Business Context and Reporting Period
Company: Alaska Air Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Outstanding Shares: 26,491,618 common shares as of June 30, 2001.
The Company operates through two principal subsidiaries: Alaska Airlines, Inc. and Horizon Air Industries, Inc. The reporting period covers the second quarter and first six months of 2001. Results are significantly impacted by the adoption of SFAS 133 (Accounting for Derivative Instruments) and a special charge recorded in the prior year related to the Mileage Plan.
Key Financial Metrics
Income Statement Highlights (Six Months Ended June 30)
| Item (in millions) | 2000 | 2001 |
|---|---|---|
| Total Operating Revenues | $1,042.5 | $1,095.3 |
| Total Operating Expenses | $1,046.0 | $1,133.5 |
| Operating Loss | $(3.5) | $(38.2) |
| Net Loss | $(57.3) | $(28.4) |
| Diluted EPS (Loss) | $(2.17) | $(1.07) |
Note: 2000 Net Loss includes a $56.9 million cumulative effect of an accounting change. Excluding this, 2000 reported a loss of $0.4 million.
Balance Sheet and Liquidity (in millions)
| Item | Dec 31, 2000 | Jun 30, 2001 |
|---|---|---|
| Cash and Cash Equivalents | $101.1 | $35.7 |
| Marketable Securities | $360.6 | $334.9 |
| Total Current Assets | $805.7 | $749.4 |
| Total Current Liabilities | $710.8 | $767.5 |
| Working Capital | $94.9 | $(18.1) |
| Long-Term Debt & Capital Leases | $609.2 | $656.0 |
| Shareholders' Equity | $862.3 | $834.5 |
Cash Flow (Six Months Ended June 30, in millions)
- Operating Activities: Provided $123.7 million (2000: $152.4 million).
- Investing Activities: Used $208.4 million (2000: $151.2 million), primarily for flight equipment additions ($241.7 million).
- Financing Activities: Provided $19.3 million (2000: Used $13.8 million), driven by $136.5 million in new debt proceeds.
Material Changes vs. Prior Period
Revenue and Profitability
- Revenue Growth: Consolidated operating revenues increased 5.1% to $1,095.3 million, driven by a 6.4% increase in Alaska Airlines revenues. Horizon Air revenues remained relatively flat (+0.8%).
- Operating Loss: The Company reported an operating loss of $38.2 million for the six months ended June 30, 2001, compared to an operating loss of $3.5 million in 2000. This deterioration is largely due to increased capacity costs and lower yields.
- Yield Pressure: Alaska Airlines passenger yields decreased 1.8% in Q2 and 0.9% for the six months, attributed to a reduction in business passengers. Horizon Air yields also declined 4.6% in Q2.
- Expense Increases: Operating expenses rose 8.1% year-over-year. Significant drivers included:
- Wages and Benefits: Increased 11.4% due to fleet expansion and wage increases.
- Depreciation: Increased 29.7% due to owning 11 additional aircraft.
- Landing Fees: Increased 27.4% due to higher airport rates.
Liquidity and Capital Structure
- Cash Position: Cash and marketable securities decreased by $91.1 million to $370.6 million. Working capital turned negative, moving from a surplus of $94.9 million to a deficit of $18.1 million.
- Debt: Long-term debt increased by $46.8 million to $656.0 million following the issuance of $136.5 million in new debt to fund capital expenditures.
- Capital Expenditures: The Company spent $284.6 million on capital expenditures, including the purchase of seven new Boeing 737 aircraft.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capacity Strategy: Alaska Airlines increased capacity by 11.2% in Q2, focusing on Pacific Northwest-to-Southern California and Alaska-to-mainland routes. Horizon Air capacity remained flat.
- Cost Management: Management expects landing fee increases to continue due to airport "living wage" ordinances and facility expansions. Mileage Plan award expenses are expected to slow following changes to redemption levels effective September 1, 2001.
- Horizon Fleet Transition: Horizon Air is preparing for the delivery of CRJ 700 aircraft, delayed from January to July 2001. Costs have risen due to hiring and training, but efficiency benefits are not yet realized.
Risks and Contingencies
- Legal Proceedings:
- Oakland Maintenance Investigation: A grand jury investigation regarding 1998 maintenance activities is ongoing. The FAA has proposed a $44,000 civil penalty, currently in settlement discussions.
- Flight 261 Litigation: Lawsuits regarding the January 2000 crash seek unspecified damages. A judge ruled in May 2001 that punitive damages are not available against Alaska. Management believes the ultimate disposition is not likely to materially affect financial position.
- FAA Audit: A proposed $1 million penalty regarding maintenance and flight operations was settled for a negotiated amount.
- Accounting Changes: Adoption of SFAS 133 resulted in a $2.5 million nonoperating expense for the six months ended June 30, 2001, related to fair value changes in fuel hedge contracts. SFAS 142 (Goodwill) is expected to be adopted in 2002 with no material impact anticipated.
- Commitments: The Company has firm orders for 48 aircraft totaling approximately $1.1 billion, with deliveries scheduled through 2005.
Investor Verification Checklist
- Working Capital Deficit: Verify the sustainability of operations given the shift from positive working capital ($94.9M) to a deficit ($18.1M) and the significant drawdown in cash reserves.
- Yield Trends: Monitor the continued decline in passenger yields for both Alaska and Horizon, which is eroding revenue growth despite capacity increases.
- Debt Service: Assess the impact of increased interest expense (up $6.9 million for the six months) and the $1.1 billion in future aircraft payment commitments.
- Horizon CRJ 700 Delivery: Confirm the timeline for CRJ 700 deliveries and the associated cost/benefit realization, as delays have already impacted expenses without revenue offset.
- Legal Exposure: Track the status of the Oakland maintenance investigation and Flight 261 litigation to ensure no unexpected material liabilities arise.