Alaska Air Group, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Alaska Air Group operates Alaska Airlines and Horizon Air, serving 95 cities with regional airline partners.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Operating revenue | $4.657 billion | $4.318 billion |
| Operating income | $532 million | $449 million |
| Income before tax | $514 million | $394 million |
| Net income | $316 million | $245 million |
| Diluted EPS | $4.40 | $3.33 |
| Operating cash flow | $753 million | $696 million |
| Capital expenditures | $518 million | $387 million |
| Cash and marketable securities at year-end | $1.252 billion | $1.141 billion |
| Total long-term debt, including current portion | $1.032 billion | $1.307 billion |
| Shareholders’ equity | $1.421 billion | $1.174 billion |
- Revenue increased 8%; operating income rose 18%, while net income increased 29%.
- GAAP net income was $316 million. Adjusted net income, a company-defined non-GAAP measure excluding fuel hedge mark-to-market effects and specified special charges, was a record $339 million, or $4.73 per diluted share, versus $287 million, or $3.92, in 2011.
- Operating expenses increased 7% to $4.125 billion. Fuel expense rose 12% to $1.459 billion and accounted for 35% of operating expenses. Non-fuel unit costs, excluding specified items, fell 0.8%.
- Passenger traffic grew 7.9% and capacity 6.1%; load factor increased 1.4 percentage points to a record 85.9%. Passenger revenue was $4.030 billion.
- Fourth-quarter revenue was $1.132 billion versus $1.044 billion in 2011; operating income was $74 million versus $114 million, and net income was $44 million versus $64 million.
- Cash from operations was $753 million; investing activities used $645 million and financing activities used $88 million. The company repaid $275 million of debt and repurchased $60 million of stock during the year.
- Qualified defined-benefit pension plans were 82% funded, with a $335 million unfunded liability. Pension contributions in 2012 were $110 million, despite no required contribution.
Material changes versus the prior year
- Higher revenue mainly reflected 7.9% traffic growth and a 0.7% increase in yield. Mainline passenger revenue rose 10%; regional passenger revenue increased 5%, with regional yield pressured by competition.
- Fuel expense increased $161 million, reflecting 6.0% higher consumption and higher raw fuel prices, as well as hedge accounting effects. Economic fuel cost was $3.37 per gallon versus $3.18.
- Non-fuel expenses rose 4%, including increases in wages and benefits, maintenance, and depreciation. The 2011 period included $39 million of Horizon fleet-transition costs; none were recorded in 2012.
- Debt declined by $275 million on the balance sheet, while cash and marketable securities increased by $111 million. Adjusted debt-to-capital, including capitalized operating leases, improved to 54% from 62%.
Outlook, risks and unusual items
- For 2013, management forecast consolidated capacity growth of about 7.5%, with full-year non-fuel unit costs, excluding special items, down about 1%. First-quarter capacity was expected to increase about 8.5%; non-fuel unit costs were forecast flat year over year.
- Management expected 2013 wages and benefits to increase 6%–7%, maintenance costs about 10%, and variable incentive pay of approximately $60 million if performance targets were met. Full-year fuel cost could not be forecast with certainty; first-quarter economic fuel cost per gallon was expected to be about 3% higher year over year.
- Advance bookings indicated first-quarter 2013 load factors up 0.5 points in February and flat in March versus 2012, on expected capacity growth of 8.5%.
- The company had firm commitments for 71 Boeing 737 aircraft through 2022 and options for additional aircraft. Expected property and equipment additions were $460 million in 2013; exercising options could materially increase future capital spending.
- Key risks include volatile fuel prices, intense competition (especially low-cost carriers), labor negotiations, economic weakness, weather and operational disruption, dependence on Seattle and other key markets, and reliance on vendors, technology systems, aircraft suppliers and alliance partners.
- The Sea-Tac terminal lease expired December 31, 2012; negotiations over a new lease had not succeeded. The filing states the resolution process would not interrupt the company’s tenancy, but rates and any challenge to the Port’s resolution remained uncertain.
- Open labor matters included negotiations with Alaska and Horizon flight attendants and Alaska pilots. Management identified competition and unsigned labor agreements as major concerns.
- Fuel hedge mark-to-market losses were $38 million in 2012 versus $30 million in 2011. Management cautions that adjusted results are non-GAAP and should not be assumed to be non-recurring or unusual.
- Management stated available liquidity and expected cash flows would be sufficient for foreseeable operations. Two $100 million credit facilities were undrawn; each has a minimum unrestricted cash and marketable securities requirement of $500 million.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile record adjusted earnings of $339 million with GAAP net income of $316 million, including the treatment of fuel hedge mark-to-market adjustments.
- Assess whether planned capacity growth and aircraft investment can sustain load factors, yields and cost reductions amid competition and fuel-price volatility.
- Monitor 2013 capital spending, debt repayment, liquidity and the extent to which aircraft options are exercised or financed.
- Track labor negotiations, the Sea-Tac lease-setting process, pension funding and the risk of additional cash contributions.
- Consider the fourth-quarter declines in operating income and net income against annual growth and the company’s seasonal earnings pattern.