only when they are realized for those contracts that were settled during the period based on their original contract terms. We believe this is the best measure of the effect that fuel prices are currently having on our business as it most closely approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly, many industry analysts evaluate our results using this measure, and it is the basis for most internal management reporting and incentive pay plans.
Losses recognized for hedges that settled during the third quarter were $5 million in 2020, compared to losses of $5 million in the same
period in 2019. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.
Non-fuel Expenses
The table below provides the reconciliation of the operating expense line items, excluding fuel, the payroll support program grant wage offset and special items. Significant operating expense variances from 2019 are more fully described below.
32
Three
Months Ended September 30,
(in millions)
2020
2019
% Change
Wages and benefits
$
495
$
608
(19)
%
Variable incentive pay
42
46
(9)
%
Aircraft
maintenance
84
106
(21)
%
Aircraft rent
74
82
(10)
%
Landing fees and other rentals
109
143
(24)
%
Contracted
services
36
72
(50)
%
Selling expenses
24
77
(69)
%
Depreciation and amortization
105
106
(1)
%
Food
and beverage service
14
57
(75)
%
Third-party regional carrier expense
29
42
(31)
%
Other
89
137
(35)
%
Total
non-fuel operating expenses, excluding special items
$
1,101
$
1,476
(25)
%
Wages and Benefits
Wages and benefits decreased during the third quarter of 2020 by $113 million, or 19%, compared to 2019. The primary components of Wages and benefits are shown in the following table:
Three
Months Ended September 30,
(in millions)
2020
2019
% Change
Wages
$
356
$
460
(23)
%
Pension - Defined benefit plans service cost
11
10
10
%
Defined
contribution plans
28
34
(18)
%
Medical and other benefits
75
71
6
%
Payroll taxes
25
33
(24)
%
Total
wages and benefits
$
495
$
608
(19)
%
Wages decreased $104 million, or 23%, on a 28% reduction in FTEs. The decrease is primarily due to voluntary leaves of absence, with an average of 4,600 employees on leave throughout the quarter, as well as reductions in executive pay and hours for management employees, and reducing represented employees work hours to minimums. Reduced employee wages directly correlate with the reduction in retirement contributions and payroll taxes.
Variable
Incentive Pay
Variable incentive pay expense decreased $4 million, or 9%, during the third quarter of 2020 compared to the same period in 2019, due to the expectation that key financial metrics will not be achieved under the performance based pay program. The decrease was offset by the recognition of nine months of expense for a supplemental incentive pay plan, which was approved in July 2020, and increased operational bonuses as compared to the prior year.
Aircraft Maintenance
Aircraft maintenance expense decreased by $22 million, or 21%, during the third quarter of 2020 compared to the same period in 2019. The decrease is primarily due to fewer engine events and heavy checks as compared to the prior year, as well as lower power-by-the-hour expense on reduced third quarter utilization
of covered aircraft. These decreases were offset by penalties accrued for failure to meet minimum obligations under certain contracts and costs incurred in the temporary grounding of certain aircraft, although we are currently in negotiations with these service providers with respect to these penalties.
33
Landing fees and other rentals
Landing fees and other rentals decreased by $34 million, or 24%, during the third quarter of 2020 compared to the same period in 2019 on a 45% decrease in departures. Decreased departure-related costs were offset by rate increases at many of our airports.
Contracted
Services
Contracted services decreased by $36 million, or 50%, during the third quarter of 2020 compared to the same period in 2019 driven primarily by decreased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.
Selling Expense
Selling expense decreased by $53 million, or 69%, during the third quarter of 2020 compared to the same period in 2019, primarily driven by a significant reduction in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs also contributed to the year-over-year decline given the renegotiation of certain contracts.
Food
and Beverage Service
Food and beverage service decreased by $43 million, or 75%, during the third quarter of 2020 compared to the same period in 2019. This decrease is consistent with the overall reduction in revenue passengers as compared to the prior-year period, as well as the temporary closure of the majority of our airport lounges and temporary elimination of buy-on-board service.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, decreased by $13 million, or 31%, during the third quarter of 2020 compared to the same period in 2019. The reduction in expense is primarily due to a 11% reduction in departures flown by SkyWest as compared to the prior-year period, a reduction in departure-related contractual
rates, and the elimination of PenAir flying.
Special Items - Impairment and other charges
We recorded impairment and other charges of $121 million in the third quarter of 2020, consisting of the impairment for ten owned Airbus aircraft which are expected to be retired prior to the end of their originally anticipated useful life, eight of which have been permanently parked.
Special Items - Restructuring charges
We recorded restructuring charges of $322 million in the third quarter of 2020 relating to the right-sizing of our workforce as a result of decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for those pilots and mechanics on incentive leaves, ongoing medical
benefit coverage, and lump-sum termination payouts.
ADDITIONAL SEGMENT INFORMATION
Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline recorded a pretax loss of $463 million in the third quarter of 2020, compared to a pretax profit of $378 million in the third quarter of 2019. The $841 million shift to pretax loss was primarily driven by a $1.4 billion decrease in Passenger revenues as a result of the COVID-19 pandemic, offset by a $354 million decrease in non-fuel operating costs and a $321 million decrease in economic fuel cost.
The
decrease in Mainline passenger revenue for the third quarter of 2020 was primarily driven by a 78% decline in traffic on a 60% decrease in capacity. The overall decreases in both traffic and capacity were driven by the significant reduction in demand as a result of the COVID-19 pandemic.
34
Non-fuel operating expenses decreased significantly on cost savings driven by reduced variable costs on reduced capacity, as well as decreased wages and benefits expense from voluntary leaves of absence and a reduction in hours for management employees. Lower raw fuel prices, combined with a 64% decrease in gallons consumed, drove the decline in Mainline fuel expense.
Regional
Regional
operations generated a pretax loss of $96 million in the third quarter of 2020, compared to a pretax profit of $23 million in the third quarter of 2019. The increase in the pretax loss was attributable to a $183 million decline in operating revenues, partially offset by a $37 million decrease in fuel costs and an $27 million decrease in non-fuel operating expenses.
Regional passenger revenue decreased 53% compared to the third quarter of 2019, primarily driven by a 42% decline in traffic on a 12% decrease in capacity. The overall decrease in both traffic and capacity are driven by the significant reduction in demand as a result of the COVID-19 pandemic.
The decrease in non-fuel operating expenses is primarily due to the 12% decline in capacity, as well as a discontinuation of our partnership with PenAir for contract
flying in the state of Alaska.
Horizon
Horizon achieved a pretax profit of $11 million in both the third quarter of 2020 and the third quarter of 2019. Profit recorded by Horizon in the third quarter is primarily the result of incremental flying as a proportion of overall Air Group capacity as compared to the prior year. Horizon revenues are recorded based upon purchased capacity, and are not impacted by changes to ticket prices and customer demand. Horizon profit is also the result of significant cost reduction efforts implemented in response to the COVID-19 pandemic.
Our consolidated net loss for the nine months ended September 30, 2020 was $877 million, or $7.12 per diluted share, compared to net income of $588 million, or $4.74 per diluted share, for the nine months ended September 30, 2019.
Our adjusted net loss for the nine months ended September 30, 2020 was $940 million, or $7.63 per diluted share, compared to adjusted net income of $617 million, or $4.97 per diluted share, in the nine months ended September 30, 2019. The following tables reconcile our adjusted net income and adjusted diluted EPS to amounts as reported
in accordance with GAAP:
Non-GAAP adjusted net income (loss) and diluted EPS
$
(940)
$
(7.63)
$
617
$
4.97
35
Our
operating costs per ASM are summarized below:
Nine Months Ended September 30,
(in cents)
2020
2019
% Change
Consolidated:
CASM
14.33
¢
11.48
¢
25
%
Less
the following components:
Payroll support program grant wage offset
(2.77)
—
NM
Aircraft fuel, including hedging gains and losses
2.07
2.82
(27)
%
Special
items - merger-related costs
0.02
0.08
(75)
%
Special items - impairment charges and other
1.27
—
NM
Special items - restructuring charges
1.17
—
NM
CASM
excluding fuel and special items
12.57
¢
8.59
¢
46
%
Mainline:
CASM
13.56
¢
10.65
¢
27
%
Less
the following components:
Payroll support program grant wage offset
(2.89)
—
NM
Aircraft fuel, including hedging gains and losses
1.92
2.65
(28)
%
Special
items - merger-related costs
0.02
0.09
(78)
%
Special items - impairment charges and other
1.24
—
NM
Special items - restructuring charges
1.37
—
NM
CASM
excluding fuel and special items
11.90
¢
7.91
¢
50
%
OPERATING REVENUES
Total operating revenues decreased $3.8 billion, or 58%, during the first nine months of 2020 compared to the same period in 2019. The changes are summarized in the following table:
Nine
Months Ended September 30,
(in millions)
2020
2019
% Change
Passenger revenue
$
2,362
$
6,038
(61)
%
Mileage Plan other revenue
266
346
(23)
%
Cargo
and other
130
169
(23)
%
Total operating revenues
$
2,758
$
6,553
(58)
%
Passenger Revenue
On
a consolidated basis, Passenger revenue for the first nine months of 2020 decreased by $3.7 billion, or 61%, on a 45% decrease in capacity, and a 26 point decrease in load factor. Decreased revenue year-over-year is primarily due to the near complete loss of demand due to the COVID-19 pandemic. Load factors and unit revenues in the first two months of 2020 were in-line with our original expectations. In March 2020, demand deteriorated at an unprecedented level, and in response we reduced April 2020 and May 2020 capacity to approximately 80% below prior year levels. Moderate recovery began in June 2020, however, resurgence of cases throughout the United States slowed that recovery in July 2020. Targeted promotions, coupled with continued growth of guest confidence in air travel, led to sequential revenue improvement in the third quarter. We expect that fourth quarter revenue will continue to show improvement, given the holiday travel season and reopening of Hawaii, however,
revenues will remain well below 2019 levels.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other revenue decreased $80 million, or 23%, in the first nine months of 2020 compared to the first nine months of 2019, due largely to a reduction in purchased miles and decreased commissions received from our affinity card partner, consistent with fewer new affinity card holders in 2020 and an overall reduction in consumer spending.
36
Cargo and other
On a consolidated basis, Cargo and other revenue decreased $39 million, or 23%, in the first nine
months of 2020 compared to the first nine months of 2019. The decrease is primarily due to reduced belly cargo activity driven by the schedule reductions for passenger aircraft, as well as continued capacity limitations in our freighters. We expect that our cargo revenues will continue to be negatively impacted in the fourth quarter due to ongoing capacity reductions.
OPERATING EXPENSES
Total operating expenses decreased $1.8 billion, or 31%, compared to the first nine months of 2019. We believe it is useful to summarize operating expenses as follows, which is consistent with the way expenses are reported internally and evaluated by management:
Nine
Months Ended September 30,
(in millions)
2020
2019
% Change
Fuel expense
$
568
$
1,408
(60)
%
Non-fuel operating expenses, excluding special items
3,453
4,295
(20)
%
Payroll
support program grant wage offset
(760)
—
NM
Special items - merger-related costs
5
39
(87)
%
Special items - impairment charges and other
350
—
NM
Special
items - restructuring charges
322
—
NM
Total operating expenses
$
3,938
$
5,742
(31)
%
Fuel Expense
Aircraft
fuel expense decreased $840 million, or 60%, compared to the nine months ended September 30, 2019. The elements of the change are illustrated in the following table:
The raw fuel price per gallon decreased 25% due to lower West Coast jet fuel prices. West Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during the first nine months of 2020 was driven by a 26% decrease in crude oil prices and a 56% decrease in refining margins.
Losses recognized for hedges that settled in the first nine months of 2020 were $15 million,
compared to losses of $12 million in the same period in 2019. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.
We expect our economic fuel cost per gallon in the fourth quarter to range between $1.20 and $1.25 per gallon on current market West Coast jet fuel prices and trends.
37
Non-fuel Expense and Non- special items
Nine
Months Ended September 30,
(in millions)
2020
2019
% Change
Wages and benefits
$
1,579
$
1,732
(9)
%
Variable incentive pay
65
125
(48)
%
Aircraft
maintenance
244
341
(28)
%
Aircraft rent
229
247
(7)
%
Landing fees and other rentals
323
388
(17)
%
Contracted
services
138
214
(36)
%
Selling expenses
83
236
(65)
%
Depreciation and amortization
320
317
1
%
Food
and beverage service
70
159
(56)
%
Third-party regional carrier expense
92
125
(26)
%
Other
310
411
(25)
%
Total
non-fuel operating expenses, excluding special items
$
3,453
$
4,295
(20)
%
Wages and Benefits
Wages and benefits decreased during the first nine months of 2020 by $153 million, or 9%. The primary components of wages and benefits are shown in the following table:
Nine
Months Ended September 30,
(in millions)
2020
2019
% Change
Wages
$
1,159
$
1,305
(11)
%
Pension—Defined benefit plans service cost
37
31
19
%
Defined
contribution plans
96
100
(4)
%
Medical and other benefits
205
203
1
%
Payroll taxes
82
93
(12)
%
Total
wages and benefits
$
1,579
$
1,732
(9)
%
Wages decreased $146 million, or 11%, on an 18% decrease in FTEs. The decrease is primarily due to voluntary leaves of absence accepted by nearly 7,000 employees in the second and third quarters, as well as reduction in executive pay and hours for management employees. These decreases were offset by increased wage rates following the mid-2019 ratification of new contracts
for employees represented by the Aircraft Mechanics Fraternal Association and the International Association of Machinists.
For the full year, we expect wages and benefits will decline compared to the prior year as we reduce scheduled flying and executive salaries, and realize savings generated from our reduction in workforce necessary to align with our expectation of demand.
Variable Incentive Pay
Variable incentive pay expense decreased $60 million, or 48%, during the first nine months of 2020 as compared to the same period in 2019. The decrease is primarily due to the expectation that key financial metrics will not be achieved under the performance based pay program, offset by the recognition of nine months of expense for a supplemental incentive pay plan, which was approved in July
2020, and increased operational bonuses as compared to the prior year.
Aircraft Maintenance
Aircraft maintenance expense decreased by $97 million, or 28%, during the first nine months of 2020 compared to the same period in 2019. The decrease is primarily due to a significant reduction in engine events and heavy checks, as well as reduced power-by-the-hour expense on reduced utilization in covered aircraft, offset by penalties recorded for failure to meet contractual minimum obligations.
38
We expect full year aircraft maintenance expense to be lower than 2019 on reduced aircraft utilization and parking of certain aircraft.
Landing fees and other rentals
Landing fees and other rentals decreased by $65 million, or 17%, during the first nine months of 2020 compared to the same period in 2019, primarily due to a 39% decrease in departures, offset by increased rates at certain of our airports.
For the full year, we expect landing fees and other rentals to decrease as compared to 2019, however, not at the same rate as decreased departures. We expect to see continued rate increases at many of our airports, as well as negative net settlements to cover airport operating costs.
Contracted Services
Contracted services decreased by $76 million, or 36%, during the first nine months of 2020 compared
to the same period in 2019. This decrease is primarily a result of reduced vendor spend directly correlating to reduced year-over-year departures and passengers as a result of the COVID-19 pandemic.
For the full year, we expect contracted services expense to be significantly lower than in 2019, given our ongoing cost reduction efforts and significant reduction in departures.
Selling Expense
Selling expense decreased by $153 million, or 65%, during the first nine months of 2020 compared to the same period in 2019, primarily driven by a significant reduction in distribution costs and credit card commissions. Reduced marketing spend and sponsorship costs given the continued delay in professional sports also contributed to the year-over-year decline.
We
expect full year selling expense will decrease in-line with the reduction to revenue as a result of reduced distribution costs on lower bookings, as well as reduced sponsorship and marketing costs.
Food and beverage service
Food and beverage service decreased by $89 million, or 56%, during the first nine months of 2020 compared to the same period in 2019. This decrease is primarily due to the 62% decrease in revenue passengers as compared to the prior-year period, as well as the temporary closure of the majority of our airport lounges in the second quarter of 2020 and the temporary elimination of buy-on-board service.
We expect food and beverage service to decrease as compared to 2019, consistent with our expectation of reduced passengers throughout 2020.
Third-party
Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, decreased $33 million, or 26%, during the first nine months of 2020 compared to the same period in 2019. The decrease is primarily due to a 14% decrease in SkyWest departures as compared to the prior year.
For the full year, we expect third-party regional carrier expense to be lower than 2019 due to decreased flying and reduced contractual rates.
Special Items—Merger-Related Costs
We recorded special items of $5 million in the first nine months of 2020 for merger-related costs associated with our acquisition of Virgin America, compared to $39 million in the first nine months of 2019. Costs incurred in the
first nine months of 2020 are primarily comprised of certain technology integration costs. We expect 2020 will be the final year in which we incur integration related charges.
39
Special Items - Impairment and other charges
We recorded impairment and other charges of $350 million in the first nine months of 2020, driven by our current expectation of decreased future cash flows stemming from the COVID-19 pandemic. Impairment and other charges primarily consist of the write down to fair value for ten owned Airbus A320 aircraft identified for sale, the full write-down of the operating lease assets and
related spare inventory and parts, as well as estimated lease return costs for certain leased Airbus aircraft which were permanently parked, the write-down of our owned Q400 fleet to fair value, and the full write-off of gate assets at Dallas Love Field.
Additional impairment charges may be recorded as we finalize our long-term fleet strategy.
Special Items - Restructuring charges
We recorded restructuring charges of $322 million in the first nine months of 2020 relating to the right-sizing of our workforce as a result of decreased demand and capacity stemming from the COVID-19 pandemic. Charges are primarily comprised of wages for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage, and lump-sum termination payouts.
ADDITIONAL
SEGMENT INFORMATION
Refer to Note 9 of the condensed consolidated financial statements for a detailed description of each segment. Below is a summary of each segment's profitability.
Mainline
Mainline adjusted pretax loss was $1 billion in the first nine months of 2020, compared to pretax profit of $761 million in the same period in 2019. The $1.8 billion shift to pretax loss was driven by a $3.3 billion decrease in Mainline operating revenues, offset by a $768 million decrease in Mainline non-fuel operating expense and a $743 million decrease in Mainline fuel expense.
As compared to the prior year, lower Mainline revenues are primarily attributable to a 64% decrease in traffic and a 48 point decrease in capacity, driven
by the significant reduction in demand as a result of the COVID-19 pandemic. Non-fuel operating expenses decreased significantly on cost savings driven by reduced variable costs on reduced capacity, as well as decreased wages and benefits expense from voluntary leaves of absence and a reduction in hours for management employees. Lower raw fuel prices, combined with decreased consumption from the reduction in flying, drove the decrease in Mainline fuel expense.
Regional
Regional operations generated a pretax loss of $298 million in the first nine months of 2020, compared to break-even in the first nine months of 2019. The shift to a pretax loss was attributable to a $486 million decrease in operating revenues, partially offset by a $98 million decrease in fuel costs and a $90 million decrease in non-fuel operating expenses. The decrease in regional
revenues is primarily due to the 20% decrease in capacity, spurred by the COVID-19 pandemic.
Horizon
Horizon achieved a pretax profit of $27 million in the first nine months of 2020, compared to pretax profit of $33 million in the same period in 2019, primarily due to significant cost reduction efforts implemented in response to the COVID-19 pandemic.
40
LIQUIDITY AND CAPITAL RESOURCES
As a result of the
COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, increase liquidity and help to preserve the relative strength of our balance sheet. From the onset of the pandemic, we have taken the following key actions to enhance and preserve our liquidity:
•Obtained approximately $1.1 billion in CARES Act funding to use towards payment of wages and benefits;
•Executed an agreement with the U.S. Department of the Treasury to obtain up to $1.9 billion through the CARES Act Loan program, secured by certain Mileage Plan assets and cash flow streams, 34 aircraft and 15 spare engines;
•Obtained $1.2 billion in financing through the issuance of EETC, collateralized
by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft;
•Raised $589 million in secured financing collateralized by 32 aircraft;
•Drew $400 million from existing credit facilities;
•Suspended our share repurchase program and quarterly dividend indefinitely, and;
•Reduced planned capital expenditures by nearly $550 million for 2020, including suspension of pre-delivery payments and deferral of non-essential capital projects.
Although we have no plans to access equity markets at this time, we believe our equity would be of high
interest to investors. The liquidity raised from these financings, coupled with the availability of additional liquidity and our meaningful cost reductions have provided the Company with confidence in our ability to withstand the depressed demand and prepare for the recovery ahead. Despite the significant amount of debt raised, our adjusted net debt is flat as compared to the end of 2019. We will also continue to execute additional cost restructuring initiatives in an effort to transition from a cash-burn focus towards reducing outstanding debt and repairing our balance sheet.
The table below presents the major indicators of financial condition and liquidity:
Adjusted debt, net of current portion of long-term debt
$
5,044
$
2,972
70%
Shareholders'
equity
3,454
4,331
(20)%
Total invested capital
$
8,498
$
7,303
16%
Debt-to-capitalization,
including operating leases
59
%
41
%
18 pts
(a)To best reflect our leverage at September 30, 2020, we included the short-term borrowings stemming from the COVID-19 pandemic in the above calculation, although these borrowings are classified as current in the condensed consolidated balance sheets.
41
Adjusted
net debt to earnings before interest, taxes, depreciation, amortization, special items and rent
(a)Operating income can be reconciled using the trailing twelve month operating income as filed quarterly with the SEC.
The following discussion summarizes the primary drivers of the increase in our cash and marketable securities balance and our expectation of future cash requirements.
ANALYSIS OF OUR CASH FLOWS
Cash Used in Operating Activities
For
the first nine months of 2020, net cash provided by operating activities was $116 million, compared to $1.4 billion during the same period in 2019. The $1.3 billion decrease in our operating cash flows is primarily attributable to a $793 million decline in net income, net of non-cash special items for impairment and workforce reduction. The decrease is also due to significant cash refund activity, and a decline in advance bookings as compared to the same period in the prior year, all as a result of the COVID-19 pandemic.
Cash Used in Investing Activities
Cash used in investing activities was $767 million during the first nine months of 2020, compared to $708 million during the same period of 2019. The increase to cash used in investing activities is primarily due to an increase in net purchases of marketable securities, which were $572 million
in the first nine months of 2020, compared to $218 million in the nine months ended September 30, 2019. Increased net purchases is primarily driven by additional cash on hand from borrowings and the PSP program, which allowed the Company to invest additional funds. These increases were offset by the postponement of capital expenditures in 2020 as a result of the COVID-19 pandemic.
42
Cash Used in Financing Activities
Cash from financing activities was $2.3 billion during the first nine months of 2020 compared to cash used for financing activities
of $538 million during the same period in 2019. During the first nine months of 2020, we had proceeds from debt issuances of $2.6 billion, including funding from the EETC, the loan portion of the proceeds from the PSP and $135 million drawn on the CARES Act secured term loan. These proceeds were partially offset by debt payments of $238 million, dividend payments totaling $45 million, and $31 million in common stock repurchases.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Commitments
As of September 30, 2020, we have firm orders to purchase 35 aircraft. Alaska also has cancelable purchase commitments
for 30 Airbus A320neo aircraft with deliveries from 2024 through 2026. We could incur a loss of pre-delivery payments and credits as a cancellation fee. Alaska also has options to acquire 37 B737 MAX aircraft with deliveries from 2021 through 2024, and Horizon has options to acquire 30 E175 aircraft with deliveries from 2022 through 2024. In addition to the 32 E175 aircraft currently operated by SkyWest in our regional fleet, Alaska has options in future periods to add regional capacity by having SkyWest operate up to eight more E175 aircraft. Options will be exercised only if we believe return on invested capital targets can be met over the long term.
Given the drastically reduced demand for air travel as a result of the COVID-19 pandemic, we are currently evaluating our overall fleet strategy and long-term plan. We are also in the process of negotiating with aircraft manufacturers and lessors to optimize
timing of fleet activity. It is probable that the current outlook as stated below will change significantly. This table represents anticipated fleet activity by year as of September 30, 2020:
(a)The
three B737 MAX9 aircraft previously reflected in 2020 were originally contracted for delivery in 2019 and delayed due to the MAX grounding, and have been shifted to 2020, but are not expected to enter revenue service until 2021. Seven B737 MAX9 deliveries originally contracted for 2020 have been shifted to 2021 based on our current estimate of expected delivery dates. The Company continues to discuss delivery timelines with Boeing.
(b)Actual fleet at September 30, 2020, excluding 20 Airbus aircraft permanently parked in response to COVID-19 capacity reductions.
For future firm orders and option exercises, we may finance the aircraft through cash flow from operations, long-term debt, or lease arrangements.
43
Fuel Hedge Positions
All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we are hedged against volatile crude oil price increases. During a period of decline in crude oil prices, we only forfeit cash previously paid for hedge premiums. We typically hedge up to 50% of our expected consumption. However, given the sharp decline in demand and our capacity resulting from the COVID-19 pandemic, we are currently overhedged relative to our target of 50% of consumption through the remainder of 2020. Our crude oil positions are as follows:
Approximate
Gallons Hedged (in millions)
Weighted-Average Crude Oil Price per Barrel
Average Premium Cost per Barrel
Fourth Quarter 2020
90
$64
$2
Full
Year 2020
90
$64
$2
First Quarter 2021
60
$62
$2
Second Quarter 2021
65
$60
$2
Third Quarter 2021
55
$56
$2
Fourth
Quarter 2021
35
$50
$3
Full Year 2021
215
$58
$2
First Quarter 2022
15
$51
$3
Full Year 2022
15
$51
$3
Contractual
Obligations
The following table provides a summary of our contractual obligations as of September 30, 2020. For agreements with variable terms, amounts included reflect our minimum obligations.
(in
millions)
Remainder of 2020
2021
2022
2023
2024
Beyond 2024
Total
Current and long-term debt obligations
$
73
$
1,201
$
393
$
357
$
265
$
1,568
$
3,857
Aircraft
lease commitments
88
310
276
219
166
679
1,738
Facility lease commitments
3
9
8
7
7
84
118
Aircraft
maintenance deposits
7
35
45
24
6
2
119
Aircraft purchase commitments (a)
343
549
333
192
21
25
1,463
Interest
obligations (b)
16
118
88
75
63
153
513
Other obligations (c)
39
181
185
190
197
910
1,702
Total
$
569
$
2,403
$
1,328
$
1,064
$
725
$
3,421
$
9,510
(a)Although
the Company has contractual obligations for purchase commitments in 2020, informal agreements have been reached with aircraft manufacturers to defer payments beyond 2020.
(b)For variable-rate debt, future obligations are shown above using forecasted interest rates as of September 30, 2020.
(c)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.
During the nine months ended September 30, 2020, the Company renegotiated scheduled payments with certain lessors and vendor
partners, including the reduction of minimum obligations. The Company has also deferred 2020 aircraft payments, including those related to the B737 MAX9, to periods beyond 2020. Discussions remain ongoing with aircraft manufacturers and lessors to optimize the timing of aircraft deliveries and lease returns.
Credit Card Agreements
We have agreements with a number of credit card companies to process the sale of tickets and other services. Under these agreements, there are material adverse change clauses that, if triggered, could result in the credit card companies holding back a reserve from our credit card receivables. Under one such agreement, we could be required to maintain a reserve if our credit rating is downgraded to or below a rating specified by
the agreement or our cash and marketable securities balance fell below $500 million. Under another such agreement, we could be required to maintain a reserve if our cash and marketable securities balance fell below $500 million. We are not currently required to maintain any reserve under these agreements, but if we were, our financial position and liquidity could be materially harmed.
44
Deferred Income Taxes
For federal income tax purposes, the majority of our assets are fully depreciated over a seven-year life using an accelerated depreciation method or bonus depreciation, if available. For financial reporting purposes, the majority of our assets are depreciated over 15 to 25 years
to an estimated salvage value using the straight-line basis. This difference has created a significant deferred tax liability. At some point in the future the depreciation basis difference will reverse, including via asset impairment, potentially resulting in an increase in income taxes paid.
While it is possible that we could have material cash obligations for this deferred liability at some point in the future, we cannot estimate the timing of long-term cash flows with reasonable accuracy. Taxable income or loss and cash taxes payable and refundable in the short-term are impacted by many items, including the amount of book income generated (which can be volatile depending on revenue, demand for air travel and fuel prices), usage of net operating losses, whether "bonus depreciation" provisions are available, any future tax reform efforts at the federal level, as well as other legislative changes that
are beyond our control. Given our current expectation of operating losses for the remainder of the year, we expect to file for a cash refund for the 2020 tax year.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during the three months ended September 30, 2020. For information on our critical accounting estimates, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 2, "COVID-19," for discussion about the estimates used in the
Company's impairment analyses.
GLOSSARY OF AIRLINE TERMS
Adjusted net debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
Adjusted net debt to EBITDAR - represents adjusted net debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)
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 capitalized
operating leases) 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 settled fuel-hedging contracts in the period
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 family and Airbus 321neo jets and all associated revenues and costs
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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 (CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and 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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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in market risk from the information provided in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2019.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of September 30, 2020, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our periodic reports filed with or submitted to the Securities and Exchange Commission (the SEC) is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our certifying
officers, as appropriate, to allow timely decisions regarding required disclosure. Our certifying officers concluded, based on their evaluation, that disclosure controls and procedures were effective as of September 30, 2020.
Changes in Internal Control over Financial Reporting
In the quarter ended September 30, 2020, the Company implemented a new revenue accounting system, and updated the relevant control structure. Other than this implementation, there have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30,
2020, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our internal control over financial reporting is based on the 2013 framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework).
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PART II
ITEM 1.
LEGAL PROCEEDINGS
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The
Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines.
The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal
law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The
Company believes the claims in the case are without factual and legal merit and intends to defend the lawsuit.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
ITEM 1A. RISK FACTORS
Except
for the additional risk factors below, there have been no material changes to the risk factors affecting our business, financial condition or future results from those set forth in Item 1A."Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
The global pandemic caused by COVID-19, and related measures implemented to combat its spread has had, and is expected to continue to have, a material adverse effect on the Company’s operations, financial position and liquidity.
In late 2019, an outbreak of novel coronavirus and its resulting disease (COVID-19) was detected in Wuhan, China. Since that time, COVID-19 has spread rapidly throughout the globe, including within the United
States, where over one million cases have been positively diagnosed to date. In March 2020, the President of the United States declared a national emergency in response to the rapid spread, and all markets we serve have implemented some measure of travel restriction or stay-at-home order. These orders, combined with a wariness among the public of travel by aircraft due to perceived risk of infection, have resulted in an unprecedented decline in business and leisure travel. Cancellations of conventions and conferences, sporting events, concerts and other similar events, as well as the closure of popular tourist destinations, have contributed to this decline. This reduction in demand has materially negatively impacted our revenues and results of operations. As there is no indication of when these restrictions may be lifted or when demand may return, we expect to continue to see negative impacts from the COVID-19 pandemic
on our business. Our operations could be negatively affected further if our employees are quarantined or sickened as a result of exposure to COVID-19, or if they are subject to additional governmental COVID-19 curfews or “shelter
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in place” health orders or similar restrictions. Measures restricting the ability of our airport or inflight employees to come to work may cause a further deterioration in our service or operations, all of which could negatively affect our business.
In response to the pandemic, we have implemented and continue to implement a comprehensive strategy to mitigate the impacts on our business. This strategy may itself have negative impacts on our business
and operations. One such action is the waiver of change fees and the ability to rebook travel for an extended period beyond standard rebooking terms. The loss of change fee revenue, combined with ongoing significant ticket cancellation activity, has adversely impacted our revenues and liquidity, and we expect such impacts to continue if governmental authorities extend existing travel restriction or stay-at-home orders or impose new orders or other restrictions intended to mitigate the spread of COVID-19, if businesses continue to restrict nonessential travel for their employees, or if the perceived risk of infection persists.
We have also implemented significant cash preservation and cost reduction strategies in response to the impacts of COVID-19. These strategies include, but are not limited to, capital expenditure reductions, hiring freezes, solicitation of voluntary leaves of absence and renegotiation
of contractual terms and conditions. These measures, while helpful in slowing the rate at which we utilize our cash, are not expected to fully recover the loss of cash as a result of decreased ticket sales.
The Company may also experience significant supply chain disruptions as the COVID-19 pandemic may also adversely impact our suppliers. See “Item 1A., Risk Factors – We are dependent on a limited number of suppliers for aircraft and parts” of our Annual Report on Form 10-K for further discussion of risks related to the Company’s dependence on a limited number of suppliers. Should COVID-19 cause our limited vendors to have performance problems, reduced or ceased operations, or bankruptcies, or other events causing them to be unable
to fulfill their commitments to us, our operations and business could be materially adversely affected.
At this time, we are unable to predict what impact the pandemic will have on future customer behavior. Future business travel may be impacted by widespread use of videoconferencing or the reduction of business travel budgets. Travelers may also become more reluctant in general to travel. In addition, the Company has incurred, and will continue to incur COVID-19 related costs for enhanced aircraft cleaning and additional procedures to limit transmission among employees and guests. Although these procedures are elective, the industry may in the future be subject to further cleaning and safety measures, which may be costly and take a significant amount of time to implement. These contingencies, individually
and combined, could have a material adverse impact on our business. See “Item 1A., Risk Factors – Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.” of our Annual Report on Form 10-K for further discussion of the Company’s vulnerability to a general economic downturn or recession.
We have a significant amount of debt and fixed obligations and have incurred substantial incremental debt in response to the COVID-19 pandemic. These obligations could lead to liquidity restraints and have a material adverse effect on our financial position.
We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease
and financing commitments, as well as non-cancelable commitments for airport and facility leases, maintenance and other obligations. In response to the COVID-19 pandemic, we have incurred and continue to seek new financing sources to fund our operations while demand remains at an unprecedented low level and for the unknown duration of any economic recovery period. Further, as we incur incremental obligations, issuers may require future debt agreements to contain more restrictive covenants or require additional collateral beyond historical market terms which may further restrict our ability to successfully access capital.
Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, the impacts of COVID-19, or from other risks as described in “Item 1A., Risk Factors” of our Annual Report on Form 10-K, may
prohibit us from doing so in the future and may adversely affect our overall liquidity.
We have accepted certain conditions by accepting funding under the payroll support program of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The CARES Act was signed into law on March 27, 2020, providing U.S. airlines and related businesses the ability to access liquidity in the form of grants, loans, loan guarantees and other investments by the U.S. government.
In the second quarter of 2020, the Company, Alaska Airlines, Horizon Air, and McGee entered agreements with the United States Department of the Treasury (Treasury) to secure approximately
$1 billion of funding under the CARES Act payroll support program (PSP), of which $290 million is in the form of an unsecured senior term loan payable over ten years. PSP proceeds must be used exclusively for employee payroll and benefits expenses in accordance with the terms and conditions of the PSP agreements and the applicable provisions of the CARES Act.
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In the third quarter of 2020, the Company and its airline subsidiaries entered agreements with the Treasury to obtain access to term loans of approximately $1.3 billion under the CARES Act loan program. Funds
drawn under the loan program must be secured with assets owned by Alaska Airlines or Horizon Air. In October of 2020, Treasury informed the Company it would amend these agreements to increase the total amount of available secured loan funds to $1.9 billion.
To date, the Company has drawn $135 million from the loan facility, and may, at its option, borrow additional amounts in up to two subsequent borrowings until March 31, 2021. All proceeds must be used for general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreements and the applicable provisions of the CARES Act. All borrowings are pre-payable in whole or in part and are ultimately
due and payable on September 26, 2025 (or March 28, 2025 with respect to the portion of the loan, if any, secured with certain loyalty program assets).
In addition to repayment commitments, we are subject to the following conditions under our CARES Act PSP and loan agreements:
•Alaska Airlines, Horizon Air and McGee had to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits for non-officer employees through September 30, 2020;
•Alaska Airlines and Horizon Air had to maintain DOT-prescribed levels of air service to markets they
served as of March 1, 2020, through September 30, 2020 (subject to extension through March 1, 2022);
•The Company may not repurchase its common stock or pay dividends on its common stock until the later of September 30, 2021, or one year after secured loan funds are repaid;
•The Company must meet minimum liquidity and collateral coverage ratio requirements until the secured loan funds are repaid;
•Compensation
and severance payments for officers and employees who earned more than $425,000 in total compensation in 2019 will be subject to maximum limitations through the later of March 24, 2022, or one year after secured loan funds are repaid; and
•The Company must maintain certain internal controls and records, and provide any additional reporting required by the U.S. government, relating to PSP and loan funding.
These conditions may adversely affect the Company’s profitability, our ability to negotiate favorable terms with loyalty partners, our attractiveness to investors, and our ability to compensate
at market-competitive levels and retain key personnel.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Historically, the Company purchased shares pursuant to a $1 billion repurchase plan authorized by the Board of Directors in August 2015. In March 2020, the Company suspended the share repurchase program indefinitely. When the repurchase program is restarted, the plan has
remaining authorization to purchase an additional $456 million in shares.
On September 30, 2020, the Company issued the New PSP Warrant (as defined in Item 5. “Other Information” below) to the United States Department of the Treasury (“Treasury”) in connection with the payroll support program under the Coronavirus Aid, Relief and Economic Security (CARES) Act, resulting in warrants to purchase a total of 915,929 shares of the Company’s common stock that have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $31.61 per share of common stock and will expire on the fifth anniversary of the issue date of the
warrant. Such warrants were issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).
In addition, in connection with increases on September 28, 2020 and October 30, 2020 in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, the Company may issue the Additional Loan Program Warrants (as defined in Item 5. “Other Information” below) to Treasury pursuant to the loan program, resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants
that may be issuable in connection with the loan program. A warrant to purchase 427,080 shares of the Company’s common stock was issued on September 28, 2020. Additional warrants will be issued to Treasury in conjunction with each new borrowing under the A&R Loan Agreement (as defined in Item 5. “Other Information” below). Each warrant is exercisable at a strike price of $31.61 per share of common stock and will expire on the fifth anniversary of the issue date of the warrant. Such warrants were or, when issued will be, issued to Treasury in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.
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ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
On
September 30, 2020, the Company and Treasury agreed to an increase of $28.7 million in the payroll support available to Alaska Airlines and Horizon under the payroll support program (PSP) under the CARES Act, which resulted in an increase in the unsecured term loan borrowed from Treasury by approximately $8.6 million, bringing the total amount in unsecured funds borrowed from Treasury under the payroll support program for Alaska Airlines and Horizon to approximately $280.8 million (the “New Maximum Alaska Airlines Loan Amount”). As a result of this increase, on September 30, 2020, the Company issued additional warrants to Treasury to purchase 27,258 shares of the
Company’s common stock (the “New PSP Warrant”).
In addition, on September 28, 2020, the Company, Alaska Airlines and Treasury agreed to an increase of $173 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in an initial aggregate lender commitment of $1,301 million. On October 30, 2020, the Company, Alaska Airlines and Treasury agreed to a further increase of $627 million in the aggregate principal amount that may be borrowed from Treasury pursuant to the loan program under the CARES Act, resulting in a new aggregate initial lender commitment
of $1,928 million under such program. In connection with the new aggregate initial lender commitment, Alaska Airlines, as Borrower, the Company, as Parent, the guarantors party thereto from time to time, the Treasury, as the initial lender, and Bank of New York Mellon, as administrative agent and collateral agent, entered into a Restatement Agreement (the “Restatement Agreement”) to amend and restate the Loan and Guarantee Agreement (the “A&R Loan Agreement”), and Alaska Airlines, Horizon and, in each case, the guarantors party thereto each entered into an amended and restated Pledge and Security Agreement (together, the “A&R Pledge and Security Agreements”) relating to the collateral that secure the new aggregate initial lender commitment pursuant to the A&R Loan Agreement. As a result of the increases in the aggregate initial lender commitment, additional
warrants to purchase 2,530,845 shares of the Common Stock are issuable by the Company to Treasury from time to time in connection with borrowings made pursuant to the A&R Loan Agreement (the “Additional Loan Program Warrants”), resulting in a maximum of 6,099,336 shares of the Company’s common stock subject to warrants that may be issuable in connection with the loan program.
On November 4, 2020, the Board of Directors (the “Board”) adopted resolutions (the “Resolutions”) pursuant to Section 204 of the General Corporation Law of the State of Delaware, which Resolutions ratify, confirm and approve the additional corporate actions taken on September
28, 2020, September 30, 2020 and October 30, 2020 as described above. Specifically, the Resolutions ratify, confirm and approve: (i) the New Maximum Alaska Airlines Loan Amount, the issuance to Treasury of the New PSP Warrant and the issuance of shares of the Company’s common stock upon exercise of the New PSP Warrant; and (ii) the New Initial Lender Commitment, including the execution, delivery and performance of the Restatement Agreement, the A&R Loan Agreement, the A&R Pledge and Security Agreements and all additional loan documents required to be executed or otherwise related to such agreements, as well as the transactions contemplated by such loan documents, the issuance to Treasury of the Additional Loan Program Warrants and the issuance of shares of the
Company’s common stock upon exercise of the Additional Loan Program Warrants. Pursuant to the Resolutions, the Board ratified the foregoing corporate actions because it determined that such actions may not have been approved by the Board. Any claim that the defective corporate acts or putative stock ratified by the Board are void or voidable due to the failure of authorization specified in the Resolutions, or that the Delaware Court of Chancery should declare in its discretion that the ratification thereof not be effective or be effective only on certain conditions, must be brought within 120 days from the later of the validation effective time (which is November 4, 2020), and the giving of this notice (which is deemed given on the date that this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission).
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ITEM 6.
EXHIBITS
The following documents are filed as part of this report:
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document.
Certain confidential information contained in this exhibit, marked by [***], has been omitted because it (i) is not material and it (ii) would likely cause competitive harm to the Company if it were to be publicly disclosed.
**
Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.1 filed herewith contains a list of documents applicable to the Boeing 737-890 Aircraft (other than the Aircraft bearing U.S. Registration No. N568AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed
herewith as Exhibits 4.12 and 4.13, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-890 Aircraft. Exhibit 99.1 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.12 and 4.13 with respect to the Aircraft bearing U.S. Registration No. N568AS.
***
Pursuant to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.2 filed herewith contains a list of documents applicable to the Boeing 737-990ER Aircraft (other than the Aircraft bearing U.S. Registration No. N494AS) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1,
which documents are substantially identical to those which are filed herewith as Exhibits 4.14 and 4.15, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Boeing 737-990ER Aircraft. Exhibit 99.2 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.14 and 4.15 with respect to the Aircraft bearing U.S. Registration No. N494AS.
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****
Pursuant
to Instruction 2 to Item 601 of Regulation S-K, Exhibit 99.3 filed herewith contains a list of documents applicable to the Embraer E175 LR Aircraft (other than the Aircraft bearing U.S. Registration No. N626QX) that relate to the offering of the Alaska Air Pass Through Certificates, Series 2020-1, which documents are substantially identical to those which are filed herewith as Exhibits 4.16 and 4.17, except for the information identifying the Aircraft in question and various information relating to the principal amounts of the Equipment Notes relating to such Embraer E175 LR Aircraft. Exhibit 99.3 sets forth the details by which such documents differ from the corresponding representative sample of documents filed herewith as Exhibits 4.16 and 4.17 with respect to the Aircraft bearing U.S. Registration No. N626QX.
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Dates Referenced Herein and Documents Incorporated by Reference