EX-99.1 2 ex99110202016earningsrelea.htm THIRD QUARTER 2016 EARNINGS RELEASE Exhibit


Exhibit 99.1
alaskaairgrouplogoa06.jpg

October 20, 2016
Contact:
 
Investor contact:
Media Relations
 
Lavanya Sareen
(206) 304-0008
 
Managing Director, Investor Relations
 
 
(206) 392-5656

Alaska Air Group reports third quarter 2016 results
Financial Highlights:
•
Reported net income for the third quarter under Generally Accepted Accounting Principles (GAAP) of $256 million or $2.07 per diluted share, compared to net income of $274 million, or $2.14 per diluted share in 2015.
•
Reported adjusted diluted earnings per share of $2.20, a 2% increase over the third quarter of 2015. Third quarter net income, excluding special items, was $272 million, a 2% decrease from the third quarter of 2015. This quarter's results exceed First Call analyst consensus estimate of $2.09 per share.
•
Paid 27.5¢ per-share quarterly cash dividend in the third quarter, a 38% increase over the dividend paid in the third quarter of 2015.
•
Generated approximately $1.2 billion of operating cash flow and $700 million of free cash flow for the nine months ending September 30, 2016.
•
Achieved 24.8% adjusted pre-tax margin on a trailing 12-month basis.
•
Achieved return on invested capital of 24.4% for the 12-month period ending September 30, 2016.
•
Held $3.2 billion in unrestricted cash and marketable securities as of September 30, 2016.

Planned Acquisition of Virgin America:
•
Announced proposed acquisition of Virgin America on April 4, 2016.
•
Raised approximately $1.5 billion of funding in anticipation of the proposed acquisition of Virgin America.
•
Recorded special items of $22 million in the third quarter for merger-related costs.
Year-To-Date Accomplishments and Highlights:
•
Became the first major U.S. airline to receive approval from the Federal Aviation Administration for its Safety Management System.
•
Ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in 2016 by J.D. Power for ninth year in a row.
•
Ranked "Highest in Customer Satisfaction with Airline Loyalty Rewards Programs" in 2016 by J.D. Power for the third consecutive year.
•
Ranked first in the U.S. News & World Report's list of Best Airline Rewards Programs for the second consecutive year.
•
Announced enhanced benefits to the Alaska Airlines Visa Signature credit card and the Alaska Airlines Visa Business credit card including the elimination of foreign transaction fees and increased bonus miles.
•
Announced a new codeshare agreement and frequent flier partnership with Japan Airlines, providing Alaska customers seamless travel and mileage earning opportunities.

1


•
Ranked among Forbes' 2016 "America's Best Employers."
•
Held the No. 1 spot in U.S. Department of Transportation on-time performance among the six largest U.S. airlines for the 12 months ended August 2016.
•
Received the Department of Defense 2016 Freedom Award, the highest recognition given to employers by the U.S. government for their support of National Guard and Reserve members.
•
Received 15th Diamond Awards of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon's aircraft technicians for their commitment to training.
•
Earned first place in the commercial aviation division and first place overall at the 2016 Annual International Aerospace Maintenance Competition, surpassing over 50 teams from around the world.
•
Named the No. 1 cargo carrier by Logistics Management magazine, as part of its annual Quest for Quality awards.
•
Joined the Standard and Poor's 500 Index. Companies included in the S&P 500 are chosen by the S&P Index Committee based on their size, earnings history and liquidity, among other factors.
•
Ranked among the Fortune 500 for the third year in a row.
•
Flew the first commercial flight using sustainable alcohol-to-jet biofuel made from U.S. grown corn, continuing Alaska's commitment to reduce its carbon emissions.
•
Ranked among the top "green companies" in the United States by Newsweek.
•
Received the Seattle-Tacoma International Airport Green Gateway Environmental Excellence Award for the second year in a row, as a result of efforts in reducing emissions, recycling and waste reduction and lowered energy consumption.

New routes announced in the third quarter were as follows:
New Non-Stop Routes Announced (Launch Dates)
Portland, Oregon to Newark, New Jersey (11/10/16)
San Diego to Newark, New Jersey (11/21/16)
Portland to Sun Valley, Idaho (12/17/16)
Los Angeles to Havana, Cuba (1/5/17) (a)
San Jose, California to Newark, New Jersey (3/12/17)
Seattle to Wichita, Kansas (4/13/17)
Seattle to Indianapolis, Indiana (5/11/17)
(a) Pending final Department of Transportation (DOT) approval.

SEATTLE — Alaska Air Group, Inc., (NYSE: ALK) today reported third quarter 2016 GAAP net income of $256 million, or $2.07 per diluted share, compared to $274 million, or $2.14 per diluted share in the third quarter of 2015. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported record adjusted net income of $272 million, or $2.20 per diluted share, compared to adjusted net income of $277 million, or $2.16 per diluted share, in 2015.

“We had a fantastic quarter operationally and financially. I want to thank both our employees and customers,” said Alaska Airlines Chairman and CEO Brad Tilden.  “All of us at Alaska are fully focused on completing our merger with Virgin America, while continuing to work together to be the best airline we can possibly be for our customers.”


2


The following table reconciles the company's reported GAAP net income and earnings per diluted share (Diluted EPS).
 
Three Months Ended September 30,
 
2016
 
2015
(in millions, except per-share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Reported GAAP net income
$
256

 
$
2.07

 
$
274

 
$
2.14

Mark-to-market fuel hedge adjustments
3

 
0.02

 
5

 
0.04

Special items - merger-related costs
22

 
0.18

 
—

 
—

Income tax effect
(9
)
 
(0.07
)
 
(2
)
 
(0.02
)
Non-GAAP adjusted income and per-share amounts
$
272

 
$
2.20

 
$
277

 
$
2.16


 
Nine Months Ended September 30,
 
2016
 
2015
(in millions, except per-share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Reported GAAP net income
$
700

 
$
5.63

 
$
657

 
$
5.05

Mark-to-market fuel hedge adjustments
(9
)
 
(0.07
)
 
(1
)
 
(0.01
)
Special items - merger-related costs
36

 
0.29

 
—

 
—

Income tax effect
(10
)
 
(0.08
)
 
—

 
—

Non-GAAP adjusted income and per-share amounts
$
717

 
$
5.77

 
$
656

 
$
5.04


Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the third quarter results will be simulcast online at 8:30 a.m. Pacific time on October 20, 2016. It can be accessed through the company's website at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.









3


Forward-Looking Statements
This communication contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended.  These statements relate to future events, Alaska Air Group and the proposed merger of Virgin America with a wholly owned subsidiary of Alaska Air Group. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward-looking terminology such as “believe,” “ expect,” “may,” “likely,” “should,” “project,” “could,” “plan,” “goal,” “potential,” “pro forma,” “seek,” “estimate,” “intend” or “anticipate” or the negative thereof or comparable terminology, and include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of announced transactions, and statements about the future performance, operations and services of Alaska Air Group. Alaska Air Group cautions readers not to place undue reliance on these statements. These forward-looking statements are subject to a variety of risks and uncertainties. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks and uncertainties include the following: delay in closing the merger or the possibility of non-consummation of the merger; labor costs and relations; general economic conditions; increases in operating costs including fuel; competition; inability to meet cost reduction goals; seasonal fluctuations in our financial results; an aircraft accident; and changes in laws and regulations. These risks and others relating to Alaska Air Group and the proposed merger are described in greater detail in Alaska Air Group’s SEC filings, including Alaska Air Group’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as well as in other documents filed by Alaska Air Group with the SEC after the date thereof. Alaska Air Group makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances occurring or existing after the date any forward-looking statement is made.

###


Alaska Airlines, together with its regional partners, flies 32 million customers a year to more than 110 cities with an average of 970 daily flights throughout the United States, including Hawaii, Canada, Costa Rica, and Mexico. With Alaska’s 17 global airline partners, customers can earn and redeem miles to more than 800 destinations worldwide. Onboard, customers are invited to make the most of their flight with amenities like power outlets at every seat, streaming entertainment direct to your device, Wi-Fi and an inspired food and beverage selection featured on most flights. Alaska Airlines ranked “Highest in Customer Satisfaction Among Traditional Carriers in North America” in the J.D. Power North American Airline Satisfaction Study for nine consecutive years from 2008 to 2016. Alaska Airlines Mileage Plan also ranked “Highest in Customer Satisfaction with Airline Loyalty Rewards Programs” in the J.D. Power Airline Loyalty/Rewards Program Satisfaction Report for the last three consecutive years. Alaska Airlines is a subsidiary of Alaska Air Group (NYSE: ALK). Learn more on the airline’s newsroom, blog, alaskaair.com, @AlaskaAir, facebook.com/alaskaairlines and linkedin.com/company/alaska-airlines.

###

4


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(in millions, except per-share amounts)
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,073

 
$
1,057

 
2
 %
 
$
3,036

 
$
2,977

 
2
 %
 
Regional
249

 
240

 
4
 %
 
682

 
638

 
7
 %
 
Total passenger revenue
1,322

 
1,297

 
2
 %
 
3,718

 
3,615

 
3
 %
 
Freight and mail
31

 
30

 
3
 %
 
82

 
83

 
(1
)%
 
Other - net
213

 
188

 
13
 %
 
607

 
523

 
16
 %
 
Total Operating Revenues
1,566

 
1,515

 
3
 %
 
4,407

 
4,221

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Wages and benefits
340

 
312

 
9
 %
 
1,008

 
923

 
9
 %
 
Variable incentive pay
31

 
32

 
(3
)%
 
95

 
90

 
6
 %
 
Aircraft fuel, including hedging gains and losses
225

 
245

 
(8
)%
 
593

 
741

 
(20
)%
 
Aircraft maintenance
64

 
67

 
(4
)%
 
197

 
182

 
8
 %
 
Aircraft rent
25

 
26

 
(4
)%
 
80

 
78

 
3
 %
 
Landing fees and other rentals
89

 
80

 
11
 %
 
232

 
217

 
7
 %
 
Contracted services
63

 
54

 
17
 %
 
183

 
157

 
17
 %
 
Selling expenses
58

 
53

 
9
 %
 
162

 
160

 
1
 %
 
Depreciation and amortization
101

 
81

 
25
 %
 
281

 
236

 
19
 %
 
Food and beverage service
31

 
30

 
3
 %
 
93

 
83

 
12
 %
 
Third-party regional carrier expense
25

 
20

 
25
 %
 
72

 
52

 
38
 %
 
Other
92

 
82

 
12
 %
 
267

 
259

 
3
 %
 
Special items - merger-related costs
22

 
—

 
NM

 
36

 
—

 
NM

 
Total Operating Expenses
1,166

 
1,082

 
8
 %
 
3,299

 
3,178

 
4
 %
 
Operating Income
400

 
433

 
(8
)%
 
1,108

 
1,043

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
7

 
5

 
 
 
20

 
16

 
 
 
Interest expense
(11
)
 
(10
)
 
 
 
(33
)
 
(32
)
 
 
 
Interest capitalized
6

 
9

 
 
 
21

 
25

 
 
 
Other - net
—

 
—

 
 
 
(2
)
 
1

 
 
 
Total Nonoperating Income (Expense)
2

 
4

 
 
 
6

 
10

 
 
 
Income Before Income Tax
402

 
437

 
 
 
1,114

 
1,053

 
 
 
Income tax expense
146

 
163

 
 
 
414

 
396

 
 
 
Net Income
$
256

 
$
274

 
 
 
$
700

 
$
657

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
2.08

 
$
2.15

 
 
 
$
5.66

 
$
5.08

 
 
 
Diluted Earnings Per Share:
$
2.07

 
$
2.14

 
 
 
$
5.63

 
$
5.05

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares Used for Computation:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
123.149

 
127.308

 
 
 
123.648

 
129.231

 
 
 
Diluted
123.833

 
128.205

 
 
 
124.393

 
130.200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividend declared per share:
$
0.275

 
$
0.20

 
 
 
$
0.825

 
$
0.60

 
 
 

5


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
(in millions)
September 30, 2016

 
December 31, 2015

Cash and marketable securities
$
3,226

 
$
1,328

 
 

 
 

Total current assets
3,600

 
1,663

Property and equipment-net
5,031

 
4,802

Other assets
68

 
65

Total assets
8,699

 
6,530

 
 
 
 
Air traffic liability
785

 
669

Current portion of long-term debt
275

 
114

Other current liabilities
1,063

 
1,022

Current liabilities
2,123

 
1,805

Long-term debt
1,861

 
569

Other liabilities and credits
1,851

 
1,745

Shareholders' equity
2,864

 
2,411

Total liabilities and shareholders' equity
$
8,699

 
$
6,530

 
 

 
 

Debt-to-capitalization ratio, adjusted for operating leases(a)
45%

 
27%

 
 

 
 

Number of common shares outstanding
123.266

 
125.175

(a) 
Calculated using the present value of remaining aircraft lease payments.



6


OPERATING STATISTICS SUMMARY (unaudited)
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Consolidated Operating Statistics:(a)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
9,054
 
8,616
 
5.1%
 
25,536
 
23,956
 
6.6%
RPMs (000,000) "traffic"
9,601
 
8,878
 
8.1%
 
27,569
 
25,052
 
10.0%
ASMs (000,000) "capacity"
11,212
 
10,368
 
8.1%
 
32,728
 
29,574
 
10.7%
Load factor
85.6%
 
85.6%
 
—
 
84.2%
 
84.7%
 
(0.5)pts
Yield
13.77¢
 
14.61¢
 
(5.7)%
 
13.49¢
 
14.43¢
 
(6.5)%
PRASM
11.79¢
 
12.51¢
 
(5.8)%
 
11.36¢
 
12.22¢
 
(7.0)%
RASM
13.97¢
 
14.61¢
 
(4.4)%
 
13.47¢
 
14.27¢
 
(5.6)%
CASM excluding fuel and special items(b)
8.20¢
 
8.07¢
 
1.6%
 
8.16¢
 
8.24¢
 
(1.0)%
Economic fuel cost per gallon(b)
$1.58
 
$1.82
 
(13.2)%
 
$1.47
 
$1.97
 
(25.4%)
Fuel gallons (000,000)
140
 
132
 
6.1%
 
410
 
377
 
8.8%
ASM's per gallon
80.1
 
78.5
 
2.0%
 
79.8
 
78.4
 
1.8%
Average number of full-time equivalent employees (FTE)
14,674
 
14,003
 
4.8%
 
14,500
 
13,690
 
5.9%
 
 
 
 
 
 
 
 
 
 
 
 
Mainline Operating Statistics:
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
6,507
 
6,171
 
5.4%
 
18,432
 
17,193
 
7.2%
RPMs (000,000) "traffic"
8,595
 
7,976
 
7.8%
 
24,767
 
22,633
 
9.4%
ASMs (000,000) "capacity"
9,987
 
9,278
 
7.6%
 
29,216
 
26,609
 
9.8%
Load factor
86.1%
 
86.0%
 
0.1pts
 
84.8%
 
85.1%
 
(0.3)pts
Yield
12.49¢
 
13.26¢
 
(5.8)%
 
12.26¢
 
13.15¢
 
(6.8)%
PRASM
10.75¢
 
11.40¢
 
(5.7)%
 
10.39¢
 
11.19¢
 
(7.1)%
RASM
12.96¢
 
13.50¢
 
(4.0)%
 
12.53¢
 
13.23¢
 
(5.3)%
CASM excluding fuel and special items(b)
7.28¢
 
7.19¢
 
1.3%
 
7.21¢
 
7.33¢
 
(1.6)%
Economic fuel cost per gallon(b)
$1.57
 
$1.81
 
(13.3)%
 
$1.46
 
$1.97
 
(25.9%)
Fuel gallons (000,000)
119
 
113
 
5.3%
 
350
 
326
 
7.4%
ASM's per gallon
83.9
 
82.1
 
2.2%
 
83.5
 
81.6
 
2.3%
Average number of FTE's
11,397
 
10,824
 
5.3%
 
11,260
 
10,643
 
5.8%
Aircraft utilization
10.6
 
10.9
 
(2.8%)
 
10.7
 
10.9
 
(1.8)%
Average aircraft stage length
1,203
 
1,168
 
3.0%
 
1,218
 
1,185
 
2.8%
Operating fleet
154
 
144
 
10 a/c
 
154
 
144
 
10 a/c
 
 
 
 
 
 
 
 
 
 
 
 
Regional Operating Statistics:(c)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
2,547
 
2,445
 
4.2%
 
7,105
 
6,762
 
5.1%
RPMs (000,000) "traffic"
1,006
 
903
 
11.4%
 
2,801
 
2,419
 
15.8%
ASMs (000,000) "capacity"
1,225
 
1,090
 
12.4%
 
3,512
 
2,965
 
18.4%
Load factor
82.1%
 
82.8%
 
(0.7)pts
 
79.8%
 
81.6%
 
(1.8)pts
Yield
24.75¢
 
26.53¢
 
(6.7)%
 
24.35¢
 
26.37¢
 
(7.7)%
PRASM
20.32¢
 
21.97¢
 
(7.5)%
 
19.43¢
 
21.51¢
 
(9.7)%
Operating fleet
69
 
63
 
6 a/c
 
69
 
63
 
6 a/c
(a)     Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.
(b) 
See a reconciliation of operating expenses excluding fuel and special items, a reconciliation of economic fuel costs, and Note A in the accompanying pages, for a discussion of why these measures may be important to investors.
(c) 
Data presented includes information related to flights operated by Horizon Air and third-party carriers.

7


OPERATING SEGMENTS (unaudited)
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
Alaska
 
 
 
 
 
 
 
 
 
 
(in millions)
Mainline
 
Regional
 
Horizon
 
Parent & Consolidating(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,073

 
$
—

 
$
—

 
$
—

 
$
1,073

 
$
—

 
$
1,073

Regional
—

 
249

 
—

 
—

 
249

 
—

 
249

Total passenger revenues
1,073

 
249

 
—

 
—

 
1,322

 
—

 
1,322

CPA revenues
—

 
—

 
109

 
(109
)
 
—

 
—

 
—

Freight and mail
30

 
1

 
—

 
—

 
31

 
—

 
31

Other-net
190

 
21

 
1

 
1

 
213

 
—

 
213

Total operating revenues
1,293

 
271

 
110

 
(108
)
 
1,566

 
—

 
1,566

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
727

 
202

 
99

 
(109
)
 
919

 
22

 
941

Economic fuel
188

 
34

 
—

 
—

 
222

 
3

 
225

Total operating expenses
915

 
236

 
99

 
(109
)
 
1,141

 
25

 
1,166

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
7

 
—

 
—

 
—

 
7

 
—

 
7

Interest expense
(7
)
 
—

 
(2
)
 
(2
)
 
(11
)
 
—

 
(11
)
Other
5

 
—

 
—

 
1

 
6

 
—

 
6

Total Nonoperating income (expense)
5

 
—

 
(2
)
 
(1
)
 
2

 
—

 
2

Income (loss) before income tax
$
383

 
$
35

 
$
9

 
$
—

 
$
427

 
$
(25
)
 
$
402

 
Three Months Ended September 30, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
(in millions)
Mainline
 
Regional
 
Horizon
 
Parent & Consolidating(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,057

 
$
—

 
$
—

 
$
—

 
$
1,057

 
$
—

 
$
1,057

Regional
—

 
240

 
—

 
—

 
240

 
—

 
240

Total passenger revenues
1,057

 
240

 
—

 
—

 
1,297

 
—

 
1,297

CPA revenues
—

 
—

 
105

 
(105
)
 
—

 
—

 
—

Freight and mail
29

 
1

 
—

 
—

 
30

 
—

 
30

Other-net
167

 
20

 
1

 
—

 
188

 
—

 
188

Total operating revenues
1,253

 
261

 
106

 
(105
)
 
1,515

 
—

 
1,515

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
667

 
181

 
93

 
(104
)
 
837

 
—

 
837

Economic fuel
205

 
35

 
—

 
—

 
240

 
5

 
245

Total operating expenses
872

 
216

 
93

 
(104
)
 
1,077

 
5

 
1,082

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
5

 
—

 
—

 
—

 
5

 
—

 
5

Interest expense
(7
)
 
—

 
(3
)
 
—

 
(10
)
 
—

 
(10
)
Other
7

 
—

 
—

 
2

 
9

 
—

 
9

Total Nonoperating income (expense)

5

 
—

 
(3
)
 
2

 
4

 
—

 
4

Income (loss) before income tax
$
386

 
$
45

 
$
10

 
$
1

 
$
442

 
$
(5
)
 
$
437



8


 
Nine Months Ended September 30, 2016
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Parent & Consolidating(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
3,036

 
—

 
$
—

 
$
—

 
$
3,036

 
$
—

 
$
3,036

Regional
—

 
682

 
—

 
—

 
682

 
—

 
682

Total passenger revenues
3,036

 
682

 
—

 
—

 
3,718

 
—

 
3,718

CPA revenues
—

 
—

 
322

 
(322
)
 
—

 
—

 
—

Freight and mail
79

 
3

 
—

 
—

 
82

 
—

 
82

Other - net
546

 
57

 
3

 
1

 
607

 
—

 
607

Total operating revenues
3,661

 
742

 
325

 
(321
)
 
4,407

 
—

 
4,407

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
2,107

 
580

 
305

 
(322
)
 
2,670

 
36

 
2,706

Economic fuel
512

 
90

 
—

 
—

 
602

 
(9
)
 
593

Total operating expenses
2,619

 
670

 
305

 
(322
)
 
3,272

 
27

 
3,299

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
19

 
—

 
1

 
—

 
20

 
—

 
20

Interest expense
(23
)
 
—

 
(7
)
 
(3
)
 
(33
)
 
—

 
(33
)
Other
15

 
—

 
—

 
4

 
19

 
—

 
19

Total Nonoperating income (expense)

11

 
—

 
(6
)
 
1

 
6

 
—

 
6

Income (loss) before income tax
$
1,053

 
$
72

 
$
14

 
$
2

 
$
1,141

 
$
(27
)
 
$
1,114

 
Nine Months Ended September 30, 2015
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Parent & Consolidating(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
2,977

 
$
—

 
$
—

 
$
—

 
$
2,977

 
$
—

 
$
2,977

Regional
—

 
638

 
—

 
—

 
638

 
—

 
638

Total passenger revenues
2,977

 
638

 
—

 
—

 
3,615

 
—

 
3,615

CPA revenues
—

 
—

 
303

 
(303
)
 
—

 
—

 
—

Freight and mail
79

 
4

 
—

 
—

 
83

 
—

 
83

Other - net
465

 
55

 
3

 
—

 
523

 
—

 
523

Total operating revenues
3,521

 
697

 
306

 
(303
)
 
4,221

 
—

 
4,221

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,951

 
514

 
274

 
(302
)
 
2,437

 
—

 
2,437

Economic fuel
641

 
101

 
—

 
—

 
742

 
(1
)
 
741

Total operating expenses
2,592

 
615

 
274

 
(302
)
 
3,179

 
(1
)
 
3,178

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
15

 
—

 
—

 
1

 
16

 
—

 
16

Interest expense
(21
)
 
—

 
(8
)
 
(3
)
 
(32
)
 
—

 
(32
)
Other
21

 
—

 
—

 
5

 
26

 
—

 
26

Total Nonoperating income (expense)

15

 
—

 
(8
)
 
3

 
10

 
—

 
10

Income (loss) before income tax
$
944

 
$
82

 
$
24

 
$
2

 
$
1,052

 
$
1

 
$
1,053

(a) 
Includes consolidating entries, Parent Company, and other immaterial business units.
(b) 
The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain charges. See Note A in the accompanying pages for further information.
(c) 
Includes accounting adjustments related to mark-to-market fuel-hedge accounting charges, and other special items described previously.

9


Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
CASM EXCLUDING FUEL RECONCILIATION (unaudited)
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in cents)
2016
 
2015
 
2016
 
2015
Consolidated:
 
 
 
 
 
 
 
CASM

10.40
¢
 

10.44
¢
 

10.08
¢
 

10.75
¢
Less the following components:
 
 
 

 
 
 
 
Aircraft fuel, including hedging gains and losses
2.01

 
2.37

 
1.81

 
2.51

Special items - merger-related costs
0.19

 
—

 
0.11

 
—

CASM excluding fuel and special items

8.20
¢
 

8.07
¢
 

8.16
¢
 

8.24
¢
 
 
 
 
 
 
 
 
Mainline:
 
 
 
 
 
 
 
CASM

9.19
¢
 

9.45
¢
 

8.93
¢
 

9.74
¢
Less the following components:
 
 
 

 
 
 
 
Aircraft fuel, including hedging gains and losses
1.91

 
2.26

 
1.72

 
2.41

CASM excluding fuel and special items

7.28
¢
 

7.19
¢
 

7.21
¢
 

7.33
¢
FUEL RECONCILIATIONS (unaudited)
 
Three Months Ended September 30,
 
2016
 
2015
(in millions, except for per-gallon amounts)
Dollars
 
Cost/Gallon
 
Dollars
 
Cost/Gallon
Raw or "into-plane" fuel cost
$
218

 
$
1.55

 
$
235

 
$
1.78

Losses on settled hedges
4

 
0.03

 
5

 
0.04

Consolidated economic fuel expense
222

 
1.58

 
240

 
1.82

Mark-to-market fuel hedge adjustment
3

 
0.02

 
5

 
0.03

GAAP fuel expense
$
225

 
$
1.60

 
$
245

 
$
1.85

Fuel gallons
140

 
 
 
132

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2016
 
2015
(in millions, except for per gallon amounts)
Dollars
 
Cost/Gallon
 
Dollars
 
Cost/Gallon
Raw or "into-plane" fuel cost
$
590

 
$
1.44

 
$
727

 
$
1.93

Losses on settled hedges
12

 
0.03

 
15

 
0.04

Consolidated economic fuel expense
$
602

 
$
1.47

 
$
742

 
$
1.97

Mark-to-market fuel hedge adjustment
(9
)
 
(0.02
)
 
(1
)
 
—

GAAP fuel expense
$
593

 
$
1.45

 
$
741

 
$
1.97

Fuel gallons
410

 
 
 
377

 
 



10



Note A: Pursuant to Regulation G, we have provided reconciliations of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

•
By eliminating fuel expense and certain special items from our unit metrics, we believe that we have better visibility into the results of operations and our non-fuel cost-reduction initiatives. Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results. In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long term, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

•
Cost per ASM (CASM) excluding fuel and certain special items is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.

•
Adjusted Income before income tax and CASM excluding fuel, and other special items, are important metrics for the employee incentive plan that covers all Air Group employees.

•
CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry. The measure is also the subject of frequent questions from investors.

•
Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as mark-to-market hedging adjustments or Virgin America merger-related costs, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

•
Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices. Fuel expense represents a large percentage of our total operating expenses. Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term. Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

Note B: Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. To manage the two operating airlines, management views the business in three operating segments. Alaska operates a fleet of passenger jets (Alaska Mainline) and contracts with Horizon, SkyWest Airlines, Inc. (SkyWest), and Peninsula Airways, Inc. (PenAir) for regional capacity under which Alaska receives all passenger revenue from those flights (Alaska Regional). Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase arrangement. The Company believes the amounts paid by Alaska to Horizon approximate current market rates received by other regional carriers for similar flying and are available to pay for various Horizon operating expenses such as crew expenses, maintenance, and aircraft ownership costs. All inter-company revenues and expenses between Alaska and Horizon are eliminated in consolidation.

11


Glossary of Terms

Aircraft Utilization - block hours per day; this represents the average number of hours our aircraft are flying

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or “capacity”; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Free Cash Flow - total operating cash flow generated less cash paid for capital expenditures

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737 jets and all associated revenues and costs

PRASM - passenger revenue per ASM; commonly called “passenger unit revenue”

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile








12