Business Context and Reporting Period
Company: Alaska Air Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Context: The filing covers the second quarter and first six months of 2002. The financial statements for the prior year (2001) and the first quarter of 2002 have been restated due to changes in accounting policies regarding leased aircraft return costs and internally developed software. The independent public accountants have not yet completed their review of the restated statements due to the complexity of the restatement.
Key Financial Metrics
Income Statement (Six Months Ended June 30, 2002)
| Metric | 2002 (Restated) | 2001 (Restated) |
|---|---|---|
| Total Operating Revenues | $1,071.0 million | $1,095.3 million |
| Total Operating Expenses | $1,128.9 million | $1,137.2 million |
| Operating Loss | $(57.9) million | $(41.9) million |
| Net Loss | $(38.6) million | $(30.8) million |
| Diluted Loss Per Share | $(1.45) | $(1.16) |
Balance Sheet (As of June 30, 2002)
| Metric | June 30, 2002 | Dec 31, 2001 (Restated) |
|---|---|---|
| Cash and Cash Equivalents | $269.9 million | $490.3 million |
| Marketable Securities | $437.0 million | $170.4 million |
| Total Current Assets | $1,013.0 million | $925.4 million |
| Total Assets | $2,988.2 million | $2,943.2 million |
| Total Current Liabilities | $817.1 million | $763.1 million |
| Long-Term Debt & Capital Leases | $852.1 million | $847.9 million |
| Shareholders' Equity | $820.5 million | $849.2 million |
Cash Flow (Six Months Ended June 30, 2002)
- Net Cash Provided by Operating Activities: $81.6 million (down from $126.8 million in 2001).
- Net Cash Used in Investing Activities: $(309.2) million (primarily purchases of marketable securities and flight equipment).
- Net Cash Provided by Financing Activities: $7.2 million.
- Net Change in Cash: Decrease of $220.4 million.
Material Changes vs. Prior Period
- Restatement Impact: Prior period financials were restated, resulting in a $28.9 million increase in shareholders' equity as of December 31, 2001. This was due to changes in accounting for lease return costs and software development.
- Revenue Decline: Consolidated operating revenues decreased 2.2% year-over-year for the six-month period, driven by a 3.2% drop in passenger revenue and a 14.1% drop in freight/mail revenue.
- Widened Operating Loss: Operating loss increased from $41.9 million in 2001 to $57.9 million in 2002. This was primarily driven by Alaska Airlines, where the operating loss widened by $18.2 million.
- Fuel Costs: Despite a 19.8% decrease in fuel cost per gallon, total fuel expense decreased 19.4% for Alaska and 34.7% for Horizon due to lower consumption rates and fleet efficiency.
- Nonoperating Gains: The company recognized an $8.6 million gain on fuel hedging contracts in the first half of 2002, compared to a $2.5 million loss in the same period in 2001.
Guidance, Outlook, and Risks
Management Commentary
- Market Conditions: Management cites the September 11, 2001 terrorist attacks, a slowing economy, and reduced business travel as primary drivers for lower yields and load factors.
- Cost Management: The company implemented a 100% incentive-based travel agent commission program in June 2002, expected to save approximately $17 million for the remainder of the year.
- Government Compensation: Alaska expects to receive up to $85 million in total compensation under the Air Transportation Safety and System Stabilization Act; $71.6 million has been recognized as of June 30, 2002. Horizon expects $9.8 million total.
Risks and Contingencies
- Goodwill Impairment: The company adopted SFAS No. 142 and completed the first step of a goodwill impairment test. Results indicate potential impairment for both Alaska and Horizon reporting units. The second step to quantify the impairment is expected to be completed in Q4 2002; the amount is currently unestimable.
- Litigation: Ongoing litigation related to Flight 261 (January 2000). Management believes the ultimate disposition is not likely to materially affect financial position, but this is subject to litigation risks.
- Labor Negotiations: Major labor contracts for pilots, mechanics, and flight attendants are amendable in late 2002 and early 2003. Negotiations have begun or are expected to begin soon.
- Capital Commitments: The company has firm orders for 26 aircraft totaling approximately $721 million, with deliveries scheduled through 2005.
Investor Verification Checklist
- Restatement Review: Verify the final reviewed financial statements once the independent accountants complete their review, as the current filing is unaudited and subject to amendment.
- Goodwill Impairment Charge: Monitor Q4 2002 filings for the quantification of the potential goodwill impairment charge, which could significantly impact net income.
- Labor Contract Outcomes: Track the results of upcoming negotiations with the International Association of Machinists (COPS), AMFA (mechanics), and Association of Flight Attendants, as these could materially impact future wage costs.
- Government Compensation Finalization: Confirm the final amount of compensation received from the U.S. Department of Transportation under the 9/11 stabilization act.
- Liquidity Position: Monitor cash burn rates given the $220.4 million decrease in cash and cash equivalents over the first half of the year, despite a strong cash position of $706.9 million (including marketable securities).