Alaska Air Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; quarterly figures below include the fourth quarter. Alaska Air Group operates Alaska Airlines and Horizon Air, serving passengers and cargo across the United States, Canada, and Mexico.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $4,317.8 million | $3,832.3 million |
| Operating income | $448.9 million | $471.6 million |
| Net income | $244.5 million | $251.1 million |
| Diluted EPS | $6.66 | $6.83 |
| Operating cash flow | $696.0 million | $552.7 million |
| Cash and marketable securities, year-end | $1,140.9 million | $1,208.2 million |
| Long-term debt, including current portion | $1,306.9 million | $1,534.2 million |
- Revenue rose 12.7%, driven primarily by 9.6% higher traffic and 3.3% higher yield. Passenger load factor increased to 84.5% from 82.4%.
- Operating expenses rose 15.1% to $3,868.9 million. Fuel expense increased 44.0% to $1,297.7 million; fuel represented 34% of operating expenses, compared with 27% in 2010.
- Operating margin was approximately 10.4% in 2011 versus 12.3% in 2010; net margin was approximately 5.7% versus 6.6%.
- Reported results included $38.9 million of Horizon fleet-transition costs and $30.1 million of fuel-hedge mark-to-market losses. Excluding these items, management reported adjusted net income of $287.4 million, or $7.83 per diluted share, versus $262.6 million, or $7.14, in 2010. These are non-GAAP measures.
- Capital expenditures were $387.4 million. Investing cash outflow was $403.3 million and financing cash outflow was $280.0 million.
- Year-end current assets were $1,595.5 million and current liabilities were $1,509.6 million. The company reported $200 million of revolving credit facilities with no borrowings outstanding and said it expected liquidity to cover foreseeable needs.
- The qualified defined-benefit pension plans were 81% funded, with a $306.3 million unfunded liability, versus 85% funded and $200.3 million unfunded in 2010. The company voluntarily contributed $133.3 million to defined-benefit plans in 2011.
Fourth-quarter results
Fourth-quarter operating revenue was $1,044.3 million, operating income $114.1 million, and net income $64.0 million. In fourth-quarter 2010, the respective figures were $958.5 million, $119.3 million, and $64.8 million. Thus, revenue increased while operating and net income declined modestly year over year.
Changes, outlook, and material items
- Fuel costs were the principal earnings pressure: raw fuel cost per gallon increased 36.1%, while fuel consumption rose 5.6%. Management cited crude oil prices and sharply higher West Coast refining margins.
- Non-fuel unit cost, excluding fuel and fleet-transition costs, declined 3.1% to 8.55 cents per available seat mile. Revenue per available seat mile increased 6.0% to 13.33 cents.
- Horizon completed its transition to an all-Q400 fleet and began selling all capacity to Alaska under a capacity purchase agreement effective January 1, 2011. SkyWest began flying certain routes under a separate agreement in May 2011. The change affected year-over-year segment presentation.
- For 2012, management forecast consolidated capacity growth of about 6% and full-year cost per available seat mile, excluding fuel and special items, of 8.40–8.45 cents, approximately 1.5% lower year over year. It expected first-quarter economic fuel price per gallon to be about 18% higher year over year, while noting that full-year fuel costs could not be forecast reliably.
- Management reported advance bookings indicating load factors up 2.5 percentage points in both February and March 2012, with first-quarter capacity expected to increase 3.5%. Planned 2012 capital expenditures were $455 million.
- After year-end, the board declared a two-for-one stock split, authorized a further $50 million repurchase program, and approved Horizon’s purchase and sale of Q400 aircraft. The company also announced that CEO William Ayer would become executive chairman and Alaska Airlines president Bradley Tilden would become CEO, both effective May 15, 2012.
Risks, contingencies, and unusual items
- Material business risks include volatile fuel prices, intense fare competition, economic weakness, weather and operational disruptions, labor costs and negotiations, reliance on key markets and airline partners, and dependence on aircraft and parts suppliers.
- Fixed obligations are significant: contractual obligations totaled $3,690.9 million, including debt, operating leases, aircraft purchases, interest, and other commitments. Firm aircraft orders totaled 27, with additional purchase options.
- Fuel hedges covered about half of planned fuel consumption in 2012. Hedge valuations and settlements can create earnings volatility; swap contracts may require cash outlays if market prices fall below contracted prices.
- Pension funding and expense are sensitive to discount rates and investment returns. A 0.5 percentage-point decrease in the discount rate would, according to the filing, increase the projected benefit obligation by about $119 million.
- The LAX Terminal 6 project was estimated at $235 million, with approximately $210 million expected to be reimbursed by Los Angeles World Airports. The company reported $152.1 million capitalized at year-end and described continuing accounting and cash-flow implications.
- Routine litigation was not expected by management to materially affect financial position or results. The SEC had closed its previously disclosed inquiry involving Mr. Ayer. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How sustained fuel prices and West Coast refining margins affect 2012 earnings, cash generation, and the value and effectiveness of hedge positions.
- Whether the 2012 capacity and non-fuel unit-cost forecasts are achieved, and how reported GAAP results compare with management’s adjusted measures.
- Cash requirements for aircraft commitments, Terminal 6, debt service, and pension contributions, including changes in pension funded status.
- Whether Horizon’s all-Q400 capacity-purchase model and third-party regional flying deliver the anticipated economics and service reliability.
- Potential labor, competitive, operational, and partner-airline developments, including the impact of American Airlines’ bankruptcy filing and the announced leadership transition.