Alaska Air Group, Inc. — 2010 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2010; fourth-quarter figures are also shown. Alaska Air Group operates Alaska Airlines and Horizon Air, serving more than 90 destinations. The filing was signed February 23, 2011.
Financial and operating performance
- Full year: Revenue was $3.832 billion, up 12.7% from $3.400 billion in 2009. Operating income was $471.6 million, compared with $267.4 million; net income was $251.1 million, or $6.83 diluted EPS, compared with $121.6 million, or $3.36. Operating and net margins were approximately 12.3% and 6.6%, respectively.
- Fourth quarter: Revenue was $958.5 million versus $846.1 million in Q4 2009; operating income was $119.3 million versus $52.8 million; net income was $64.8 million versus $24.1 million. Diluted EPS was $1.75 versus $0.67.
- Cash flow and capital spending: Operating cash flow was $553.7 million, up from $292.5 million. Investing activities used $295.2 million, including $183.0 million of capital expenditures. Financing activities used $333.2 million. Cash and cash equivalents declined to $89.5 million from $164.2 million, while cash and marketable securities combined rose to $1.208 billion from $1.192 billion.
- Liquidity and debt: Long-term debt, including current maturities, totaled $1.534 billion at year-end, down from $1.855 billion; long-term debt net of current maturities was $1.313 billion. Shareholders’ equity increased to $1.105 billion from $872.1 million. Two $100 million credit facilities were undrawn; the company reported compliance with their $500 million minimum unrestricted liquidity covenant.
- Margins and airline metrics: Alaska mainline load factor rose 4.0 percentage points to 83.3%; passenger revenue per available seat mile increased 7.3%, while nonfuel cost per ASM, excluding specified items, declined 5.0%. Horizon load factor rose 2.6 points to 75.7%, but reported pretax income fell to $7.6 million from $22.8 million.
Changes versus 2009
- Management attributed the $203.0 million increase in pretax income mainly to $432.5 million of higher revenue, partly offset by $242.8 million of higher fuel expense. Passenger traffic increased 9.8%; average raw fuel cost per gallon rose 27%.
- Consolidated fuel expense rose to $900.9 million from $658.1 million. Fuel represented 27% of operating expenses, compared with 21% in 2009.
- Alaska’s passenger revenue benefited from stronger traffic and load factors, ancillary fees, and increased Mileage Plan revenue. Alaska reported pretax income of $401.6 million, up from $183.8 million.
- Horizon incurred $13.2 million of restructuring and CRJ-700 transition costs. Excluding specified items, Horizon’s pretax income was $22.8 million versus $7.7 million in 2009; reported results were lower year over year.
Outlook, risks, and unusual items
- Management identified rising fuel prices as its principal 2011 concern. It expected first-quarter 2011 economic fuel cost of about $2.80 per gallon, while stating that full-year fuel costs could not be forecast with certainty. Fuel hedges covered approximately 50% of expected 2011 fuel requirements.
- Management forecast Alaska mainline nonfuel cost per ASM, excluding specified items, to decline 5%–6% in Q1 2011 and 3% for full-year 2011; expected capacity growth was 13% in Q1 and 8%–9% for the year. First-quarter advance bookings were slightly ahead of the prior year despite higher capacity.
- Horizon planned to complete its transition to an all-Q400 fleet in 2011 and move to flying entirely under Alaska capacity-purchase arrangements. Management anticipated further CRJ-700 transition charges, potentially up to $3 million per aircraft at cease-use.
- The company reported 2010 mark-to-market fuel hedge losses of $5.3 million after the filing’s stated comparison basis, versus gains of $88.8 million in 2009. Reported 2010 results also included $13.2 million of Horizon transition and restructuring costs; 2009 included $35.8 million of Alaska pilot-contract transition costs. Adjusted results are non-GAAP and should not be treated as necessarily nonrecurring.
- Key risks include fuel-price volatility, economic and demand changes, concentrated exposure to Seattle and other core markets, labor costs and negotiations, weather and operational disruptions, pension funding, supplier/vendor dependence, and substantial debt and lease commitments. The filing also describes a possible credit-card receivables reserve trigger if cash falls below $350 million; no reserve was required at year-end.
- Commitments include $3.775 billion of listed debt, lease, aircraft-purchase, interest, and other obligations as of year-end, excluding the January 2011 Boeing order from the contractual-obligations table. Including that order, firm aircraft commitments were approximately $1.151 billion. The company expected 2011 capital expenditures of $385 million.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end. Routine litigation was not expected by management to have a material effect; the filing notes an SEC inquiry involving trading in Puget Energy securities and the company’s CEO, who was cooperating voluntarily.
Important facts for investors to verify
- Reconcile reported earnings with fuel-hedge mark-to-market effects and Horizon transition charges; review the company’s non-GAAP reconciliations.
- Assess sensitivity to fuel prices, hedge coverage and settlements, and whether fares and ancillary revenue can offset higher fuel costs.
- Verify the assumptions and funding needs for pension obligations, aircraft purchases, operating leases, and the LAX Terminal 6 project.
- Monitor the Horizon all-Q400 and capacity-purchase transition, remaining CRJ-700 dispositions, and related future charges.
- Review liquidity covenant headroom and the contractual triggers that could require credit-card receivables reserves.