Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.09M
2: EX-10.1 EX-10.1 Change of Control Agreement HTML 82K
3: EX-10.2 EX-10.2 Amendment No. 16 to Purchase Agreement HTML 30K
Dated April 11, 2016
4: EX-10.3 EX-10.3 Supplemental Agreement No. 18 to Purchase HTML 26K
Agreement No. 3866
5: EX-31.1 EX-31.1 Certification of Chief Executive Officer HTML 22K
6: EX-31.2 EX-31.2 Certification of Chief Financial Officer HTML 22K
7: EX-32.1 EX-32.1 Certification of Chief Executive Officer HTML 19K
8: EX-32.2 EX-32.2 Certification of Chief Financial Officer HTML 19K
15: R1 Cover HTML 70K
16: R2 Condensed Consolidated Balance Sheets HTML 160K
17: R3 Condensed Consolidated Balance Sheets HTML 35K
(Parentheticals)
18: R4 Condensed Consolidated Statements of Operations HTML 134K
19: R5 Condensed Consolidated Statements of Comprehensive HTML 79K
Operations
20: R6 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS HTML 108K
EQUITY Statement
21: R7 Condensed Consolidated Statements of Cash Flows HTML 123K
22: R8 General and Summary of Significant Accounting HTML 22K
Policies
23: R9 COVID-19 Pandemic HTML 43K
24: R10 Revenue From Contracts With Customers HTML 72K
25: R11 Fair Value Measurements HTML 88K
26: R12 Long-Term Debt HTML 43K
27: R13 Employee Benefit Plans HTML 42K
28: R14 Commitments HTML 37K
29: R15 Shareholders' Equity HTML 38K
30: R16 Operating Segment Information HTML 247K
31: R17 General and Summary of Significant Accounting HTML 21K
Policies (Policies)
32: R18 Covid-19 Pandemic (Tables) HTML 37K
33: R19 Revenue From Contracts With Customers (Tables) HTML 66K
34: R20 Fair Value Measurements (Tables) HTML 82K
35: R21 Long-Term Debt (Tables) HTML 44K
36: R22 Employee Benefit Plans (Tables) HTML 39K
37: R23 Commitments (Tables) HTML 32K
38: R24 Shareholders' Equity (Tables) HTML 35K
39: R25 Operating Segment Information (Tables) HTML 256K
40: R26 COVID-19 Pandemic, CARES Funding (Details) HTML 46K
41: R27 Covid-19 Pandemic (Details) HTML 27K
42: R28 REVENUE FROM CONTRACTS WITH CUSTOMERS - HTML 51K
Disaggregation of Revenue (Details)
43: R29 REVENUE FROM CONTRACTS WITH CUSTOMERS - Narrative HTML 34K
(Details)
44: R30 REVENUE FROM CONTRACTS WITH CUSTOMERS - Contract HTML 30K
Liabilities Activity (Details)
45: R31 Fair Value Measurements - Fair Value of Assets and HTML 79K
Liabilities (Details)
46: R32 Fair Value Measurements - Maturities for HTML 35K
Marketable Securities (Details)
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48: R34 Long-Term Debt - Schedule of Long-Term Debt HTML 124K
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49: R35 Long-Term Debt Long-Term Debt - Future Payments HTML 37K
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50: R36 Long-Term Debt - Line of Credit (Details) HTML 45K
51: R37 Employee Benefit Plans - Net Pension Expense HTML 43K
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52: R38 Commitments (Details) HTML 58K
53: R39 Shareholders' Equity, Cash Dividend (Details) HTML 19K
54: R40 Shareholders' Equity, Common Stock Repurchase HTML 28K
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55: R41 Shareholders' Equity, Accumulated Other HTML 29K
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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
iALK
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, 2020, 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.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended September 30,
(in millions)
2021
2020
Cash flows from operating activities:
Net Income
(Loss)
$
i460
$
(i877)
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
i294
i320
Stock-based
compensation and other
i35
i14
Special
items - impairment charges and other
i5
i350
Special
items - restructuring charges
(i12)
i322
Changes
in certain assets and liabilities:
Changes in deferred tax provision
i95
(i220)
Increase
in air traffic liability
i152
i171
Increase
in deferred revenue
i73
i193
Pension
contribution
(i100)
i—
Other
- net
(i101)
(i157)
Net
cash provided by operating activities
i901
i116
Cash
flows from investing activities:
Property and equipment additions:
Aircraft and aircraft purchase deposits
(i52)
(i61)
Other
flight equipment
(i78)
(i49)
Other
property and equipment
(i60)
(i94)
Total
property and equipment additions, including capitalized interest
(i190)
(i204)
Purchases
of marketable securities
(i3,413)
(i2,092)
Sales
and maturities of marketable securities
i2,669
i1,520
Other
investing activities
(i9)
i9
Net
cash used in investing activities
(i943)
(i767)
Cash
flows from financing activities:
Proceeds from issuance of debt
i363
i2,581
Common
stock repurchases
i—
(i31)
Dividends
paid
i—
(i45)
Long-term
debt payments
(i1,222)
(i238)
Other
financing activities
i34
i19
Net
cash provided by (used in) financing activities
(i825)
i2,286
Net
increase (decrease) in cash, cash equivalents, and restricted cash
(i867)
i1,635
Cash,
cash equivalents, and restricted cash at beginning of period
i1,386
i232
Cash,
cash equivalents, and restricted cash at end of the period
$
i519
$
i1,867
10
Nine
Months Ended September 30,
(in millions)
2021
2020
Cash paid during the period for:
Interest (net of amount capitalized)
$
i100
$
i38
Income
taxes
i—
i—
Non-cash
transactions:
Right-of-use assets acquired through operating leases
$
i126
i54
Reconciliation
of cash, cash equivalents, and restricted cash at end of the period
Cash and cash equivalents
$
i495
$
i1,855
Restricted
cash included in Prepaid expenses, assets held-for-sale, and other current assets
i24
i12
Total
cash, cash equivalents, and restricted cash at end of the period
$
i519
$
i1,867
11
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, 2020. 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, 2021 and the results of operations for the three and nine months ended September 30, 2021 and 2020. 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 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,
2021 are not necessarily indicative of operating results for the entire year.
NOTE 2. iCOVID-19 PANDEMIC
The public health and economic crisis resulting from the outbreak of COVID-19 in the first quarter of 2020 continues to have a significant impact on the Company.
Although the relaxation of restrictions by state and local governments and the rollout of vaccination programs have allowed for the return of demand, passenger enplanements remain below pre-pandemic levels. As a result, the Company continues to fly less capacity than it had pre-pandemic.
Beginning in 2020, the Company implemented various cost-saving initiatives, including permanently parking aircraft, restructuring the workforce through early-out and incentive leave programs, and obtaining funding available under programs offered by the U.S. Department of the Treasury (the Treasury). As demand has improved and the business has grown back toward pre-pandemic flying levels, these programs have been adjusted to meet the needs of the airline.
The impacts of these programs for the three and nine months ended September 30, 2021 are described below.
Lease Return Costs
Alaska removed 40 leased aircraft from operating service in 2020, and recorded an estimate of the expected future lease return costs for the aircraft. Lease return costs include the write off of associated maintenance deposits, as Alaska no longer expects to perform maintenance events covered by those deposits. The total net charge recorded in 2020 for aircraft that were parked amounted to $i209 million.
In the first quarter of 2021, the Company recorded an additional $i18 million in costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor, which was classified as Special items - impairment charges and other on the condensed consolidated statements of operations. The Company continues to evaluate estimated costs to return leased aircraft,
resulting in reductions to the related accrual of $i4 million in the second quarter and $i9 million in the third quarter.
The lease return cost estimates are based on the Company's best estimate of costs to return aircraft as of the date of this filing.
In the second quarter of 2021, Alaska initiated a plan to reactivate up to 12 previously parked Airbus aircraft to support Alaska's plans for restoring capacity to 100% of pre-pandemic levels by no later than summer 2022. Six of these reactivated aircraft returned to the operating fleet in the third quarter of 2021, with all 12 expected to be reactivated by the second quarter of 2022. The Company currently anticipates all aircraft that are temporarily being returned to service will be removed from operating service by the end of 2023. At this time, the
Company does not anticipate that the return to service of these aircraft will materially change estimated lease return costs previously recorded, as leases for aircraft returning to service generally expire within a near term window.
12
Workforce restructuring
The Company's subsidiaries reduced their operating workforce in 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. All employees on leave returned to work by October 2021.
In 2020, as a result of these programs, the Company recorded $i220 million in wage expense for those pilots and mechanics
on incentive leaves, ongoing medical benefit coverage and lump-sum termination payments. Throughout 2021, the Company continued to refine and update capacity expectations and training schedules, which resulted in changes to anticipated leave lengths. As a result, the Company has recorded a net benefit of $i12 million during the nine months ended September
30, 2021.
iThe table below presents a roll forward of the outstanding voluntary leave liability (in millions):
Total
voluntary leave liability balance at January 1
$
i127
Cash payments
(i99)
Charges
and adjustments
(i12)
Total voluntary leave liability balance at September 30
$
i16
/
The
outstanding accrual is for final payments for participants on an incentive leave who will not return to active employment. The Company will make the majority of the remaining cash payments associated with this liability in 2021. The balance is reflected in accrued wages, benefits and payroll taxes on the condensed consolidated balance sheet.
CARES Act Funding
During the first quarter of 2021, Alaska, Horizon, and McGee finalized agreements with the Treasury through an extension of the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act, made available under the Consolidated Appropriations Act, 2021 (PSP 2). Under PSP 2 and the supporting agreements, Alaska, Horizon and McGee received total funds of approximately $i539 million
in the first quarter of 2021. In April 2021, Alaska, Horizon and McGee received an additional $i87 million in funds made available under PSP 2.
Also in April 2021, Alaska, Horizon and McGee finalized additional agreements with the Treasury under a third round of the PSP, made available under the American Rescue Plan Act of 2021 (PSP 3). Under PSP 3 and the supporting agreements, Alaska, Horizon, and McGee received total funds of $i585 million
in the second quarter of 2021.
Of the amounts received during the nine months ended September 30, 2021, $i311 million represented unsecured debt and was recorded at par, and $i16 million
represented warrants recorded at fair value using the Black-Scholes model. Both were recorded on the condensed consolidated balance sheet. The remaining $i892 million was recorded as grant proceeds. These amounts are inclusive of additional funding of $i8 million
made available to McGee under the first installment of the PSP program (PSP 1). The grant is recorded as an offset to wages, salaries and benefits as eligible expenses are incurred. During the nine months ended September 30, 2021, the Company recognized $i914 million of the PSP grant proceeds as a wage offset. Included in this $i914 million
is approximately $i21 million for employee retention credits as provided for in the CARES Act. The Company does not expect to record any additional wage offset in 2021.
iTotal
funds contracted from the Treasury under the three Payroll Support Programs are allocated as follows (in millions):
Grants
Loans
Warrants
Total Proceeds
PSP
1
$
i757
$
i293
$
i9
$
i1,059
PSP
2
i457
i160
i9
i626
PSP
3
i431
i147
i7
i585
Total
$
i1,645
$
i600
$
i25
$
i2,270
/
13
Funds
were exclusively used for payment of employee salaries, wages and benefits. Upon receipt of the funds issued under PSP 3, certain conditions and restrictions were extended. These conditions include, but are not limited to, refraining from conducting involuntary furloughs or reducing employee pay rates through September 30, 2021 and placing limits on executive compensation and severance through April 1, 2023. The conditions also included suspension of dividends and share repurchases through September 30, 2022.
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 2020, the Company eliminated ticket change fees indefinitely from main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from the 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 level of detail within the Company’s condensed consolidated 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
iPassenger
revenue recognized in the condensed consolidated statements of operations (in millions):
Passenger ticket and ancillary services liabilities
The Company recognized Passenger revenue of $i101 million from the prior year-end air traffic liability balance for the three months ended September 30, 2021 , and $i276
million and $i484 million for the nine months ended September 30, 2021 and 2020.
Included within the air traffic liability is an outstanding liability for travel credits that guests may utilize for future travel. A high volume of credits were issued in 2020 as a result of the COVID-19 pandemic, and issuance levels in 2021 have normalized, though remain above pre-COVID levels. In April 2021, as part of
the Company's COVID-19 relief measures, travel credits that were set to expire at any point in 2021 were extended through December 31, 2021 for possible travel through November 30, 2022. As a result of improving demand, the Company has experienced increased credit redemptions in 2021. Total credits, net of breakage, included in the air traffic liability balance as of September 30, 2021 were $i324 million,
compared to $i569 million at December 31, 2020.
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 $i57 million of such receivables as of September 30, 2021 and $i48 million as of December 31,
2020. As demand for air travel remains unpredictable, the timing of recognition of mileage credits may differ from current assumptions.
iThe table below presents a roll forward of the total frequent flyer liability (in millions):
Travel
miles and companion certificate redemption - Passenger revenue
(i428)
(i272)
Miles
redeemed on partner airlines - Other revenue
(i30)
(i21)
Increase
in liability for mileage credits issued
i531
i486
Total
Deferred revenue balance at September 30
$
i2,350
$
i2,183
/
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, 2021, total cost basis for all marketable securities was $i2.7 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.
15
iFair
values of financial instruments on the condensed 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 are 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, 2021.
iMaturities 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: To estimate the fair value of all fixed-rate debt as of September 30, 2021, 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 Enhanced Equipment Trust Certificate debt is Level 2, as it is estimated using observable inputs, while the estimated fair value of $i769 million
of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.
Fixed-rate debt on the condensed consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
Assets
and Liabilities Measured at Fair Value on a 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. No material impairments were recorded during the three and nine months ended September 30, 2021.
NOTE 5. iLONG-TERM
DEBT
iLong-term debt obligations on the condensed consolidated balance sheet (in millions):
Less
debt issuance costs and unamortized debt discount
(i20)
(i33)
Total
debt
i2,650
i3,495
Less
current portion
i425
i1,138
Long-term
debt, less current portion
$
i2,225
$
i2,357
Weighted-average
fixed-interest rate
i3.6
%
i4.3
%
Weighted-average
variable-interest rate
i1.2
%
i1.9
%
/
Approximately
$i539 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at September 30, 2021, resulting in an effective weighted-average interest rate for the full debt portfolio of i3.3%.
During
the nine months ended September 30, 2021, the Company issued $i363 million of debt, comprised of $i311
million of unsecured loans from the PSP and $i54 million in proceeds from issuance of debt. Debt proceeds were offset by $i1.2 billion in
17
debt
payments. Included within total debt payments is the full repayment of the $i135 million loan from the U.S. Treasury made available under the CARES Act, $i363 million
outstanding balance on two credit facilities, and prepayment of the $i425 million 364-day term loan facility.
The $i600 million PSP
notes are unsecured senior term loans 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 PSP notes are prepayable at par without penalty.
CARES Act
In 2020, the Company finalized an agreement with the Treasury to obtain up to $i1.9 billion via a secured term loan facility. Obligations under the loan agreement were secured by assets related to, and revenues
generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by i30 aircraft and i15 spare engines. In 2020, the Company drew $i135 million
under the agreement, which was used for general corporate purposes and certain operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act. The full balance was repaid in the second quarter of 2021. In accordance with the related agreement, the facility terminated at the time of payment.
Debt Maturity
iAt September 30, 2021 long-term debt principal
payments for the next five years and thereafter are as follows (in millions):
Total
Remainder of 2021
$
i112
2022
i371
2023
i334
2024
i240
2025
i261
Thereafter
i1,352
Total
$
i2,670
/
Bank
Lines of Credit
Alaska has ithree credit facilities totaling $i486
million as of September 30, 2021. One of the credit facilities for $i150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. In October 2021, the expiry of this facility was extended to March 2025. The second credit facility for $i250
million expires in June 2024 and is secured by aircraft. These two facilities have variable interest rates based on LIBOR plus a specified margin. A third credit facility for $i86 million expires in June 2022 and is secured by aircraft.
Alaska has secured letters of credit against the third facility, but has no plans to borrow using either of the other two facilities. All credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities
balance of $i500 million. Alaska was in compliance with this covenant at September 30, 2021.
18
NOTE 6.
iEMPLOYEE BENEFIT PLANS
iNet periodic benefit costs for qualified defined-benefit plans include the following (in millions):
Pension
expense included in Nonoperating Income (Expense)
$
(i8)
$
(i1)
$
(i23)
$
(i1)
/
Alaska
made a $i100 million voluntary contribution to the defined benefit plan for its pilots during the three months ended September 30, 2021.
NOTE 7. iCOMMITMENTS
AND CONTINGENCIES
i
Future minimum payments for commitments as of September 30, 2021 (in millions):
Aircraft
Commitments(a)
Capacity Purchase Agreements (b)
Remainder of 2021
$
i60
$
i42
2022
i1,476
i173
2023
i1,681
i178
2024
i385
i183
2025
i79
i188
Thereafter
i13
i877
Total
$
i3,694
$
i1,641
(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.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 2021, Alaska had commitments to purchase i74
B737-9 MAX aircraft, with contracted deliveries between 2021 and 2024. Future minimum contractual payments for these aircraft reflect the expected delivery timing, but are also subject to change. Horizon also has commitments to purchase i12 E175 aircraft with deliveries between 2022 and 2025. In addition, Alaska has options to purchase i52
B737-9 MAX aircraft, and Horizon has options to purchase i21 E175 aircraft. Option payments are not reflected in the table above.
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.
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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. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment, again without awarding injunctive relief against Alaska. The determination of total judgment
has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $i0 and $i22
million, and holds an accrual for $i22 million in Other accrued liabilities on the condensed consolidated balance sheets.
Alaska is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to airlines pursuant to the U.S. Constitution and provisions of federal law 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. If appeal efforts
are unsuccessful, compliance with the California laws may have an adverse impact on the Company's operations and financial position.
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.
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, 2021, 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 Issuances
As additional taxpayer protection required under PSP programs, during the nine months ended September 30, 2021the
Company granted the Treasury a total of i539,508 warrants to purchase common stock. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at the Company's option, and have a five-year term.
Additionally, in conjunction with the October 2020 draw on the CARES Act Loan, the
Company granted the Treasury i427,080 warrants to purchase ALK common stock. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in stockholders' equity.
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, restricted stock units, and warrants, using the treasury-stock method. Loss per share is calculated by dividing net loss by the average number of basic shares outstanding. For the three and nine months ended September 30, 2021, 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, and 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. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three 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.
21
iOperating
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 allocation and excludes certain charges. See Note A in the accompanying pages for further information.
(c)Includes Payroll Support Program 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, 2020, 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 2021 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, 2021. 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 2021.
•Liquidity and Capital Resources—an overview of our financial position, analysis of cash flows, and relevant contractual obligations and commitments.
THIRD QUARTER REVIEW
Business
Recovery and Financial Outlook
In the third quarter of 2021, we reported our first adjusted net income since the onset of the pandemic. The strong return of demand during the summer season, coupled with solid cost control and operational performance at the top of the industry resulted in 12% adjusted pretax margin despite headwinds from the delta variant. In conjunction with these positive results, we took further steps in the third quarter to repair our balance sheet, with $541 million in debt repaid during the quarter, including the prepayment of the $425 million 364-day term loan facility. Efforts taken throughout 2021 have resulted in lowering our debt-to-capitalization ratio to 51%, a 10-point improvement from December 31, 2020.
We remain committed to returning capacity in a prudent manner
to match demand as we also work toward our goal of returning flying to 2019 levels by no later than the summer of 2022. However, we anticipate fourth quarter regional capacity will be negatively impacted due to anticipated pilot attrition at Horizon, as industry mainline carriers ramp to 2019 capacity levels and look to hire regional pilots. As a result of these factors, we anticipate flying in the fourth quarter to be 13% to 16% below the same period in 2019. Although we continue to be disciplined in matching the return of capacity with demand, and optimizing the aircraft gauge for flown routes, the delta variant has had a significant negative impact on our fourth quarter expectations and advance bookings. Given this, we anticipate fourth quarter load factors to range between 77% and 80%.
The guidance we have provided and our outlook more broadly are sensitive to health trends, exposure to variants of
the COVID-19 virus, and regulations and restrictions imposed by state, local and federal authorities. Our plans will be responsive to emerging information and the guidance we have provided above is subject to greater uncertainty than we have historically experienced. Our people continue to focus on keeping costs low, running a great operation, and welcoming guests back to travel with Next-Level Care to ensure they are safe and comfortable when they fly. These are competitive advantages we have
24
cultivated over many years that will continue to serve us well in 2021 and beyond. We are confident that we are prepared to meet the challenges ahead and that we will emerge from the pandemic a stronger and more resilient airline.
Environmental,
Social and Governance Updates
As we move beyond the impacts of the COVID-19 pandemic, we are returning our focus back to our 2025 strategic plan, which was announced in 2019. During the third quarter, we continued to make strides toward our goals of increasing our commitments to diversity, equity, and inclusion, as well as expanding our sustainability efforts. In the third quarter we formed Alaska Star Ventures, a wholly-owned entity with the purpose of identifying and investing in technologies that may accelerate Alaska's path to net zero carbon emissions. During the quarter, Alaska Airlines Foundation also awarded $260,000 in LIFT Grants to 25 nonprofits who are dedicated to providing educational and career-development programs to young people throughout their respective communities. Alaska and Horizon also announced expanded measures to invest in people, including a new internal maintenance technician
program, which will provide eligible employees with financial assistance to enhance and develop skills with the goal of becoming a certified maintenance technician.
As a reflection of the importance of the commitments made, we have tied a portion of long-term executive compensation to achievement of diversity goals. Additionally, we have incorporated a carbon emissions target into our company-wide Performance-Based Pay Plan, which we currently expect to meet.
Labor Update
In July 2021, we ratified an amended wage agreement with the International Brotherhood of Teamsters, representing Horizon Air pilots. The amended agreement contains competitive wage increases aimed at attracting and retaining pilots.
Additionally, in September 2021, Alaska Airlines engaged the National Mediation Board to assist in negotiations with Alaska's pilots, represented by the Air Line Pilots Association.
Financial Overview
Our consolidated pretax income for the third quarter of 2021 was $245 million, compared to a pretax loss of $589 million in the third quarter of 2020. The $834 million improvement is driven by an increase of $1.3 billion in operating revenue from an exponential increase in demand for air travel, coupled with a decrease of $453 million in special charges recorded for impairment and workforce restructuring. These improvements were offset by $398 million in wage offsets provided by the Payroll Support Program of the CARES Act recorded in the third quarter of 2020 which were not repeated in 2021, a $227 million increase in non-fuel operating costs, excluding
special items, and a $251 million increase in fuel expense driven by increased consumption and rising fuel costs.
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.
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, special items, 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 productivity, airport costs, maintenance costs, etc., which are more controllable by management.
25
•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 our Board of Directors in assessing quarterly and annual cost performance.
•Adjusted income before income tax (and other
items as specified in our plan documents) is an important metric for the employee annual cash incentive plan, which covers the majority of employees within the Alaska 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.
26
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.
(a)Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b)See reconciliation of this non-GAAP measure to the most directly related GAAP measure in the accompanying pages.
(c)Data presented includes information
related to flights operated by Horizon and third-party carriers.
(d)Excludes all aircraft removed from operating service. In 2021, six aircraft previously removed reentered the operating fleet, and are reflected above.
27
Given the unusual nature of 2020, we believe that some analysis of specific financial and operational results compared to 2019 provides meaningful insight. The table below includes comparative results from 2021 to 2019.
FINANCIAL
INFORMATION AND OPERATING STATISTICS - 2019 RESULTS (unaudited)
Operating
expense, excluding fuel and special items
$
1,328
$
1,476
(10)
%
3,699
$
4,295
(14)
%
Economic fuel
376
486
(23)
%
853
1,408
(39)
%
Special
items
(9)
5
(280)
%
(921)
39
NM
Total operating expenses
$
1,695
$
1,967
(14)
%
$
3,631
$
5,742
(37)
%
Total
nonoperating expense
(13)
(6)
117
%
(46)
(38)
21
%
Income (loss) before income tax
$
245
$
416
(41)
%
$
600
$
773
(22)
%
Consolidated
Operating Statistics(a):
Revenue passengers (000)
9,832
12,574
(22)
%
23,211
35,018
(34)
%
RPMs
(000,000) "traffic"
11,592
15,026
(23)
%
27,319
42,113
(35)
%
ASMs (000,000) "capacity"
14,429
17,519
(18)
%
38,238
50,006
(24)
%
Load
Factor
80.3%
85.8%
(5.5)
pts
71.4%
84.2%
(12.8)
pts
Yield
15.30¢
14.71¢
4
%
13.85¢
14.34¢
(3)
%
RASM
13.54¢
13.64¢
(1)
%
11.19¢
13.10¢
(15)
%
CASMex
9.21¢
8.43¢
9
%
9.67¢
8.59¢
13
%
FTEs
20,315
22,247
(9)
%
18,819
22,000
(14)
%
(a)2019
comparative operating statistics have been recalculated using the information presented above, and as filed in our third quarter 2019 Form 10-Q.
Our consolidated net income for the three months ended September 30, 2021 was $194 million, or $1.53 per diluted share, compared to a net loss of $431 million, or $3.49 per share, for the three months ended September 30, 2020.
Excluding the impact of the Payroll Support Program grant wage offset, special items and mark-to-market fuel hedge adjustments, our adjusted net income for the third quarter of 2021 was $187 million, or $1.47 per share, compared to an adjusted net loss of $399 million, or $3.23 per share, in the third quarter of 2020. The following table reconciles
our adjusted net income (loss) per diluted share (EPS) to amounts as reported in accordance with GAAP:
Total operating revenues increased $1.3 billion during the third quarter of 2021 compared to the same period in 2020. The changes are summarized in the following table:
Three
Months Ended September 30,
(in millions)
2021
2020
% Change
Passenger revenue
$
1,774
$
572
210
%
Mileage Plan other revenue
120
84
43
%
Cargo
and other
59
45
31
%
Total operating revenues
$
1,953
$
701
179
%
Passenger Revenue
On
a consolidated basis, Passenger revenue for the third quarter of 2021 increased by $1.2 billion, primarily driven by a significant increase in passenger traffic. In the third quarter of 2020, although we began to see rebounding demand during the summer months, traffic remained well below historical levels. This compares to the third quarter of 2021, where pent up demand for leisure travel spurred a significant increase in traffic, particularly in July and August. As we entered September, results were impacted by the rise of the delta variant, slowing demand and increasing refund activity. Despite these headwinds, quarterly load factor increased 32 points over the prior year on an 83% increase in capacity, providing meaningful increases to revenue as compared to the prior year.
Mileage Plan other revenue
On a consolidated basis, Mileage Plan other
revenue increased by $36 million, or 43%, as compared to the same prior-year period, largely due to an increase in commissions from our bank card partners driven by increased consumer spending and new card acquisitions. Performance of Mileage Plan other revenues outpaced all other revenue sources, and resulted in the best performance of the program ever in the third quarter of 2021.
Cargo and other
On a consolidated basis, Cargo and other revenue for the third quarter of 2021 increased by $14 million, or 31%, as compared to the same prior-year period. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.
OPERATING EXPENSES
Total
operating expenses increased $423 million, or 33%, compared to the third quarter of 2020. 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)
2021
2020
%
Change
Fuel expense
$
376
$
125
201
%
Non-fuel operating expenses, excluding special items
1,328
1,101
21
%
Payroll
Support Program grant wage offset
—
(398)
(100)
%
Special items - impairment charges and other
(9)
121
(107)
%
Special items - restructuring charges
—
322
(100)
%
Special
items - merger-related costs
—
1
(100)
%
Total operating expenses
$
1,695
$
1,272
33
%
30
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 increased $251 million, compared to the third quarter of 2020. The elements of the change are illustrated in the following table:
Raw fuel expense per gallon for the three months ended September 30, 2021 increased by approximately 70% due to higher 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 increase in raw fuel price per gallon during the third quarter of 2021 was primarily driven by a 70% increase in crude oil prices and a 170% increase in refining margins, when compared
to the prior year. This is coupled with an increase in consumption of 86 million gallons on an increase 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.
Gains recognized for hedges that settled during the third quarter were $21 million in 2021, compared to losses of $5 million in the same period in 2020. These amounts represent cash received from hedges at settlement, offset by cash paid for premium expense.
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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 2020 are more fully described below.
Three Months Ended September 30,
(in millions)
2021
2020
%
Change
Wages and benefits
$
578
$
495
17
%
Variable incentive pay
42
42
—
%
Aircraft
maintenance
89
84
6
%
Aircraft rent
64
74
(14)
%
Landing fees and other rentals
141
109
29
%
Contracted
services
62
36
72
%
Selling expenses
49
24
104
%
Depreciation and amortization
99
105
(6)
%
Food
and beverage service
39
14
179
%
Third-party regional carrier expense
39
29
34
%
Other
126
89
42
%
Total
non-fuel operating expenses, excluding special items
$
1,328
$
1,101
21
%
Wages and Benefits
Wages and benefits increased during the third quarter of 2021 by $83 million, or 17%, compared to 2020. The primary components of Wages and benefits are shown in the following table:
Three
Months Ended September 30,
(in millions)
2021
2020
% Change
Wages
$
433
$
356
22
%
Pension - Defined benefit plans service cost
13
11
18
%
Defined
contribution plans
33
28
18
%
Medical and other benefits
68
75
(9)
%
Payroll taxes
31
25
24
%
Total
wages and benefits
$
578
$
495
17
%
Wages increased $77 million, or 22%, on a 27% increase in FTEs. Increased wages as compared to the prior period are primarily the result of leaves of absence taken and reduction in executive pay and hours for management employees in 2020 which were not repeated in 2021. Increased expense for defined contribution plans and payroll taxes are in line with the related increase to wages.
Aircraft Rent
Aircraft rent
expense decreased by $10 million, or 14%, during the third quarter of 2021 compared to the same period in 2020 primarily the result of the full impairment taken on certain leased Airbus aircraft in 2020.
Landing fees and other rentals
Landing fees and other rentals increased by $32 million, or 29%, during the third quarter of 2021 compared to the same period in 2020 primarily due to a significant increase in departures. Increased departure-related costs were coupled by rate increases at many of our hub airports.
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Contracted Services
Contracted services increased
by $26 million, or 72%, during the third quarter of 2021 compared to the same period in 2020 driven primarily by increased departures and passengers as compared to the prior-year period as a result of the COVID-19 pandemic.
Selling Expense
Selling expense increased by $25 million during the third quarter of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions incurred with the overall increase in travel.
Food and Beverage Service
Food and beverage service increased by $25 million during the third quarter of 2021 compared to the same period in 2020. This increase is consistent with the overall increase in revenue passengers as compared to the
prior-year period, as well as the return and expansion of many of our on-board products in the third quarter of 2021.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased by $10 million, or 34%, during the third quarter of 2021 compared to the same period in 2020. The increase in expense is primarily due to increases in departures flown by SkyWest as compared to the prior-year period, offset by the final pass through of CARES Act PSP funding for SkyWest pilot and flight attendant wages.
Other expense
Other expense increased $37 million, or 42%, during the third quarter of 2021 compared to the same period in 2020. Increased expense is primarily driven by incremental
crew hotel stays and per diem, consistent with the overall increase in departures and capacity, as well as additional expense for professional services.
Special Items - Impairment and other charges
We recorded a benefit associated with impairment and other charges of $9 million in the third quarter of 2021, consisting of updated estimates for costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor.
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 adjusted pretax profit of $221 million in the third quarter of 2021, compared to a pretax loss of $463 million in the third quarter of 2020. The $684 million improvement was primarily driven by a $1 billion increase in Passenger revenues as a result of increased demand for air travel, offset by a $188 million increase in non-fuel operating costs and a $209 million increase in economic fuel cost.
Non-fuel operating expenses increased significantly, driven by increased variable costs, largely consistent with the overall increase in capacity and departures. Higher economic fuel prices, combined with a significant increase in gallons consumed, drove the increase in Mainline fuel expense.
Regional
Regional operations generated an adjusted pretax loss of $1 million in the third quarter
of 2021, compared to an adjusted pretax loss of $96 million in the third quarter of 2020. The improved pretax loss was attributable to a $174 million increase in operating revenues, partially offset by a $40 million increase in non-fuel operating expenses and a $39 million increase in fuel costs.
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Regional passenger revenue increased significantly compared to the third quarter of 2020, primarily driven by increased traffic and capacity driven by the resurgence in demand for air travel.
The increase in non-fuel operating expenses is primarily due to increased variable costs and higher CPA rates on an increase in capacity.
Horizon
Horizon
achieved adjusted pretax profit of $8 million in the third quarter of 2021 compared to $11 million in the third quarter of 2020. Decreased profit is driven by increased operating expenses, primarily driven by increased maintenance expense on the Q400 fleet as compared to the prior year.
Our consolidated net income for the nine months ended September 30, 2021 was $460 million, or $3.64 per diluted share, compared to a net loss of $877 million, or $7.12 per share, for the nine months ended
September 30, 2020.
Our adjusted net loss for the nine months ended September 30, 2021 was $287 million, or $2.27 per diluted share, compared to an adjusted net loss of $940 million, or $7.63 per diluted share, in the nine months ended September 30, 2020. The following table reconciles our adjusted net loss and adjusted diluted EPS to amounts as reported in accordance with GAAP:
Total operating revenues increased $1.5 billion, or 55%, during the first nine months of 2021 compared to the same period in 2020. The changes are summarized in the following table:
Nine
Months Ended September 30,
(in millions)
2021
2020
% Change
Passenger revenue
$
3,785
$
2,362
60
%
Mileage Plan other revenue
332
266
25
%
Cargo
and other
160
130
23
%
Total operating revenues
$
4,277
$
2,758
55
%
Passenger Revenue
On
a consolidated basis, Passenger revenue for the first nine months of 2021 increased by $1.4 billion, or 60%, on a 69% increase in passenger traffic, driven primarily by rebounding demand for leisure travel experienced in the second and third quarters of 2021. As travel restrictions were largely removed in the second quarter of 2021, passenger counts increased dramatically as compared to the prior year, with summer holiday travel approaching pre-COVID levels. These improvements were offset by the impacts of the delta variant, which slowed the return of demand primarily in September 2021.
Although the delta variant is likely to have an acute impact on October results, we expect that overall fourth quarter revenue will continue to show improvement over 2020 driven by leisure passengers traveling for the holiday season, and the gradual return of business travel.
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Mileage
Plan other revenue
On a consolidated basis, Mileage Plan other revenue increased $66 million, or 25%, in the first nine months of 2021 compared to the first nine months of 2020, due largely to an increase in commission received from our affinity card partner stemming from growing consumer spend and an increase in cardholders.
Cargo and other
On a consolidated basis, Cargo and other revenue increased $30 million, or 23%, in the first nine months of 2021 compared to the first nine months of 2020. The increase is primarily due to the return of all three freighters back to full capacity in the second quarter of 2021, coupled with increased belly cargo activity as we increase scheduled departures.
We expect that our cargo and
other revenues will be positively impacted as compared to 2020 due to similar reasons as discussed above.
OPERATING EXPENSES
Total operating expenses decreased $307 million, or 8%, compared to the first nine months of 2020. 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)
2021
2020
% Change
Fuel expense
$
853
$
568
50
%
Non-fuel operating expenses, excluding special items
3,699
3,453
7
%
Payroll
Support Program grant wage offset
(914)
(760)
20
%
Special items - impairment charges and other
5
350
(99)
%
Special items - restructuring charges
(12)
322
(104)
%
Special
items - merger-related costs
—
5
(100)
%
Total operating expenses
$
3,631
$
3,938
(8)
%
Fuel Expense
Aircraft
fuel expense increased $285 million, or 50%, compared to the nine months ended September 30, 2020. The elements of the change are illustrated in the table:
The raw fuel price per gallon increased 24% due to higher 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 increase in raw fuel price per gallon during the first nine months of 2021 was driven by a 55% increase in crude oil prices, offset by a slight decrease in refining margins.
Gains recognized for hedges that settled in the first nine months of 2021 were $28
million, compared to losses of $15 million in the same period in 2020. These amounts represent cash received from settled hedges, offset by cash paid for premium expense.
36
We expect our economic fuel cost per gallon in the fourth quarter to range between $2.25 and $2.30 per gallon based on current market West Coast jet fuel prices.
Non-fuel Expense and Non- special items
Nine
Months Ended September 30,
(in millions)
2021
2020
% Change
Wages and benefits
$
1,581
$
1,579
—
%
Variable incentive pay
109
65
68
%
Aircraft
maintenance
272
244
11
%
Aircraft rent
188
229
(18)
%
Landing fees and other rentals
414
323
28
%
Contracted
services
167
138
21
%
Selling expenses
123
83
48
%
Depreciation and amortization
294
320
(8)
%
Food
and beverage service
97
70
39
%
Third-party regional carrier expense
106
92
15
%
Other
348
310
12
%
Total
non-fuel operating expenses, excluding special items
$
3,699
$
3,453
7
%
Wages and Benefits
Wages and benefits increased during the first nine months of 2021 by $2 million. The primary components of wages and benefits are shown in the following table:
Nine
Months Ended September 30,
(in millions)
2021
2020
% Change
Wages
$
1,176
$
1,159
1
%
Pension—Defined benefit plans service cost
39
37
5
%
Defined
contribution plans
91
96
(5)
%
Medical and other benefits
192
205
(6)
%
Payroll taxes
83
82
1
%
Total
wages and benefits
$
1,581
$
1,579
—
%
Wages increased $17 million, or 1%, on a 4% increase in FTEs. Increased wages as compared to the prior period are primarily the result of pilots and employees returning from leaves of absence and incentive lines accepted in 2020. These increases were coupled with increased wages in the third quarter as we began to rebuild staffing and provide incentives to employees in response to increasing demand.
For
the full year, we expect wages and benefits will increase compared to 2020 as we increase scheduled flying and return workers from incentive leaves or other absences to align with our expectation of increased demand. Additionally, as labor shortages continue to impact many of our markets, we expect to see wage pressure as we offer premium and bonus pay to attract and retain employees.
Variable Incentive Pay
Variable incentive pay expense increased $44 million, or 68%, during the first nine months of 2021 as compared to the same period in 2020. The increase is primarily due to the expectation that higher payouts will be achieved under the Performance Based Pay Plan.
Aircraft Maintenance
Aircraft maintenance expense increased by $28
million, or 11%, during the first nine months of 2021 compared to the same period in 2020. The increase is primarily due to increased component repairs which were deferred in 2020, as well as increased power-by-the-hour expense driven by increased utilization of covered aircraft.
37
We expect full year aircraft maintenance expense to be higher than 2020 on increased aircraft utilization.
Landing fees and other rentals
Landing fees and other rentals increased by $91 million, or 28%, during the first nine months of 2021 compared to the same period in 2020, primarily due to a significant increase in departures, combined with
increased rates at certain of our hub airports.
For the full year, we expect landing fees and other rentals to increase as compared to 2020 as we continue to increase capacity and departures on increased rates at many of our hub airports.
Selling Expense
Selling expense increased by $40 million, or 48%, during the first nine months of 2021 compared to the same period in 2020, primarily driven by a significant increase in distribution costs and credit card commissions. Increased marketing spend and sponsorship costs given the return of professional sports and events also contributed to the year-over-year increase.
We expect full year selling expense will increase in-line with the increase to revenue as a result of increased
distribution costs on higher bookings, as well as increased sponsorship and marketing costs.
Third-party Regional Carrier Expense
Third-party regional carrier expense, which represents payments made to SkyWest under our CPA, increased $14 million, or 15%, during the first nine months of 2021 compared to the same period in 2020. The increase is primarily due to a 25% increase in SkyWest departures as compared to the prior year.
For the full year, we expect third-party regional carrier expense to be higher than 2020 driven by increased departures.
Special Items - Impairment and other charges
We recorded impairment and other charges of $5 million in the first nine
months of 2021, consisting of costs associated with leased aircraft that have been retired and removed from the operating fleet but not yet returned to the lessor. We continue to evaluate total estimated costs to return these permanently parked aircraft, and make updates to total expense where necessary.
Special Items - Restructuring charges
We recorded a restructuring benefit of $12 million in the first nine months of 2021 primarily as a result of issuing recall notices to pilots on incentive lines for periods earlier than were previously anticipated.
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 reported an adjusted pretax loss of $247 million in the first nine months of 2021, compared to an adjusted pretax loss of $1 billion in the same period in 2020. The $772 million improvement to pretax loss was driven by a $1.2 billion increase in Mainline operating revenues offset by a $278 million increase in Mainline fuel expense and a $160 million increase in Mainline non-fuel operating expense.
As compared to the prior year, higher Mainline revenues are primarily attributable to a 71% increase in traffic on a 41-point increase in capacity, driven by the significant increase in demand recovering from the COVID-19 pandemic. Non-fuel operating expenses increased from higher variable costs on increased capacity, as well as rising wages and benefits
expense as we expand our workforce to meet growing demand. Higher raw fuel prices, combined with increased consumption drove the growth in Mainline fuel expense.
38
Regional
Regional operations incurred an adjusted pretax loss of $207 million in the first nine months of 2021, compared to an adjusted pretax loss of $298 million in the first nine months of 2020. The decreased loss was attributable to a $278 million increase in operating revenues, offset by a $112 million increase in non-fuel operating expenses and a $75 million increase in fuel costs.
The increase to regional revenues is driven by a 58% increase in traffic
as compared to the prior-year period, also resulting in increased variable non-fuel operating expenses.
Horizon
Horizon achieved an adjusted pretax profit of $34 million in the first nine months of 2021, compared to an adjusted pretax profit of $27 million in the same period in 2020, primarily due to improved operational performance and cost management.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the COVID-19 pandemic, we have taken, and will continue to take action to reduce costs, manage liquidity and preserve the relative strength of our balance sheet. In 2020,
we took significant actions to enhance and preserve our liquidity, withstand depressed demand, and prepare for the recovery ahead. In 2021, we have achieved the following, which we believe positions us well for recovery:
•Generated positive operating cash flow of $901 million, bolstered by improved advance bookings for increased demand for air travel, and the receipt of $1.2 billion in payroll support funding from the U.S. Treasury under extensions of CARES Act programs, $892 million of which is included in operating cash flow;
•Repaid $1.2 billion in debt, including the termination of the CARES Act loan, full repayment of two outstanding lines of credit, and prepayment of the $425 million 364-day term loan facility;
•Made a $100 million voluntary contribution to the defined benefit plan for Alaska's pilots in the third quarter, boosting estimated combined funded status of all defined benefit plans to 94%;
•Finalized a previously announced amendment to the existing aircraft purchase agreement with Boeing, which significantly reduced our 2021 capital commitments and provides flexibility for timing of future deliveries and capital expenditures, and;
•Maintained low capital expenditures, which are expected to be
approximately $250 million in 2021, including renegotiated timing 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.
As the business continues to recover and maintain profitability, reducing outstanding debt, normalizing our on-hand liquidity, and strengthening our balance sheet is a high priority. Based on our fourth quarter expectations including reduced bookings driven by the delta variant and rising fuel prices, we expect to use cash flow from operations of $100 million to zero, excluding any federal income tax refunds or payments.
We believe that our current cash and marketable securities balance, combined with available sources of
liquidity, will be sufficient to fund our operations, meet our debt payment obligations, and remain in compliance with the financial debt covenants in existing financing arrangements for the foreseeable future.
39
The table below presents the major indicators of financial condition and liquidity:
Payroll Support Program grant wage offset and special items
(767)
71
Mark-to-market fuel hedge adjustments
(76)
(8)
Depreciation and amortization
394
420
Aircraft
rent
258
299
EBITDAR
$
(140)
$
(993)
Adjusted net debt to EBITDAR
(6.6x)
(1.7x)
(a)Operating Income (loss) 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.
40
ANALYSIS OF OUR CASH FLOWS
Cash Provided by Operating Activities
For the first nine months of 2021, net cash provided by operating activities was $901 million, compared to $116 million during the same period in 2020. The $785 million increase in our
operating cash flows is primarily attributable to a $1.3 billion improvement to net income, aided by the receipt and recognition of $892 million in PSP grant funding made available by the U.S. Treasury. Additionally, improvement in our operating cash flows is due to continued increases in advanced bookings and a significant reduction in refund activity when compared to the first nine months of 2020. These improvements were partially offset by a $100 million voluntary contribution to the defined benefit plan for Alaska pilots.
Cash Used in Investing Activities
Cash used in investing activities was $943 million during the first nine months of 2021, compared to $767 million during the same period of 2020. The increase to cash used in investing activities is primarily due to net purchases of marketable securities, which were $744 million in the
first nine months of 2021, compared to $572 million in the nine months ended September 30, 2020. Increased net purchases is primarily driven by additional cash on hand from the PSP program and improved operational results, allowing the Company to invest additional funds.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities was $825 million during the first nine months of 2021 compared to cash provided by financing activities of $2.3 billion during the same period in 2020. During the first nine months of 2021, we utilized cash on hand to repay $1.2 billion of outstanding long-term debt, compared to payments of $238 million during the same period in 2020. These payments were offset
by proceeds from debt issuances of $363 million, primarily a result of the loan portion of the proceeds from the CARES Act PSP, compared to $2.6 billion issued in 2020 in response to the COVID-19 pandemic.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Aircraft Commitments
As of September 30, 2021, our airlines have firm orders to purchase 86 aircraft, and firm commitments to lease 12 aircraft. Alaska also has an agreement with SkyWest Airlines to expand our long-term capacity purchase agreement by eight aircraft in 2022. Alaska also has options to acquire 52 B737-9 MAX aircraft with deliveries from 2024 through
2026, and Horizon has options to acquire 21 E175 aircraft with deliveries from 2023 through 2025. Options will be exercised only if we believe return on invested capital targets can be met over the long term.
41
The following table summarizes our anticipated fleet count by year, as of September 30, 2021:
Actual
Fleet
Anticipated Fleet Activity(a)
Aircraft
Sept 30, 2021
2021 Additions
2021 Removals
Dec 31, 2021
2022 Changes
Dec 31, 2022
2023 Changes
Dec 31, 2023
B737
Freighters
3
—
—
3
—
3
—
3
B737-700
11
—
—
11
—
11
—
11
B737-800
61
—
—
61
—
61
—
61
B737-900
12
—
—
12
—
12
—
12
B737-900ER
79
—
—
79
—
79
—
79
B737-9
MAX
7
5
—
12
31
43
32
75
A320(b)
27
4
31
(7)
24
(24)
—
A321neo
10
—
—
10
—
10
—
10
Total
Mainline Fleet
210
9
—
219
24
243
8
251
Q400
operated by Horizon(c)
32
—
—
32
—
32
—
32
E175 operated by Horizon(c)
30
—
—
30
5
35
4
39
E175
operated by third party(c)
32
—
—
32
8
40
—
40
Total Regional Fleet
94
—
—
94
13
107
4
111
Total
304
9
—
313
37
350
12
362
(a)Anticipated
fleet activity reflects intended early retirement and extensions or replacement of certain leases, not all of which have been contracted yet.
(b)Actual fleet at September 30, 2021, excluding Airbus aircraft permanently parked in response to COVID-19 capacity reductions. We have announced plans to return 12 of these aircraft to operating service. Of these aircraft, six were returned in Q3 2021, four are planned for Q4 2021 and two for 2022.
(c)Aircraft are either owned or leased by Horizon or operated under capacity purchase agreement with a third party. Under the terms of our capacity purchase agreement with a third party, in 2023 an additional spare aircraft will be leased to support the operational integrity of the network.
For
future firm orders and option exercises, we may finance the aircraft through cash flow from operations or long-term debt.
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. Our crude oil positions are as follows:
Approximate
% of Expected Fuel Requirements
Weighted-Average Crude Oil Price per Barrel
Average Premium Cost per Barrel
Fourth
Quarter 2021
50
%
$61
$3
Remainder of 2021
50
%
$61
$3
First Quarter 2022
50
%
$69
$3
Second
Quarter 2022
40
%
$69
$3
Third Quarter 2022
30
%
$73
$3
Fourth Quarter 2022
20
%
$70
$4
Full
Year 2022
34
%
$70
$3
First Quarter of 2023
10
%
$69
$4
Full Year 2023
2
%
$69
$4
42
Contractual
Obligations
The following table provides a summary of our contractual obligations as of September 30, 2021. For agreements with variable terms, amounts included reflect our minimum obligations.
(in
millions)
Remainder of 2021
2022
2023
2024
2025
Beyond 2025
Total
Current and long-term debt obligations
$
112
$
371
$
334
$
240
$
261
$
1,352
$
2,670
Aircraft
lease commitments(a)
81
292
229
172
165
656
1,595
Facility lease commitments
3
9
9
9
6
88
124
Aircraft-related
commitments(b)
60
1,476
1,681
385
79
13
3,694
Interest
obligations (c)
7
85
91
68
51
176
478
Other obligations (d)
47
184
189
195
197
898
1,710
Total
$
310
$
2,417
$
2,533
$
1,069
$
759
$
3,183
$
10,271
(a)Future
minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service, as we have remaining obligation under existing terms.
(b)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations.
(c)For variable-rate debt, future obligations are shown above using interest rates forecast as of September 30, 2021.
(d)Primarily comprised of non-aircraft lease costs associated with capacity purchase agreements.
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.
Leased Aircraft Return Costs
For many of our leased aircraft, we are
required under the contractual terms to return the aircraft in a specified state. As a result of these contractual terms, we will incur significant costs to return these aircraft at the termination of the lease. Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination. We anticipate recording material expenses and cash outflows to return aircraft beginning in 2022, as all Airbus A320 aircraft are expected to exit our fleet by
2023.
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.
43
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to our critical accounting estimates during
the three months ended September 30, 2021. 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, 2020.
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
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 and SkyWest. In this segment, Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon and SkyWest 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
44
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, 2020.
45
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021, 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, 2021.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2021, 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).
46
PART II
ITEM 1. LEGAL PROCEEDINGS
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. In February 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. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. Based on the facts and circumstances available, the Company believes the range of potential loss to be between $0 and $22 million, and holds an accrual for $22 million in Other accrued liabilities on the condensed consolidated balance sheets.
Alaska is seeking an appellate court ruling that the California
laws on which the judgment is based are invalid as applied to airlines pursuant to the U.S. Constitution and provisions of federal law 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. If appeal efforts are unsuccessful, compliance with the California laws may have an adverse impact on the Company's operations and financial position.
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 factor 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, 2020.
Mandatory vaccination programs could have a material adverse impact on the Company's
operations and financial results.
The President's executive order of September 9, 2021 requires employees of government contractors to be fully vaccinated against COVID-19 as soon as December 8, 2021, though final timelines are pending. Alaska Airlines and Horizon Air are government contractors by virtue of their agreements with the U.S. government for the carriage of passengers and mail, among other activities. McGee Air Services is subject to the executive order as a subcontractor of Alaska Airlines. Our operating subsidiaries are working to achieve compliance with the mandate. The executive order allows employers to excuse employees from the vaccination requirement only with a valid medical or religious exemption. Alaska,
Horizon and McGee operate in highly competitive job markets in which the pool of available employees is limited. Our companies, contractors and vendor partners whose services we rely on to run our operation, may lose current or prospective employees because individuals decline to be vaccinated. If our companies, contractors and vendor partners cannot fill job vacancies with other qualified workers, operational disruption and associated negative impact to guests and our financial results could result. If we cannot comply with the scope and/or timing of the executive order or similar state mandates, we could lose business and revenues associated with our government contracts.
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.
47
As of September 30, 2021, a total of 1,455,436
shares of the Company’s common stock have been issued to Treasury in connection with the payroll support program. Each warrant is exercisable at a strike price of $52.25 (49,625 shares related to PSP2) and $66.39 (221,812 shares related to PSP3) 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”).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
On November 2, 2021, the Company entered into new Change of Control Agreements with Messrs. Minicucci, Tackett and Harrison, as well as other officers of the Company and its subsidiaries. The
new Change of Control Agreements replace and supersede the change-in-control agreements that were previously in place for these officers. The new agreements with Messrs. Minicucci, Tackett and Harrison have a term of three years, with automatic one-year extensions on each anniversary of the effective date, unless the Company notifies an executive before the next occurring anniversary that the agreement will not be extended beyond the term then in effect.
Under the new agreements, if a change of control occurs, an “employment period” of three years would go into effect. During the employment period, Messrs. Minicucci, Tackett and Harrison would be entitled to the following benefits, provided that they comply with any restrictive covenants under any agreements to which they remain subject:
•The
highest monthly salary the executive received at any time during the 12-month period preceding the change in control;
•An annual incentive payment equal to the higher of the executive’s target Performance-Based Pay Plan incentive or the average of the executive’s annual incentive payments for the three years preceding the year in which the change in control occurs;
•Continued employer contributions under the Company’s DC Supplementary Retirement Plan;
•Continued participation in fringe benefit programs that are at least as favorable as those in which the executive was participating prior to the change of control;
•Travel
benefits for the executive and his spouse or domestic partner and eligible family members and dependents under the most favorable plans, policies, programs and practices of the Company as in effect for the executive at any time during the 90‑day period immediately preceding the change of control or, if more favorable to the executive, as in effect generally at any time thereafter with respect to other peer executives of the Company; and
•Within 60 days after the later of the change of control or the date on which any restrictions on the executive’s compensation pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act Restrictions”) end, (i) a lump-sum cash payment equal to any cash-based obligations
recouped by the Company pursuant to the CARES Act Restrictions, and (ii) with respect to any equity awards forfeited pursuant to the CARES Act Restrictions, a combination of shares of common stock of the Company or its successor, equity awards of the same type and subject to the same vesting schedule as the forfeited awards, and/or a cash payment equal to the fair market value of all or a portion of the shares of common stock covered by the forfeited awards (the amounts described in clauses (i) and (ii) collectively referred to as “CARES Act Restoration Payments”).
If the executive’s employment is terminated by the Company without cause or by the executive
for “good reason” during the employment period (or, in certain circumstances, if such a termination occurs prior to and in connection with a change of control), the executive would be entitled to receive:
•A lump sum payment equal to the value of the payments and benefits identified above that the executive would have received had he continued to be employed for the entire employment period (other than travel benefits and equity awards forfeited pursuant to the Cares Act Restrictions);
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•Lifetime unlimited, fee-waived, positive-space travel in any class of service for the executive and his spouse or domestic partner and eligible family
members and dependents or, if more favorable to the executive, as in effect generally at any time thereafter with respect to other peer executives of the Company; and
•In the event that the CARES Act Restrictions end and, as of the executive’s termination date, CARES Act Restoration Payments have not been paid in full, then any remaining CARES Act Restoration Payments that would otherwise be payable had the executive remained employed.
The amount an executive would be entitled to receive would be reduced on a pro-rata basis for any time the executive worked during the employment period. (The terms “cause,”“good reason” and “change in control” are each defined in the new agreements.) In the event that change of control benefits under
the new agreements exceed the threshold amount that would trigger an excise tax under Section 280G of the Internal Revenue Code, the executive would receive the larger of the following amounts:
•The “safe harbor amount,” which is equal to the level at which excise taxes are triggered; or
•The full change in control benefits if, after receipt of the full change in control benefits and payment of the excise tax, the after-tax amount is greater than the safe harbor amount referenced above.
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 portions have been redacted from this exhibit in accordance with Item 601(b)(10) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
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Dates Referenced Herein and Documents Incorporated by Reference