Alaska Air Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing reports annual results and unaudited quarterly data; Q4 figures are included below. Air Group operates Alaska Airlines and Horizon Air, with regional flying also provided by partner carriers.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Operating revenue | $5.368 billion | $5.156 billion |
| Operating income | $962 million | $838 million |
| Net income, GAAP | $605 million; diluted EPS $4.42 | $508 million; diluted EPS $3.58 |
| Adjusted net income (non-GAAP) | $571 million; diluted EPS $4.18 | $383 million; diluted EPS $2.70 |
| Operating cash flow | $1.030 billion | $981 million |
| Capital expenditures | $694 million | $566 million |
| Cash and marketable securities | $1.217 billion | $1.330 billion |
| Long-term debt, including current portion | $803 million | $871 million |
Management reported $336 million of free cash flow for 2014. Adjusted pretax margin was 17.2%, versus 12.4% in 2013; return on invested capital was 18.6%, versus 13.6%. The adjusted debt-to-capital ratio, including the present value of operating aircraft leases, was 31%, down from 35%. Air Group reported $1.2 billion of unrestricted cash and marketable securities and unused credit facilities totaling $200 million.
Q4 2014: Revenue was $1.306 billion, operating income $242 million, net income $148 million and diluted EPS $1.11. Q4 2013 results were $1.210 billion, $130 million, $78 million and $0.56, respectively.
Air Group carried 29.3 million revenue passengers. Capacity (ASMs) rose 7.1%, traffic (RPMs) rose 6.5%, and load factor decreased 0.5 percentage point to 85.1%. Consolidated revenue per ASM rose 0.9% to 14.88 cents. Fuel expense was $1.418 billion, down 3%; economic fuel cost per gallon fell 6.7% to $3.08. Non-fuel unit costs, excluding fuel and fleet transition costs, declined 1.3%.
Changes versus the prior year
- Reported revenue increased 4%; excluding the $192 million one-time mileage-plan accounting benefit recorded in 2013, revenue increased 8%. Passenger revenue increased 7% as traffic grew 6.5% and ticket yield rose 0.7%.
- Operating income increased to $962 million and GAAP net income rose to $605 million. Adjusted net income increased to $571 million from $383 million.
- Operating expenses increased 2%. Non-fuel expenses rose 6% to support 7% capacity growth, while fuel expense declined $49 million.
- Operating cash flow increased $49 million. Capital spending rose $128 million, while cash and marketable securities declined $113 million.
- Debt declined and shareholders’ equity increased to $2.127 billion. The company repurchased 7.3 million shares for $348 million and paid $68 million in dividends.
Outlook, commentary and risks
- Management cited strong 2015 demand and expected full-year capacity growth of 9%–10%, with Seattle departures expected to rise 10%. Capacity was forecast to increase about 11% in Q1 2015.
- Management expected competitive capacity overlap to increase 12% in 2015, with Delta’s overlap rising from 41% to 50%. It anticipated continued pressure on unit revenues, while expecting passenger revenue to grow with capacity.
- Management said lower fuel prices improved the outlook, but could not reliably forecast full-year fuel costs. Economic fuel price per gallon was expected to be about 41% lower in Q1 2015 than in Q1 2014. Crude-oil call options covered about 42% of expected 2015 fuel requirements; refining-margin swaps were discontinued in Q3 2014.
- Expected 2015 aircraft, equipment and property additions totaled $750 million, excluding possible option exercises. Firm aircraft purchase commitments were $2.959 billion in total across the contractual-obligations schedule. Management said liquidity and operating cash flows should fund foreseeable needs.
- Key exposures include fuel-price volatility, intense fare and capacity competition, dependence on Seattle and other core markets, economic and seasonal demand changes, weather and operational disruption, labor costs and negotiations, aircraft and supplier concentration, technology and cybersecurity risks, and aircraft safety and regulatory compliance.
- Qualified defined-benefit pension plans moved from 104% funded at year-end 2013 to 94% funded at year-end 2014, with a $133 million unfunded position. The company expected 2015 pension contributions of $30–$35 million and pension expense of approximately $28 million.
- Unusual items affected comparability: 2014 included a $20 million non-cash post-retirement plan curtailment gain and a $10 million legal-settlement gain. 2013 included a $192 million non-cash mileage-plan revenue adjustment. Adjusted results are non-GAAP measures and exclude fuel-hedge mark-to-market effects and specified items.
- The company reported routine litigation with no material liability expected, and stated that no known FAA or TSA enforcement proceedings were expected to materially affect its financial position or operating authority.
Important facts for investors to verify
- Reconcile GAAP and adjusted earnings, including fuel-hedge mark-to-market adjustments and the 2013 mileage-plan accounting item.
- Track realized fuel costs, hedge coverage and premiums, and the sensitivity of results to crude-oil and refining-margin changes.
- Assess whether forecast 2015 capacity growth can be absorbed without further weakening load factors, yields or unit revenue amid stronger competition.
- Review aircraft capital commitments, operating leases and debt service against cash generation and the company’s liquidity covenant requirements, including the $500 million minimum cash and securities threshold in credit facilities.
- Monitor pension funded status and assumptions, as well as the $730 million Mileage Plan liability and deferred-revenue balance, which depend on estimates including mileage breakage.
- Confirm the timing and execution of fleet deliveries, Seattle growth, and expected increases in maintenance, depreciation, labor and contracted-service costs.