Alaska Air Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 12, 2020. The company operates Alaska Airlines, Horizon Air and McGee Air Services. This is an annual report, with fourth-quarter results also disclosed.
Business context and performance
Alaska and Horizon, together with regional partners, served 115 destinations. The company carried 46.7 million passengers, up 2.0%, while capacity rose 2.0%. Virgin America integration was substantially complete during 2019.
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $8.781 billion | $8.264 billion |
| Operating income | $1.063 billion | $643 million |
| Income before tax | $1.016 billion | $585 million |
| Net income | $769 million | $437 million |
| Diluted EPS | $6.19 | $3.52 |
| Adjusted net income, non-GAAP | $798 million | $554 million |
Revenue increased 6.3%, driven mainly by passenger revenue, Saver Fare and network growth. RASM rose 4.2%; load factor was 84.1%, up 0.4 percentage points. GAAP operating margin was approximately 12.1%; management reported a 12% adjusted pretax margin. Adjusted figures exclude merger costs and mark-to-market fuel hedge adjustments; 2018 adjusted results also exclude other special items.
Fourth-quarter revenue was $2.228 billion, operating income $252 million and net income $181 million, compared with $2.064 billion, $46 million and $23 million, respectively, in fourth-quarter 2018.
Cash flow, debt and liquidity
- Operating cash flow was $1.722 billion, versus $1.195 billion in 2018. Capital expenditures were $696 million; operating cash flow less capital expenditures was approximately $1.026 billion.
- Cash and marketable securities totaled $1.521 billion at year-end, up $285 million. Shareholders’ equity was $4.331 billion.
- Long-term debt, including current maturities, was $1.499 billion, down from $2.103 billion. The company made $1.058 billion of debt payments, including $779 million of prepayments, and issued $450 million of secured debt. Debt and operating leases together were $3.207 billion; adjusted debt-to-capitalization including leases was 41%, and net adjusted debt to EBITDAR was 0.9x.
- Credit facilities totaled $516 million, with no borrowings; $116 million was secured by letters of credit. Management described approximately $400 million of lines as available.
- Shareholders received $173 million in dividends and $75 million in repurchases. The quarterly dividend was raised to $0.375 per share for 2020; management expected approximately $430 million of 2020 capital returns.
Material changes and operating trends
- Operating income increased $420 million year over year. Fuel expense fell $58 million as raw fuel cost per gallon declined, while non-fuel expenses rose 4.4% to $5.796 billion.
- Wages and benefits increased 8.2% to $2.370 billion, reflecting staffing growth, higher wage rates, new labor agreements and one-time contract costs. Medical and other benefits also rose.
- Consolidated CASM excluding fuel and special items increased 2.3% to 8.70 cents; mainline increased 3.5% to 8.00 cents. Merger-related costs declined to $44 million from $87 million.
- Mainline pretax profit rose to $993 million from $809 million. Regional improved to a $2 million pretax profit from a $100 million loss; Horizon pretax profit increased to $38 million from $27 million.
- Adoption of the new lease accounting standard in 2019 added operating lease assets of $1.711 billion and corresponding liabilities to the balance sheet; comparative 2018 amounts were not recast.
Outlook, risks and unusual items
- For 2020, management forecast 3%–4% capacity growth, approximately 2% unit-cost growth, and $125 million of incremental revenue from ongoing initiatives and merger synergies. Long-term goals are 13%–15% pretax margins and 4%–6% annual capacity growth over the business cycle. Full merger-synergy run rate was expected by 2021.
- Guidance depends on Boeing 737 MAX deliveries and return to service. The MAX remained grounded; ten deliveries were anticipated in 2020, and further delays could constrain growth. Planned 2020 capital expenditures were approximately $750 million.
- Management expected aircraft maintenance expense to increase 17%–19% in 2020, landing fees and rentals to increase 9%–12%, and wages and benefits to rise with approximately 3% FTE growth. These forecasts excluded potential new labor agreements. Fuel prices remain volatile; the filing did not provide a reliable full-year fuel-cost forecast.
- Key risks include intense fare and capacity competition, concentration of 83% of guests in Seattle, Portland and the Bay Area, fuel-price volatility, labor costs and negotiations, weather and operational disruptions, vendor and cybersecurity risks, and aircraft delivery or maintenance issues.
- A court entered an approximately $78 million judgment in a California wage-and-hour class action involving former Virgin America flight attendants. The company was appealing and recorded no loss accrual. Other routine litigation was not considered material.
- The Mileage Plan liability was approximately $2.0 billion, supported by estimates including redemption breakage and the standalone selling price of miles. The auditor identified assessment of this model as a critical audit matter. Qualified pension plans were 86% funded, with a $363 million unfunded status.
Important facts for investors to verify
- Whether MAX aircraft deliveries and the return-to-service timeline supported the 2020 capacity outlook.
- Whether planned revenue initiatives and merger synergies offset projected wage, maintenance and airport-cost increases.
- The availability and terms of liquidity facilities, including the distinction between $516 million of total facilities and approximately $400 million described as available.
- The outcome and potential financial exposure of the $78 million class-action appeal and other employment-law matters.
- The key assumptions behind the $2.0 billion Mileage Plan deferred-revenue balance and pension funding estimates.