SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8957
ALASKA AIR GROUP, INC.
|(State of Incorporation)||(I.R.S. Employer Identification No.)|
19300 International Boulevard, Seattle, Washington 98188
Telephone: (206) 392-5040
Securities registered pursuant to section 12(b) of the Act:
|Title of each class||Name of exchange on which registered||Ticker symbol|
|Common Stock, $0.01 Par Value||New York Stock Exchange||ALK|
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
|Large accelerated filer||☒||Accelerated filer||☐||Non-accelerated filer||☐||Smaller reporting company||☐||Emerging Growth Company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☒
As of January 31, 2020, shares of common stock outstanding totaled 122,913,010. The aggregate market value of the shares of common stock of Alaska Air Group, Inc. held by nonaffiliates on June 30, 2019, was approximately $7.9 billion (based on the closing price of $63.91 per share on the New York Stock Exchange on that date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy Statement relating to 2020 Annual Meeting of Shareholders are incorporated by reference in Part III.
ALASKA AIR GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
As used in this Form 10-K, the terms “Air Group,” the "Company," “our,” “we” and "us," refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc., Virgin America Inc. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc.), and Horizon Air Industries, Inc. are referred to as “Alaska,” "Virgin America" and “Horizon,” respectively, and together as our “airlines.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control.
Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors in this Form 10-K, see “Item 1A: Risk Factors.” Please consider our forward-looking statements in light of those risks as you read this report.
Alaska Air Group is a Delaware corporation incorporated in 1985 that operates two airlines, Alaska and Horizon. Alaska was organized in 1932 and incorporated in 1937 in the state of Alaska. Horizon is a Washington corporation that was incorporated and began service in 1981, and was acquired by Air Group in 1986. Virgin America was a member of Air Group since it was acquired in 2016 until 2018, when Alaska and Virgin America combined operating certificates to become a single airline, and legally merged into a single entity. The Company also includes McGee Air Services, an aviation services provider that was established as a wholly-owned subsidiary of Alaska in 2016.
Alaska and Horizon operate as separate airlines, with individual business plans, competitive factors and economic risks. Together with our regional airline partners, we fly to 115 destinations with over 1,300 daily departures through an expansive network across the U.S., Mexico, Canada, and Costa Rica. With global airline partners, we provide our guests with a network of more than 800 destinations worldwide. During 2019, we carried an all-time high 47 million guests and earned consolidated net income under Generally Accepted Accounting Principles (GAAP) of $769 million compared to net income of $437 million in 2018. Our adjusted net income was $798 million, which excludes merger-related costs and mark-to-market fuel hedge adjustments. Refer to "Results of Operations" in Management's Discussion and Analysis for our reconciliation of Non-GAAP measures to the most directly comparable GAAP measure.
We organize the business and review financial operating performance by aggregating our business in three operating segments, which are as follows:
•Mainline - includes scheduled air transportation on Alaska's Boeing and Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Mexico, and Costa Rica.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under capacity purchase agreements (CPA). This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under a CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
Our purpose is "creating an airline people love." The "ing" is to recognize that we are never done; we are continually working to improve. We believe our success depends on our ability to provide safe air transportation, develop relationships with guests by providing exceptional customer service and low fares, and maintain a low cost structure to compete effectively. It is important to us that we achieve our objective as a socially responsible company that values not just performance, but also our people, the communities we serve, and the environment.
We marked the 16th consecutive year of profitability on an adjusted basis in 2019. Our liquidity and capital position remain strong, positioning us among other high-quality industrial companies. Due to our strong financial health and outlook, we are one of only three U.S. airlines with investment grade credit ratings. The cash generated by our continued success enables us to invest in our business to deliver profitable growth, enhance our guests' experience, and improve our financial position.
We are active in the communities we serve and strive to be an industry leader in environmental and community stewardship. In 2019, Air Group donated $15 million in cash and in-kind travel to over 1,200 charitable organizations, and our employees volunteered more than 41,000 hours of community service related to youth and education, medical research and transportation. One of our leadership principles is to "give back" and we are proud of the efforts and voluntarism of our employees. Also in 2019, we launched LIFT, our social and environmental impact program aimed at uniting all of our social and environmental impact efforts. Through this program, our guests also showed great generosity, donating 72 million miles in 2019 for donation to charitable organizations. As recognition of our community leadership, financial stability and the fact that our combined fleet is one of the youngest and most fuel-efficient in North America, we ranked higher than any other North American airline for the third year in a row on the Dow Jones Sustainability Index.
In 2019, we completed the majority of the remaining integration milestones from our acquisition of Virgin America. During the year, Alaska flight attendants began flying as integrated crews and our pilots adopted an integrated seniority list. In July 2019, Alaska aircraft maintenance technicians, represented by the Aircraft Mechanics Fraternal Association (AMFA), ratified an
agreement bringing our last work group under a single collective bargaining agreement. We also finished painting the remainder of the Airbus fleet in the Alaska livery, and completed interior cabin renovations on 60% of the Airbus fleet.
With the integration largely behind us, we have shifted our focus towards our vision and strategy for the next five years. This strategy has three major pillars:
Our success depends on our more than 24,000 employees living our values every day to deliver award-winning customer service as one team. We know engaged employees deliver higher productivity, superior execution and better guest experiences, which is why investing in our people is imperative to our future success.
In 2019, we completed Flight Path - a program that brought all Alaska and Horizon employees together through leader-led sessions to inform, engage and set the course for our business and culture. Aside from one-time programs, we continue to communicate with employees through a variety of vehicles, including weekly Leader Look Ahead and periodic live-streamed webcasts, to provide employees better information and a stronger connection to organizational priorities. Our efforts were recognized by Forbes Magazine, who named Alaska as one of the World's Best Employers for the fifth year in a row for 2019, and as one of America's Best Employers for Diversity in 2020.
Aligning our employees' goals with Air Group's goals has been an important contributor to our strong track record of accomplishments and financial performance. The majority of Alaska and Horizon employees participate in our Performance-Based Pay (PBP) and Operational Performance Rewards (OPR) programs, which encourage employees to work together to achieve metrics related to the Company's strategy - including safety, profitability, on-time performance, low costs, customer loyalty and customer satisfaction. Over the last ten years, our incentive programs have paid out on average more than one month's pay for most employees. In 2019, our employees earned more than $150 million under these incentive programs.
Driving growth will require our focus in a variety of areas, including a powerful brand, optimized network and strong revenue generation.
•Powerful brand - Providing genuine and caring service to our guests is key to our success and loyalty to the Alaska brand. This service is demonstrated daily by our employees who are empowered to make the best choices for our guests. As proof, in 2019, Alaska ranked first in the J.D. Power and Associates annual survey of customer satisfaction among traditional network carriers for the 12th year in a row. Alaska was also recognized for excellent service by Condé Nast Traveler and Travel + Leisure magazine for the second consecutive year, continuing an achievement earned by Virgin America for the preceding ten years.
Our award winning Mileage PlanTM is another way we build long-term guest relationships and grow our brand. We maintain the only distance-based frequent flier program in the United States, which rewards all fliers regardless of the price they paid for their tickets. In 2019, we increased our sign-up promotion for new cardholders to 40,000 miles, providing immediate utility of the program. We also offered promotions like Buy One Get One Free companion fares and continued popular redemption benefits, including using miles for hotel redemptions (with access to over 400,000 hotels worldwide), and adding EL AL Airlines as a new global partner.
Over the past two years, we initiated a refresh of many of our amenities with the aim of highlighting our West Coast roots. From updated on-board offerings, including fresh and local food, to local craft beers and wines, as well as updating our in-air Wi-Fi to meet the evolving needs of our guests, we will continue to innovate and evolve to provide our guests with the best experience. Work towards updated guest-facing amenities continued in 2019, with our flagship lounge opening in the North Satellite at Sea-Tac Airport, as well as the announcement of a new lounge at San Francisco International Airport, which is expected to open in the second half of 2020. We also strive to connect with West Coast guests through key sponsorships including Russell Wilson, the San Jose Sharks, San Francisco Giants, Seattle Mariners, Portland Timbers, Seattle's new NHL team, and more.
•Optimized Network - The acquisition of Virgin America positioned us as the fifth largest airline in the U.S., with an unparalleled ability to serve West Coast travelers. We offer the highest guest relevance of any carrier from the West Coast. Competition in our markets is significant, and we know that we must defend our customer base as we grow our network presence by providing guests with an increased choice of schedule times and fares. We are intensely focused on providing the most utility and routes to our guests. From our West Coast hub cities, we lead all other airlines in
non-stop markets, daily flights and seat share. In 2019, we began departures from Paine Field-Snohomish County Airport in Everett, Washington to ten West Coast markets. We also optimized our current network, and reallocated flying to expand offerings between the Pacific Northwest and California, increasing network utility and providing more non-stop service on the West Coast.
•Revenue Generation - In 2018, we introduced our Saver Fare product, which offers greater choice for our guests, allowing them to purchase and pay for the ticket type and other amenities they value most. In 2019, our Saver Fare product provided meaningful revenue growth, and is expected to continue to provide incremental revenue into 2020. This, combined with synergies from the merger, which are expected to hit their full run rate in 2021, and capacity growth, will enable us to continue to grow our annual revenues. Innovation will also be key to growth in our revenues. We will focus our efforts on merchandising and demand generation, including through a variety of unique marketing strategies aimed at increasing revenues in typically off-peak periods.
Safety is the foundation of everything we do and remains our top priority. We have an unwavering commitment to run a safe operation, and we will not compromise this commitment in the pursuit of other initiatives. Alaska and Horizon were the first U.S. major airlines to receive FAA validation and acceptance of their Safety Management Systems (SMS) in 2016. In 2018, we used SMS to safely and consistently guide our integration with the legacy Virgin America operation. Report It!, our mobile safety reporting application, makes it easier for employees to file safety reports. In 2018, 100% of our Alaska and Horizon aircraft technicians completed the requirements for the FAA's "Diamond Certificate of Excellence" award, marking the 17th consecutive year Alaska has received the award, and the 17th time in the last 19 years Horizon has received this award. In early 2020, we were again included as one of only two U.S. airlines on the AirlineRatings.com list of the world's Top 20 safest airlines. We believe that maintaining safe operations, through adherence to well-defined processes and ensuring every Air Group employee is aware of their individual contribution to our operation, is critical to ensuring on-time performance. The rigor we apply to running a safe operation has resulted in Alaska consistently being one of the top airlines in North America for on-time performance; and Horizon was recognized once again as the leader in on-time performance in 2019 among regional airlines.
Ultimately, our success will be driven by our business model being flexible and innovative as we drive towards our pretax margin goals of 13% to 15%, and our growth goals of 4% to 6% over the business cycle. We know that in order to provide low fares in our growing network while generating strong returns for our shareholders, it is imperative for us to maintain a competitive cost structure. In 2019, our unit costs, excluding fuel and special items, increased 2.3% on a consolidated basis. Although our unit costs are expected to rise again in 2020, primarily due to general wage inflation, higher engine maintenance on both our Airbus and B737-800 fleets, and increased lease return costs associated with our Airbus fleet, we will continue our focus on lowering overhead, improving productivity, and managing vendor costs. We are also actively managing fuel costs by flying larger, more fuel-efficient aircraft, which has increased our fuel efficiency as measured by available seat miles flown per gallon by 1.6% over the last five years. We have a long track record of effective cost control, and we remain keenly committed to protecting our unit cost advantage relative to competitors.
Our airlines operate different aircraft and missions. Alaska operates a fleet of narrowbody passenger jets on primarily longer-haul capacity. Alaska contracts primarily with Horizon and SkyWest Airlines, Inc. (SkyWest) for shorter-haul capacity, such that Alaska receives all passenger revenue from those flights. Horizon operates Embraer 175 (E175) regional jet aircraft and Bombardier Q400 turboprop aircraft and sells all of its capacity to Alaska pursuant to a CPA. The majority of our revenues are generated by transporting passengers. The percentage of revenues by category is as follows:
|Passenger revenue||92 ||%||93 ||%||93 ||%||91 ||%||85 ||%|
|Mileage Plan other revenue||5 ||%||5 ||%||5 ||%||6 ||%||(b)|| |
|Cargo and other||3 ||%||2 ||%||2 ||%||3 ||%||(b)|| |
|Other revenue||(b)|| ||(b)|| ||(b)|| ||(b)|| ||13 ||%|
|Freight and Mail revenue||(b)|| ||(b)|| ||(b)|| ||(b)|| ||2 ||%|
|Total||100 ||%||100 ||%||100 ||%||100 ||%||100 ||%|
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.
(b)As a result of the new revenue recognition standards, certain financial statement line items were modified to address new requirements. We did not apply this change to fiscal year 2015, and have left the captioning above as it was presented in that fiscal year.
We deploy aircraft in ways that we believe will best optimize our revenues and profitability and reduce the impacts of seasonality.
The percentage of our capacity by region is as follows:
|28 ||%||27 ||%||28 ||%||34 ||%||36 ||%|
|Transcon/midcon||44 ||%||44 ||%||43 ||%||29 ||%||24 ||%|
|Hawaii and Costa Rica||14 ||%||14 ||%||13 ||%||17 ||%||18 ||%|
|Alaska||10 ||%||10 ||%||10 ||%||14 ||%||15 ||%|
|Mexico||3 ||%||4 ||%||5 ||%||5 ||%||6 ||%|
|Canada||1 ||%||1 ||%||1 ||%||1 ||%||1 ||%|
|Total||100 ||%||100 ||%||100 ||%||100 ||%||100 ||%|
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.
(b)Category represents flying within the West Coast. Departures from the West Coast to other regions are captured in other categories.
Our Mainline operations include Boeing 737 (B737) and Airbus A320 family (A319, A320, and A321neo) jet service offered by Alaska. We offer extensive passenger service from the western U.S. throughout the contiguous United States, Alaska, Hawaii, Canada, Mexico, and Costa Rica. Our largest concentrations of departures are in Seattle, Portland, and the Bay Area. We also offer cargo service throughout our network and have three dedicated cargo aircraft that operate primarily to and within the state of Alaska.
In 2019, we carried 36 million revenue passengers in our Mainline operations. At December 31, 2019, our Mainline operating fleet consisted of 166 Boeing 737 jet aircraft and 71 Airbus A320 family jet aircraft compared to 162 B737 aircraft and 71 Airbus aircraft as of December 31, 2018.
The percentage of Mainline passenger capacity by region and average stage length is presented below:
|23 ||%||23 ||%||24 ||%||30 ||%||31 ||%|
|Transcon/midcon||46 ||%||46 ||%||45 ||%||30 ||%||27 ||%|
|Hawaii and Costa Rica||16 ||%||15 ||%||15 ||%||19 ||%||20 ||%|
|Alaska||11 ||%||11 ||%||11 ||%||15 ||%||16 ||%|
|Mexico||4 ||%||5 ||%||5 ||%||6 ||%||6 ||%|
|Total||100 ||%||100 ||%||100 ||%||100 ||%||100 ||%|
|Average Stage Length (miles)||1,299 || ||1,298 || ||1,301 || ||1,225 || ||1,195 || |
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.
(b)Category represents flying within the West Coast. Departures from the West Coast to other regions are captured in other categories.
Our Regional operations consist primarily of flights operated by Horizon and SkyWest. In 2019, our Regional operations carried approximately 11 million revenue passengers, primarily in the states of Washington, Oregon, Idaho and California. Horizon is the largest regional airline in the Pacific Northwest and carries approximately 70% of Air Group's regional revenue passengers.
Based on 2019 Horizon passenger enplanements on regional aircraft, our most significant concentration of regional activity was in Seattle and Portland. At December 31, 2019, Horizon’s operating fleet consisted of 30 E175 jet aircraft and 33 Bombardier Q400 turboprop aircraft. The regional fleet operated by SkyWest consisted of 32 E175 aircraft.
The percentage of regional passenger capacity by region and average stage length is presented below:
|West Coast||61 ||%||53 ||%||59 ||%||60 ||%||62 ||%|
|Pacific Northwest||10 ||%||11 ||%||13 ||%||16 ||%||19 ||%|
|Canada||3 ||%||3 ||%||4 ||%||5 ||%||7 ||%|
|Alaska||1 ||%||2 ||%||3 ||%||4 ||%||5 ||%|
|Midcon||25 ||%||30 ||%||21 ||%||15 ||%||6 ||%|
|Mexico||— || ||1 ||%||— ||%||— ||%||1 ||%|
|Total||100 ||%||100 ||%||100 ||%||100 ||%||100 ||%|
|Average Stage Length (miles)||490 || ||468 || ||422 || ||381 || ||348 || |
FREQUENT FLYER PROGRAM
Alaska Airlines Mileage Plan™ provides a comprehensive suite of frequent flyer benefits. Miles can be earned by flying on our airlines or on one of our 18 airline partners, by using an Alaska Airlines credit card, or through other non-airline partners. Alaska's extensive list of airline partners includes carriers associated with each of the three major global alliances, making it easier for our members to earn miles and reach elite status in our frequent flyer program. Through Alaska and our global partners, Mileage Plan™ members have access to a large network of over 800 worldwide travel destinations. Further, members can receive up to 40,000 bonus miles upon signing up for the Alaska Airlines Visa Signature card and meeting a minimum spend threshold, and earn triple miles on Alaska Airlines purchases. Alaska Airlines Visa Signature cardholders and small business cardholders in the U.S., and Platinum and World Elite Mastercard cardholders in Canada, also receive an annual companion ticket that allows members to purchase an additional ticket for $99 plus taxes, with no restrictions or black-out dates, and a free first checked bag for up to six people traveling on the same itinerary. Earned miles can be redeemed for flights on our airlines, or our partner airlines, for hotel stays via mileageplanhotels.com, or for upgrades to First Class on Alaska Airlines. We believe all of these benefits give our Mileage Plan™ members more value than competing programs.
Mileage Plan™ revenues, including those in the Passenger revenue income statement line item, represented approximately 13% of Air Group's total revenues in 2019. Mileage Plan™ helps drive revenue growth by attracting new customers, keeping existing customers actively engaged, and building customer loyalty through the benefits that we provide.
AGREEMENTS WITH OTHER AIRLINES
Our agreements fall into three different categories: frequent flyer, codeshare and interline agreements. Frequent flyer agreements enable our Mileage PlanTM members to earn mileage credits and make redemptions on one of our 18 domestic and international partner airlines.
Codeshare agreements allow one or more marketing carriers to sell seats on a single operating carrier that services passengers under multiple flight numbers. The sale of codeshare seats can vary depending on the sale arrangement. For example, in a free-sale arrangement, the marketing carrier sells the operating carrier's inventory without any restriction; whereas in a block-space arrangement, a fixed amount of seats are sold to the marketing carrier by the operating carrier. The interchangeability of the flight code between carriers provides a greater selection of flights for customers, along with increased flexibility for mileage accrual and redemption.
Interline agreements allow airlines to jointly offer a competitive, single-fare itinerary to customers traveling via multiple carriers to a final destination. An interline itinerary offered by one airline may not necessarily be offered by the other, and the fares collected from passengers are prorated and distributed to interline partners according to preexisting agreements between the carriers. Frequent flyer, codeshare and interline agreements help increase our traffic and revenue by providing a more diverse network and schedule options to our guests.
Alaska has marketing alliances with a number of airlines that provide frequent flyer and codesharing opportunities. Alliances are an important part of our strategy and enhance our revenues by:
•offering our guests more travel destinations and better mileage credit/redemption opportunities, including elite qualifying miles on U.S. and international airline partners;
•giving our Mileage PlanTM program a competitive advantage because of our partnership with both unaffiliated international carriers and carriers from all three major worldwide alliances;
•giving us access to more connecting traffic from other airlines; and
•providing members of our alliance partners’ frequent flyer programs an opportunity to travel on Alaska and our regional partners while earning mileage credit in our partners’ programs.
Most of our codeshare relationships are free-sale codeshares, where the marketing carrier sells seats on the operating carrier’s flights from the operating carrier’s inventory, but takes no inventory risk. Our marketing agreements have various termination dates, and one or more may be in the process of renegotiation at any time. Our codeshare and interline agreements generated 5%, 5%, and 6% of our total marketed revenues as of December 31, 2019, 2018 and 2017.
The comprehensive summary of Alaska's alliances with other airlines is as follows:
|Alaska Flight # on |
Flights Operated by
|Other Airline Flight # |
on Flights Operated by
Alaska or CPA Partners
|Major U.S. or International Airlines|
|Cathay Pacific Airways||Yes||No||Yes|
|EL AL Israel Airlines||Yes||No||Yes|
|Regional Airlines|| || || |
(a)These airlines do not have their own frequent flyer program. However, Alaska's Mileage PlanTM members can earn and redeem miles on these airlines' route systems.
CARGO AND OTHER REVENUE
The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination, or is transferred to a third-party carrier for delivery.
The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue.
The airline industry is highly competitive and subject to various uncertainties, including economic conditions, volatile fuel prices, a largely unionized work force, the need to finance large capital expenditures and the related availability of capital, government regulation—including taxes and fees, and potential aircraft incidents. Airlines have high fixed costs, primarily for wages, aircraft fuel, aircraft ownership and facilities rents. Because expenses of a flight do not vary significantly based on the number of passengers carried, a relatively small change in the number of passengers or in pricing has a disproportionate effect on an airline’s operating and financial results. In other words, a minor shortfall in expected revenue levels could cause a disproportionately negative impact to our operating and financial results. Passenger demand and ticket prices are, in large measure, influenced by the general state of the economy, current global economic and political events, and total available airline seat capacity.
In 2019, the airline industry posted another year of profits, and increases over 2018, primarily due to lower fuel prices. Although growth was impacted in 2019 following the grounding of the Boeing 737 MAX aircraft, airlines have continued to make significant investments in airports and new services to differentiate their customer service offering. Thus, the level of competition is expected to continue to increase.
Our business and financial results are highly impacted by the price and the availability of aircraft fuel. Aircraft fuel expense includes raw fuel expense, or the price that we generally pay at the airport, including taxes and fees, plus the effect of mark-to-market adjustments to our fuel hedge portfolio as the value of that portfolio increases and decreases. The cost of aircraft fuel is volatile and outside of our control, and it can have a significant and immediate impact on our operating results. Over the past five years, aircraft fuel expense ranged from 18% to 25% of operating expenses. Fuel prices are impacted by changes in both the price of crude oil and refining costs and can vary by region in the U.S.
The price of crude oil on an average annual basis for the past five years has ranged from a low of $43 per barrel in 2016 to a high of $65 in 2018. For us, a $1 per barrel change in the price of oil equates to approximately $21 million of fuel cost annually. Said another way, a one-cent change in our fuel price per gallon will impact our expected annual fuel cost by approximately $9 million per year.
Refining margins, which represent the price of refining crude oil into aircraft fuel, are a smaller portion of the overall price of jet fuel, but have also contributed to the price volatility in recent years. Over the last five years, average annual West Coast refining margin prices have fluctuated from a low of $13 per barrel in 2016 to a high of $26 per barrel in 2019.
Generally, West Coast jet fuel prices are somewhat higher and more volatile than prices in the Gulf Coast or on the East Coast. Our average raw fuel cost per gallon decreased 6% in 2019, after increasing 28% in 2018 and increasing 21% in 2017.
The percentages of our aircraft fuel expense by crude oil and refining margins, as well as the percentage of our aircraft fuel expense of operating expenses, are as follows:
|Crude oil || ||62 ||%||68 ||%||66 ||%||69 ||%||62 ||%|
|Refining margins || ||28 ||%||25 ||%||23 ||%||20 ||%||26 ||%|
|10 ||%||7 ||%||11 ||%||11 ||%||12 ||%|
|Total || ||100 ||%||100 ||%||100 ||%||100 ||%||100 ||%|
|Aircraft fuel expense || ||24 ||%||25 ||%||22 ||%||18 ||%||22 ||%|
(a)Includes information for Virgin America for the period December 14, 2016 through December 31, 2016.
(b)Other includes gains and losses on settled fuel hedges, unrealized mark-to-market fuel hedge gains or losses, taxes and other into-plane costs.
We use crude oil call options as hedges against our exposure to the volatility of jet fuel prices. Call options effectively cap our price for crude oil, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With call options, we are hedged against spikes in crude oil prices, and during a period of declines in crude oil prices, we only forfeit cash previously paid for hedge premiums. We begin hedging approximately 18 months in advance of consumption.
We believe that operating fuel-efficient aircraft and executing on operational best practices are the best hedges against high fuel prices. Maintaining a young, fuel-efficient fleet helps to reduce our fuel consumption rate, but also the amount of greenhouse gases and other pollutants that our aircraft emit.
Competition in the airline industry is intense and unpredictable. Our competitors consist primarily of other airlines and, to a lesser extent, other forms of transportation. Competition can be direct, in the form of another carrier flying the exact non-stop route, or indirect, where a carrier serves the same two cities non-stop from an alternative airport in that city or via an itinerary requiring a connection at another airport. We compete with other domestic airlines and a limited number of international airlines on nearly all of our scheduled routes. Our largest competitor is Delta Airlines Inc. (Delta), who has significantly increased its capacity in Seattle since 2013. Approximately 76% of our capacity to and from Seattle competes with Delta. As we have grown in California and have expanded our transcontinental route offerings, United Airlines and Southwest Airlines have also become large competitors and have increased their capacity in markets we serve. Our California and transcontinental routes have a higher concentration of competitors when compared to our historical route structure, which was predominately concentrated in the Pacific Northwest. Based on schedules filed with the U.S. Department of Transportation, we expect the amount of competitive capacity overlap with all carriers to increase by more than 1% in the first quarter of 2020, weighted based on our network.
We believe that the following principal competitive factors are important to our guests:
Safety is our top priority and is at the core of everything we do. In early 2020, Alaska was again ranked by AirlineRatings.com as one of only two U.S. airlines in the Top 20 safest airlines in the world. In 2018, we also received our 17th Diamond Award of Excellence from the Federal Aviation Administration, recognizing both Alaska and Horizon aircraft technicians for their commitment to training.
•Fares and ancillary services
Ticket and other fee pricing is a significant competitive factor in the airline industry, and the increased availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts. Pricing is driven by a variety of factors including, but not limited to, market-specific capacity, market share per route/geographic area, cost structure, fare vs. ancillary revenue strategies, and demand.
For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors. In addition, traditional network carriers have been able to reduce their operating costs through bankruptcies and mergers, while low-cost carriers have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat one mile), which in turn may enable them to lower their fares. These factors can reduce our pricing power and that of the airline industry as a whole.
Domestic airline capacity is dominated by four large carriers, representing over 80% of total seats. One of our advantages is our low fare with high value position in the industry. However, given the large concentration of industry capacity, some carriers in our markets may discount their fares substantially to develop or increase market share. Fares that are substantially below our cost to operate can be harmful if sustained over a long period of time. We will defend our core markets and, if necessary, redeploy capacity to better match supply with demand. We believe our strong financial position and low cost advantage enables us to offer competitive fares while still earning returns for our shareholders.
•Customer service and reputation
We compete with other airlines in areas of customer service such as on-time performance and guest amenities - including first class and other premium seating, quality of on-board products, aircraft type and comfort. In 2019, Alaska ranked highest in customer satisfaction among traditional network carriers by J.D. Power and Associates for the 12th year in a row, and was also named as the best U.S. airline by Condé Nast Traveler. Additionally, in 2019 we opened our new flagship lounge in the North Satellite of Sea-Tac Airport and began work on our new lounge at San Francisco International Airport.
We are also in the process of reconfiguring our Airbus aircraft, which began in 2018. The new livery and interior reconfiguration will provide guests with one consistent brand experience across the Mainline fleet. Airbus livery updates
were completed in 2019, while the interior reconfiguration is expected to wrap up in early 2021. We began installation of next-generation Gogo inflight satellite based Wi-Fi on our entire Boeing and Airbus fleets in 2018, which is planned to be complete in 2020.
Our employees are a key element of our product. We have a highly engaged workforce that strives to provide genuine and caring service to our guests, both at the airport and onboard. We heavily emphasize our service standards with our employees through training and education programs and monetary incentives related to operational performance and guest satisfaction.
•Routes served, flight schedules, codesharing and interline relationships, and frequent flyer programs
We also compete with other airlines based on markets served, the frequency of service to those markets and frequent flyer opportunities. Some airlines have more extensive route structures than we do, and they offer significantly more international routes. In order to expand opportunities for our guests, we enter into codesharing and interline relationships with other airlines that provide reciprocal frequent flyer mileage credit and redemption privileges. These relationships allow us to offer our guests access to more destinations than we can on our own, gain exposure in markets we do not serve and allow our guests more opportunities to earn and redeem frequent flyer miles. Our Mileage Plan™ offers some of the most comprehensive benefits to our members with the ability to earn and redeem miles on 18 partner carriers. For the fifth year in a row, Mileage Plan™ was ranked first in U.S. News and World Report's list of Best Travel Rewards Programs.
In addition to domestic or foreign airlines that we compete with on most of our routes, we compete with ground transportation in our short-haul markets. To some extent, our airlines also compete with technology, such as video conferencing and internet-based meeting tools that have changed the need for, or frequency of, face-to-face business meetings.
Our tickets are distributed through three primary channels:
•Direct to customer: It is less expensive for us to sell through our direct channel at alaskaair.com. We believe direct sales through this channel are preferable from a branding and customer relationship standpoint in that we can establish ongoing communication with the guest and tailor offers accordingly. As a result, we continue to take steps to drive more business to our website.
•Traditional and online travel agencies: Both traditional and online travel agencies typically use Global Distribution Systems (GDS) to obtain their fare and inventory data from airlines. Bookings made through these agencies result in a fee that is charged to the airline. Many of our large corporate customers require us to use these agencies. Some of our competitors do not use this distribution channel and, as a result, have lower ticket distribution costs.
•Reservation call centers: Our call centers are located in Phoenix, AZ, Kent, WA, and Boise, ID. We generally charge a $15 fee for booking reservations through the call centers.
Our sales by channel are as follows:
|Direct to customer||65 ||%||63 ||%||62 ||%||61 ||%||60 ||%|
|Traditional agencies||20 ||%||22 ||%||22 ||%||23 ||%||23 ||%|
|Online travel agencies||11 ||%||11 ||%||11 ||%||11 ||%||11 ||%|
|Reservation call centers||4 ||%||4 ||%||5 ||%||5 ||%||6 ||%|
|Total||100 ||%||100 ||%||100 ||%||100 ||%||100 ||%|
(a)Includes results for Virgin America for the period December 14, 2016 through December 31, 2016.
SEASONALITY AND OTHER FACTORS
Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. Our profitability is generally lowest during the first and fourth quarters due principally to fewer departures and passengers. Profitability typically increases in the second quarter and then reaches its highest level during the third quarter as a result of vacation travel. However, we have significantly moderated the impact of seasonality of our operations through continued growth from the West Coast to leisure destinations, like Hawaii and Costa Rica, and expansion to leisure and business destinations in the mid-continental and eastern U.S.
In addition to passenger loads, factors that could cause our quarterly operating results to vary include:
•pricing initiatives by us or our competitors,
• changes in fuel costs,
•increases in competition at our primary airports,
•general economic conditions and resulting changes in passenger demand,
•increases or decreases in passenger and volume-driven variable costs, and
•air space and Air Traffic Control delays, particularly in Seattle and San Francisco.
Many of the markets we serve experience inclement weather conditions in the winter, causing increased costs associated with deicing aircraft, canceling flights and accommodating displaced passengers. Due to our geographic area of operations, we can be more susceptible to adverse weather conditions, particularly in the state of Alaska and the Pacific Northwest, than some of our competitors who may be better able to spread the impact of weather-related risks over larger route systems.
No material part of our business, or that of our subsidiaries, is dependent upon a single customer, or upon a few high-volume customers.
Our business is labor intensive. As of December 31, 2019, we employed 24,134 (17,919 at Alaska, 4,301 at Horizon, and 1,914 at McGee Air Services) active full-time and part-time employees. Wages and benefits, including variable incentive pay, represented approximately 43% of our total non-fuel operating expenses in 2019 and 41% in 2018.
Most major airlines, including Alaska and Horizon, have employee groups that are covered by collective bargaining agreements (CBAs). Airlines with unionized work forces generally have higher labor costs than carriers without unionized work forces, and they may not have the ability to adjust labor costs downward quickly enough to respond to new competition or slowing demand.
As part of the integration, we have been working to bring represented work groups under single CBAs. In 2019, our aircraft maintenance technicians, represented by the Aircraft Mechanics Fraternal Association (AMFA), ratified a two-year contract extension, bringing Airbus and Boeing technicians under a single CBA. Now all five of our unionized groups at Alaska are under joint collective agreements with integrated seniority lists in place.
At December 31, 2019, labor unions represented 86% of Alaska’s, 43% of Horizon’s, and 87% of McGee Air Services' employees.
Our relations with U.S. labor organizations are governed by the Railway Labor Act (RLA). Under the RLA, collective bargaining agreements do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner prescribed by the RLA and/or described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board to initiate a process including mediation, arbitration, and a potential “cooling off” period that must be followed before either party may engage in self-help.
Alaska’s union contracts at December 31, 2019 were as follows:
|Union||Employee Group||Number of Employees||Contract Status|
Air Line Pilots Association, International (ALPA)(a)
|Pilots||3,048 || ||Amendable 3/31/2020|
|Association of Flight Attendants (AFA)||Flight attendants||6,043 || ||Amendable 12/17/2021|
|International Association of Machinists and Aerospace Workers (IAM)|| ||Ramp service and stock clerks||723 || ||Amendable 9/27/2024|
|IAM||Clerical, office and passenger service||4,443 || ||Amendable 9/27/2024|
|Aircraft Mechanics Fraternal Association (AMFA)||Mechanics, inspectors and cleaners||946 || ||Amendable 10/17/2023|
Mexico Workers Association of Air Transport(b)
|Mexico airport personnel||92 || ||Amendable 9/29/2019|
|Transport Workers Union of America (TWU)||Dispatchers||82 || ||Amendable 3/24/2021|
(a)Negotiations with ALPA for an updated collective bargaining agreement are ongoing as of the date of this filing.
(b)As a result of amendments to Mexican labor laws, the Company has up to four years to make changes to the existing labor agreements. During that time, the existing contracts remain in place.
Horizon’s union contracts at December 31, 2019 were as follows:
|Union||Employee Group||Number of Employees||Contract Status|
|International Brotherhood of Teamsters (IBT)||Pilots||824 || ||Amendable 12/31/2024|
|Flight attendants||685 || ||Amendable 7/18/2019|
|AMFA||Mechanics and related classifications||261 || ||Amendable 12/15/2020|
|Unifor||Station personnel in |
Vancouver and Victoria, BC, Canada
|40 || ||Expires 2/13/2022|
|TWU||Dispatchers||24 || ||Amendable 8/26/2018|
(a)Negotiations with AFA for an updated collective bargaining agreement are ongoing as of the date of this filing.
McGee Air Services union contract at December 31, 2019 was as follows:
|Union||Employee Group||Number of Employees||Contract Status|
|IAM||Fleet and ramp service||1,664 || ||Amendable 7/19/2023|
The executive officers of Alaska Air Group, Inc. and its primary subsidiaries, Alaska Airlines, Inc. and Horizon Air Industries, who have significant decision-making responsibilities, their positions and their respective ages are as follows:
|Bradley D. Tilden||Chairman and Chief Executive Officer of Alaska Air Group, Inc., Chairman of Alaska Airlines, Inc., Chairman of Horizon Air Industries, Inc.||59 || ||1994|
|Brandon S. Pedersen||Executive Vice President/Finance and Chief Financial Officer of Alaska Air Group, Inc. and Alaska Airlines, Inc., and Treasurer of Alaska Air Group, Inc. and Alaska Airlines, Inc. ||53 || ||2003|
|Kyle B. Levine||Senior Vice President Legal, General Counsel and Corporate Secretary of Alaska Air Group, Inc. and Alaska Airlines, Inc. and Chief Ethics and Compliance Officer of Alaska Air Group, Inc. ||48 || ||2016|
|Benito Minicucci||President of Alaska Airlines, Inc. ||53 || ||2004|
|Joseph A. Sprague||President of Horizon Air Industries, Inc. ||51 || ||2019|
|Gary L. Beck||Executive Vice President and Chief Operating Officer of Alaska Airlines, Inc.||72 || ||2018|
|Andrew R. Harrison||Executive Vice President and Chief Commercial Officer of Alaska Airlines, Inc. ||50 || ||2008|
|Shane R. Tackett||Executive Vice President, Planning and Strategy of Alaska Airlines, Inc.||41 || ||2011|
|Andrea L. Schneider||Senior Vice President People of Alaska Airlines, Inc.||54 || ||1998|
|Diana Birkett-Rakow||Vice President External Relations of Alaska Airlines, Inc.||42 || ||2017|
Mr. Tilden joined Alaska Airlines in 1991, became Controller of Alaska Air Group and Alaska Airlines in 1994 and was named Vice President/Finance at Alaska Airlines in January 1999 and at Alaska Air Group in February 2000. He was elected Alaska Airlines Chief Financial Officer in February 2000, Executive Vice President/Finance and Chief Financial Officer of both companies in January 2002 and Executive Vice President/Finance and Planning of Alaska Airlines in April 2007. Mr. Tilden was named President of Alaska Airlines in December 2008 and, in May 2012, he was elected President and CEO of Alaska Air Group and Alaska Airlines and CEO of Horizon Air. He leads Air Group’s Management Executive Committee and was elected to the Air Group Board in 2010 and became Chairman of the Board in January 2014.
Mr. Pedersen joined Alaska Airlines in 2003 as Staff Vice President/Finance and Controller of Alaska Air Group and Alaska Airlines and was elected Vice President/Finance and Controller for both entities in 2006. He was elected Chief Financial Officer of Alaska Air Group and Alaska Airlines in June 2010 and Executive Vice President/Finance and Chief Financial Officer of both entities in 2014. Effective February 2019, he was elected Treasurer of Alaska Air Group and Alaska Airlines. He was Chief Financial Officer of Virgin America Inc. from December 2016 to July 2018, when Virgin America was merged into Alaska. He is a member of Air Group's Management Executive Committee. Mr. Pedersen will retire effective March 2, 2020 and Mr. Tackett will assume the role of Chief Financial Officer.
Mr. Levine was elected Senior Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines in January 2020 and is a member of Air Group’s Management Executive Committee. Mr. Levine was previously Vice President Legal and General Counsel of Alaska Air Group and Alaska Airlines (January 2016 - January 2020). He was elected Corporate Secretary of Alaska Air Group and Alaska Airlines in August 2017. Mr. Levine joined Alaska Airlines in February 2006 as a Senior Attorney. He also served as Associate General Counsel and Managing Director Commercial Law and General Litigation from
July 2009 to February 2011 and, subsequently, as Deputy General Counsel and Managing Director of Legal at Alaska Airlines from February 2011 to January 2016. He was appointed Assistant Corporate Secretary of Horizon Air in August 2017 and was Assistant Corporate Secretary of Virgin America from November 2017 to July 2018, when Virgin America was merged into Alaska.
Mr. Minicucci was elected President of Alaska Airlines in May 2016. Prior to that he was Executive Vice President/Operations of Alaska Airlines from December 2008 to May 2016, and was Alaska’s Chief Operating Officer from December 2008 until November 2019. He was Chief Executive Officer of Virgin America Inc. from December 2016 to July 2018, when Virgin America was merged into Alaska. He is a member of Air Group’s Management Executive Committee.
Mr. Sprague was elected President of Horizon Air effective November 6, 2019 and is a member of Air Group’s Management Executive Committee. Mr. Sprague previously served as Senior Vice President External Relations of Alaska Airlines from May 2014 until his resignation in September 2017. Mr. Sprague also served Alaska Airlines as Vice President of Marketing from March 2010 to April 2014 and Vice President of Alaska Air Cargo from April 2008 to March 2010.
Mr. Harrison joined Alaska Airlines in 2003 as the Managing Director of Internal Audit and was elected Vice President of Planning and Revenue Management in 2008. He was elected Senior Vice President of Planning and Revenue Management in 2014. He was elected Executive Vice President and Chief Revenue Officer in February 2015 and named Executive Vice President and Chief Commercial Officer in August 2015. He is a member of Air Group's Management Executive Committee.
Mr. Beck was elected Executive Vice President and Chief Operating Officer of Alaska Airlines effective November 6, 2019 and is a member of Air Group’s Management Executive Committee. Prior to that he served as President and CEO of Horizon Air from January 2018 – November 2019. Mr. Beck previously served as Vice President, Flight Operations at Alaska Airlines, Inc. until retiring in June 2015. Following that date, he provided consulting services to Alaska Airlines, Inc. in connection with the integration to a single operating certificate with Virgin America Inc.
Mr. Tackett was elected Executive Vice President of Planning and Strategy in September 2018 and is a member of Air Group’s Management Executive Committee. Mr. Tackett previously served as Senior Vice President of Revenue and E-commerce from August 2017 to September 2018 and has served a number of capacities since joining Alaska Airlines in 2000, including Managing Director Financial Planning and Analysis, (2008-2010), Vice President Labor Relations (2010-2015) and Vice President Revenue Management in 2016. Mr. Tackett will assume the role of Chief Financial Officer concurrent with Mr. Pedersen's retirement in March 2020.
Ms. Schneider was elected Senior Vice President of People at Alaska Airlines in June 2019 and is a member of Air Group’s Management Executive Committee. Ms. Schneider was previously Vice President of People at Alaska (August 2017-May 2019) Vice President of Inflight Services at Alaska (2011-2017), later also taking responsibility for Call Centers at Alaska (February 2017). She began her career at Alaska as Manager of Financial Accounting in 1989. Since that time, she has held a number of positions.
Ms. Birkett-Rakow was elected Vice President of External Relations at Alaska Airlines in September 2017 and became a member of Air Group’s Management Executive Committee at that time.
The airline industry is highly regulated, most notably by the federal government. The Department of Transportation (DOT), the the Transportation Security Administration (TSA) and the FAA exercise significant regulatory authority over air carriers.
•DOT: A domestic airline is required to hold a certificate of public convenience and necessity issued by the DOT in order to provide passenger and cargo air transportation in the U.S. Subject to certain individual airport capacity, noise and other restrictions, this certificate permits an air carrier to operate between any two points in the U.S. Certificates do not expire, but may be revoked for failure to comply with federal aviation statutes, regulations, orders or the terms of the certificates. While airlines are permitted to establish their own fares without government regulation, the DOT has jurisdiction over the approval of international codeshare agreements, marketing alliance agreements between major domestic carriers, international and some domestic route authorities, Essential Air Service market subsidies, carrier liability for personal or property damage, and certain airport rates and charges disputes. International treaties may also contain restrictions or requirements for flying outside of the U.S. and impose different carrier liability limits than those applicable to domestic flights. The DOT has been active in implementing a variety of “consumer protection” regulations, covering subjects such
as advertising, passenger communications, denied boarding compensation and tarmac delay response. Airlines are subject to enforcement actions that are brought by the DOT for alleged violations of consumer protection and other economic regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.
•FAA: The FAA, through Federal Aviation Regulations (FARs), generally regulates all aspects of airline operations, including establishing personnel, maintenance and flight operation standards. Domestic airlines are required to hold a valid air carrier operating certificate issued by the FAA. Pursuant to these regulations, we have established, and the FAA has approved, our operations specifications and a maintenance program for each type of aircraft we operate. Each maintenance program provides for the ongoing maintenance of the relevant aircraft type, ranging from frequent routine inspections to major overhauls. Periodically, the FAA issues airworthiness directives (ADs) that must be incorporated into our aircraft maintenance program and operations. All airlines are subject to enforcement actions that are brought by the FAA from time to time for alleged violations of FARs or ADs. At this time, we are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.
•TSA: Airlines serving the U.S. must operate a TSA-approved Aircraft Operator Standard Security Program (AOSSP), and comply with TSA Security Directives (SDs) and regulations. Under TSA authority, we are required to collect a September 11 Security Fee of $5.60 per one-way trip from passengers and remit that sum to the government to fund aviation security measures. Airlines are subject to enforcement actions that are brought by the TSA for alleged violations of the AOSSP, SDs or security regulations. We are not aware of any enforcement proceedings that could either materially affect our financial position or impact our authority to operate.
The Department of Justice and DOT have jurisdiction over airline antitrust matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the RLA. To the extent we continue to fly to foreign countries and pursue alliances with international carriers, we may be subject to certain regulations of foreign agencies and international treaties.
We are also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The OSHA and other federal agencies have been authorized to create and enforce regulations that have an impact on our operations. In addition to these federal activities, various states have been delegated certain authorities under these federal statutes. Many state and local governments have adopted employee safety and health laws and regulations. We maintain our safety and health programs in order to meet or exceed these requirements.
We are also subject to various laws and government regulations concerning environmental matters, both domestically and internationally. Domestic regulations that have an impact to our operations include the Airport Noise and Capacity Act of 1990, the Clean Air Act, Resource Conservation and Recovery Act, Clean Water Act, Safe Drinking Water Act, the Comprehensive Environmental Response and Compensation Liability Act, the National Environmental Policy Act, Emergency Planning and Community Right-to-Know Act and the Toxic Substances Control Act. Many state and local environmental regulations exceed these federal regulations. In the future there may be incremental legislation aimed at reduction of carbon and other greenhouse gas emissions and environmental restoration.
The Airport Noise and Capacity Act recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have established aircraft noise reduction programs, including the imposition of nighttime curfews. We believe we have sufficient scheduling flexibility to accommodate local noise restrictions.
The impacts of carbon emissions generated by the airline industry and the impact of those emissions on climate change have faced increased scrutiny. We committed to carbon neutral international growth starting in 2020 through our commitment to Carbon Offsetting and Reduction Scheme for International Aviation, a global, market-based emissions offset program issued by the International Civil Aviation Organization. This does not have a direct impact on domestic flights, however EPA is expected to finalize a rule in 2020 on aircraft emission standards which will align with the international agreements.
Over the course of several years, we have transitioned to more fuel-efficient aircraft fleets, added fuel-efficient winglets, and flown efficient flight paths, keeping with our industry commitments towards emission reduction. In 2016, Alaska Airlines flew the first commercial flight in the U.S. using a sustainable alternative jet fuel of a 20% blend made from forest residuals. The fuel from that flight was produced by the Northwest Advanced Renewables Alliance (NARA), led by Washington State University. Alaska Airlines has joined with others at Seattle Tacoma International Airport and San Francisco International
Airport to strengthen the pathway to commercially viable sustainable aviation fuel, and through a partnership with Neste continues to assess the increased use of biofuels as an alternative fuel to reduce carbon dioxide emissions. In addition, Alaska Airlines and Horizon Air continue to utilize electric equipment at airports when we have the infrastructure to support it.
Overall, the total Alaska mainline Greenhouse Gas emissions and intensity trend has decreased since 2009 and future goals have been set to continue reducing emissions intensity. More broadly, we know that being responsible for our impact is a critical part of delivering value for all those who depend on us – employees, communities, guests, and owners – over the long term. To that end, we focused on addressing the breadth of our most significant environmental impact across emissions and waste, as well as important social impacts. Alaska Airlines leads the industry in inflight recycling and has reduced waste to landfill by over 15,000 tons over the past decade. In 2018 we were the first US airlines to remove plastic straws and stir sticks from our aircraft and in 2019, we launched a campaign called #FillBeforeYouFly to engage our employees and guests in reducing plastic waste. For more details on Alaska’s emission reductions programs as well as status on other key environmental initiatives, see Alaska’s annual Sustainability Reports and environmental performance metrics on our website,
www.flysustainably.com/reports. The information contained on our sustainability website is not a part of this annual report on Form 10-K.
Although we do not currently anticipate that specific environmental regulation will have a material effect on our financial condition, results of operations or cash flows, new regulations or compliance issues that we do not currently anticipate could have the potential to harm our financial condition, results of operations or cash flows in future periods.
We carry insurance of types customary in the airline industry and in amounts deemed adequate to protect our interests and property and to comply both with federal regulations and certain credit and lease agreements. The insurance policies principally provide coverage for Airline Hull, Spares and Comprehensive Legal Liability, War and Allied Perils, and Workers’ Compensation. In addition, we currently carry a Cyber Insurance policy in the event of security breaches from malicious parties.
We believe that our emphasis on safety and our state-of-the-art flight deck safety technology help to control the cost of our insurance.
WHERE YOU CAN FIND MORE INFORMATION
Our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available on our website at www.alaskaair.com, free of charge, as soon as reasonably practicable after the electronic filing of these reports with the Securities and Exchange Commission. The information contained on our website is not a part of this annual report on Form 10-K.
GLOSSARY OF TERMS
Aircraft Utilization - block hours per day; this represents the average number of hours per day our aircraft are in transit
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 capitalized operating lease liabilities) divided by total equity plus adjusted debt
Diluted Earnings per Share - represents earnings per share (EPS) 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
Free Cash Flow Conversion - free cash flow as a percentage of adjusted net income
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, Airbus 320 family and Airbus 321neo jets and all associated revenues and costs
Net adjusted debt - long-term debt, including current portion, plus capitalized operating leases, less cash and marketable securities
Net adjusted debt to EBITDAR - represents net adjusted debt divided by EBITDAR (trailing twelve months earnings before interest, taxes, depreciation, amortization, special items and rent)
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, 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 (CPA). Additionally, Regional includes an allocation of corporate overhead such as IT, finance, and 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
If any of the following occurs, our business, financial condition and results of operations could be harmed. The trading price of our common stock could also decline. We operate in a continually changing business environment. In this environment, new risks may emerge, and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.
We have adopted an enterprise-wide risk analysis and oversight program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives as well as align these risks with Board oversight. These enterprise-wide risks have been aligned to the risk factors discussed below.
SAFETY, COMPLIANCE AND OPERATIONAL EXCELLENCE
Our reputation and financial results could be harmed in the event of an airline accident or incident.
An accident or incident involving one of our aircraft or an aircraft operated by one of our codeshare partners or CPA carriers could involve loss of life and result in a loss of confidence in our Company by the flying public and/or aviation authorities. We could experience significant claims from injured passengers, bystanders and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice, as do our codeshare partners and CPA carriers. However, the amount of such coverage may not be adequate to fully cover all claims, and we may be forced to bear substantial economic losses from such an event. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if it is fully insured and does not involve one of our aircraft, could cause a public perception that our airlines or the aircraft we or our partners fly are less safe or reliable than other transportation alternatives. This would harm our business.
Our operations are often affected by factors beyond our control, including delays, cancellations and other conditions, which could harm our business, financial condition and results of operations.
As is the case for all airlines, our operations often are affected by delays, cancellations and other conditions caused by factors largely beyond our control.
Factors that might impact our operations include:
•congestion, construction, and/or space constraints at airports, specifically in our hub locations of Seattle, Los Angeles, and San Francisco;
•air traffic control problems;
•adverse weather conditions;
•lack of operational approval (e.g. new routes, aircraft deliveries, etc.);
•increased security measures or breaches in security;
•contagious illness and fear of contagion;
•changes in international treaties concerning air rights;
•international or domestic conflicts or terrorist activity; and
•other changes in business conditions.
Due to our concentration of flights in the Pacific Northwest and Alaska, we believe a large portion of our operation is more susceptible to adverse weather conditions than other carriers. A general reduction in airline passenger traffic as a result of any of the above-mentioned factors could harm our business, financial condition and results of operations.
Changes in government regulation imposing additional requirements and restrictions on our operations could increase our operating costs and result in service delays and disruptions.
Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that require substantial compliance costs. In the last several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA have issued regulations that have required significant expenditures relating to maintenance of aircraft, operation of airlines and broadening of consumer protections.
Similarly, there are a number of legislative and regulatory initiatives and reforms at the federal, state and local levels. These initiatives include increasingly stringent laws to protect the environment, minimum wage requirements, mandatory paid sick or family leave, and health care mandates. These laws could affect our relationship with our workforce and the vendors that serve our airlines and cause our expenses to increase without an ability to pass through these costs. New initiatives with employer-funded costs, specifically those impacting Washington State, could disproportionately increase our cost structure as compared
to our competitors. In recent years, the airline industry has experienced an increase in litigation over the application of state and local employment laws, particularly in California. Application of these laws may result in operational disruption, increased litigation risk, and impact on negotiated labor agreements.
Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Many airports have increased their rates and charges to air carriers to reflect higher costs of security, updates to infrastructure and other. Additional laws, regulations, taxes, airport rates and airport charges may be occasionally proposed that could significantly increase the cost of airline operations or reduce the demand for air travel. Although lawmakers may impose these additional fees and view them as “pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business. Additionally, changes in laws and regulations at the local level may be difficult to track and maintain compliance. Any instances of non-compliance could result in additional fines and fees.
The airline industry continues to face potential security concerns and related costs.
Terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a significant negative effect on the airline industry, including us, and could:
•significantly reduce passenger traffic and yields as a result of a dramatic drop in demand for air travel;
•significantly increase security and insurance costs;
•make war risk or other insurance unavailable or extremely expensive;
•increase fuel costs and the volatility of fuel prices;
•increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and
•result in a grounding of commercial air traffic by the FAA.
The occurrence of any of these events would harm our business, financial condition and results of operations.
We rely on third-party vendors for certain critical activities, which could expose us to disruptions in our operation or unexpected cost increases.
We rely on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, regional flying, ground handling, fueling, computer reservation system hosting, telecommunication systems, information technology infrastructure and services, and deicing, among others.
Even though we strive to formalize agreements with these vendors that define expected service levels, our use of outside vendors increases our exposure to several risks. In the event that one or more vendors go into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately, we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force us to renegotiate existing agreements on less favorable terms. These events could result in disruptions in our operations or increases in our cost structure.
Operation of a multi-aircraft type fleet may present standardization and training challenges.
We strive for operational efficiency, which has historically been aided by our operation of a single aircraft type fleet at each operating company. With our acquisition of Virgin America, we added additional aircraft types to our mainline fleet. Certain procedures and training remain to be completed in order to ensure standardized operations for our crews and technicians as well as a seamless experience for our guests. Any failure to complete these procedures and training may create adverse impacts on guests, employees, and our ability to run an operationally efficient airline.
The airline industry is highly competitive and susceptible to price discounting and changes in capacity, which could have a material adverse effect on our business. If we cannot successfully compete in the marketplace, our business, financial condition, and operating results will be materially adversely affected.
The U.S. airline industry is characterized by substantial price competition. In recent years, the market share held by low-cost carriers and ultra low-cost carriers has increased significantly and is expected to continue to increase. Airlines also compete for market share by increasing or decreasing their capacity, route systems, and the number of markets served. Several of our competitors have increased their capacity in markets we serve, particularly in our key West Coast markets. The resulting increased competition in both domestic and international markets may have a material adverse effect on our results of operations, financial condition, or liquidity.
We strive toward maintaining and improving our competitive cost structure by setting aggressive unit cost-reduction goals. This is an important part of our business strategy of offering the best value to our guests through low fares while achieving acceptable profit margins and return on capital. If we are unable to maintain our cost advantage over the long-term and achieve sustained targeted returns on invested capital, we will likely not be able to grow our business in the future or weather industry downturns. Therefore, our financial results may suffer.
The airline industry may undergo further restructuring, consolidation, or the creation or modification of alliances or joint ventures, any of which could have a material adverse effect on our business, financial condition and results of operations.
We continue to face strong competition from other carriers due to restructuring, consolidation, and the creation and modification of alliances and joint ventures. Since deregulation, both the U.S. and international airline industries have experienced consolidation through a number of mergers and acquisitions. Carriers may also improve their competitive positions through airline alliances, slot swaps/acquisitions and/or joint ventures. Certain airline joint ventures further competition by allowing airlines to coordinate routes, pool revenues and costs, and enjoy other mutual benefits, achieving many of the benefits of consolidation.
Our concentration in certain markets could cause us to be disproportionately impacted by adverse changes in circumstances in those locations.
Our strategy includes being the premier carrier for people living on the West Coast. This results in a high concentration of our business in key West Coast markets. A significant portion of our flights occur to and from our Seattle, Portland, and Bay Area hubs. In 2019, passengers to and from Seattle, Portland, and the Bay Area accounted for 83% of our total guests.
We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increase in competition in our key markets could also cause us to reduce fares or take other competitive measures that, if sustained, could harm our business, financial condition and results of operations.
We are dependent on a limited number of suppliers for aircraft and parts.
Alaska is dependent on Boeing and Airbus as its sole suppliers for aircraft and many aircraft parts. Horizon is similarly dependent on De Havilland and Embraer. Additionally, each carrier is dependent on sole suppliers for aircraft engines for each aircraft type. As a result, we are more vulnerable to issues associated with the supply of those aircraft and parts including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA. Should we be unable to resolve known issues with certain of our aircraft or engine suppliers, it may result in the inability to operate our aircraft for extended periods. Should these suppliers be unable to manufacture or deliver new aircraft, we may not be able to grow our fleet at our intended rate, which could impact our financial position. Specifically, the Boeing 737 MAX aircraft was grounded by the FAA in March 2019 and remains grounded. We have 32 MAX9 aircraft on order, with 10 aircraft deliveries currently anticipated in 2020. If we are unable to receive these aircraft and future aircraft in a timely manner, our growth plans could be significantly impacted. Additionally, further consolidation amongst aircraft and aircraft parts manufacturers could further limit the number of suppliers. This could result in an inability to operate our aircraft or instability in the foreign countries in which the aircraft and its parts are manufactured.
We rely on partner airlines for codeshare and frequent flyer marketing arrangements.
Our airlines are parties to marketing agreements with a number of domestic and international air carriers, or “partners." These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. In addition, the agreements generally provide that members of Alaska’s Mileage Plan™ program can earn credit on or redeem credit for partner flights and vice versa. We receive revenue from flights sold under codeshare and from interline arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our frequent flyer program. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could have a negative effect on our revenues or the attractiveness of our Mileage Plan™ program, which we believe is a source of competitive advantage.
We routinely engage in analysis and discussions regarding our own strategic position, including alliances, codeshare arrangements, interline arrangements, and frequent flyer program enhancements, and will continue to have future discussions with other airlines regarding similar activities. If other airlines participate in consolidation or reorganization, those airlines may significantly improve their cost structures or revenue generation capabilities, thereby potentially making them stronger competitors of ours and potentially impairing our ability to realize expected benefits from our own strategic relationships.
Economic uncertainty, or another recession, would likely impact demand for our product and could harm our financial condition and results of operations.
The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. We are also highly dependent on U.S. consumer confidence and the health of the U.S. economy. Unfavorable U.S. economic conditions have historically driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and shorter distance travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forgo air travel by using communication alternatives such as videoconferencing or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions also hamper the ability of airlines to raise fares to counteract increased fuel, labor and other costs. Unfavorable or even uncertain economic conditions could negatively affect our financial condition and results of operations.
We rely heavily on automated systems to operate our business, and a failure to invest in new technology or a disruption of our current systems or their operators could harm our business.
We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our check-in kiosks, mobile devices, and other systems. Substantially all of our tickets are issued to our guests as electronic tickets, and the majority of our guests check-in using our website, airport kiosks, or our mobile application. We depend on our reservation system to be able to issue, track and accept these electronic tickets. In order for our operations to work efficiently, we must continue to invest in new technology to ensure that our website, reservation system and check-in systems are able to accommodate a high volume of traffic, maintain information security and deliver important flight information. Substantial or repeated website, reservations system or telecommunication systems failures or service disruptions could reduce the attractiveness of our services and cause our guests to do business with another airline. In addition, we rely on other automated systems for crew scheduling, flight dispatch and other operational needs. We are in the final stages of moving our primary data facility. Disruptions, failed migration, untimely recovery, or a breach of these systems or the data center could result in the loss of important data, an increase of our expenses, an impact on our operational performance, or a possible temporary cessation of our operations.
Failure to appropriately comply with information security rules and regulations or safeguard our employee or guest data could result in damage to our reputation and cause us to incur substantial legal and regulatory cost.
We accept, store and transmit information about our guests, our employees, our business partners, and our business. Many international and U.S. jurisdictions have established or are in the process of establishing their own data security and privacy regulatory framework with which we, our business partners, and our corporate customers must comply. There are also various bills pending at the U.S. state and federal levels that could impose additional privacy and data security obligations. This uncertain and increasingly complex regulatory environment may result in significant expenses associated with increased investment in technology and the development of new operational processes, particularly as we continue to collect and retain large amounts of personal information. If our online activities or our other customer-facing technology systems do not function as designed, we may experience a loss of customer confidence, decreased sales, or be exposed to fraud, any of which could materially and adversely affect our reputation and operations. In addition, we frequently rely on third-party hosting sites and data processors, including cloud providers. To the extent that either we or third parties with whom we share information are found to be out of compliance with applicable laws and regulations, we could be subject to additional litigation, regulatory risks and reputational harm.
Cyber security threats have and will continue to impact our business. Failure to appropriately mitigate these risks could negatively impact our operations, reputation and financial condition.
Our sensitive information is securely transmitted over public and private networks. Our systems are subject to increasing and evolving cyber security risks. Unauthorized parties have attempted and continue to attempt to gain access to our systems and information, including through fraudulent misrepresentation and other means of deception. Methods used by unauthorized parties are continually evolving and may be difficult to identify. Because of these ever-evolving risks and regular attacks, we continue to review policies and educate our people on various methods utilized in attempts to gain unauthorized access to bolster awareness and encourage cautionary practices. However, the nature of these attacks means that proper policies and education may not be enough to prevent all unauthorized access. A compromise of our systems, the security of our infrastructure or those of other business partners that result in our information being accessed or stolen by unauthorized persons could adversely affect our operations and our reputation.
FINANCIAL CONDITION AND FINANCIAL MARKETS
Our business, financial condition and results of operations are substantially exposed to the volatility of jet fuel prices. Significant increases in jet fuel costs would harm our business.
Fuel costs constitute a significant portion of our total operating expenses. Future increases in the price of jet fuel may harm our business, financial condition and results of operations unless we are able to increase fares and fees or add additional ancillary services to attempt to recover increasing fuel costs.
Our indebtedness and other fixed obligations could lead to liquidity constraints that may restrict our activities.
We carry, and will continue to carry for the foreseeable future, a substantial amount of debt related to aircraft lease and financing commitments. Although we aim to keep our leverage low, due to our high fixed costs, including such aircraft lease commitments and debt service, a decrease in revenues would result in a disproportionately greater decrease in earnings.
Our outstanding long-term debt and other fixed obligations could have important consequences. For example, they could limit our ability to obtain additional financing to fund our future capital expenditures, working capital or other purposes; require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; or limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.
Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations when they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed.
Our maintenance costs will increase as our fleet ages, and we will periodically incur substantial maintenance costs due to the timing of maintenance events of our aircraft.
As of December 31, 2019, the average age of our NextGen aircraft (B737-700, -800, -900, -900ERs) was approximately 8.9 years, the average age of our A319, A320, and A321neo aircraft was approximately 8.6 years, the average age of our owned E175 aircraft was approximately 1.6 years, and the average age of our Q400 aircraft was approximately 11.7 years. Currently, our newer aircraft require less maintenance than they will in the future. Any significant increase in maintenance expenses could have a material adverse effect on our results of operations. In addition, expenses for aircraft coming off lease could result in unplanned maintenance expense as we are required to return the leased planes in a contractually specified condition.
The application of the acquisition method of accounting resulted in us recording a significant amount of goodwill, which could result in significant future impairment charges and negatively affect our financial results.
In accordance with acquisition accounting rules, we recorded goodwill on our consolidated balance sheet to the extent the Virgin America acquisition purchase price exceeded the net fair value of Virgin America’s tangible and identifiable intangible assets and liabilities as of the acquisition date. Goodwill is not amortized, but is tested for impairment at least annually. We could record impairment charges in our results of operations as a result of, among other items, extreme fuel price volatility, a significant decline in the fair value of certain tangible or intangible assets, unfavorable trends in forecasted results of operations and cash flows, uncertain economic environment and other uncertainties. We can provide no assurance that a significant impairment charge will not occur in one or more future periods. Any such charges may materially negatively affect our financial results.
BRAND AND REPUTATION
As we evolve our brand to appeal to a changing demographic and grow into new markets, we will engage in strategic initiatives that may not be favorably received by all of our guests.
We continue to focus on strategic initiatives designed to increase our brand appeal to a diverse and evolving demographic of airline travelers. These efforts could include significant enhancements to our in-airport and on-board environments, increasing our direct customer relationships through improvements to our purchasing portals (digital and mobile) and optimization of our customer loyalty programs. In pursuit of these efforts we may negatively affect our reputation with some of our existing customer base.
The Company's brand and reputation could be harmed if it is exposed to significant negative publicity distributed through social media.
We operate in a highly visible industry that has significant exposure to social media. Negative publicity, including as a result of misconduct by our guests or employees, can spread rapidly through social media. Should the Company not respond in a timely and appropriate manner to address negative publicity, the Company's brand and reputation may be significantly harmed. Such harm could have a negative impact on our financial results.
LABOR RELATIONS AND LABOR STRATEGY
A significant increase in labor costs, unsuccessful attempts to strengthen our relationships with union employees or loss of key personnel could adversely affect our business and results of operations.
Labor costs remain a significant component of our total expenses. In addition to costs associated with represented employee groups, labors costs could also increase for non-unionized employees and via vendor agreements as we work to compete for highly skilled and qualified employees against the major U.S. airlines and other businesses in a thriving job market. Although ample efforts have been dedicated to right-sizing our management structure following the merger with Virgin America, these increased labor costs may adversely affect our financial performance.
Should employees engage in job actions, such as slow-downs, sick-outs, or other actions designed to disrupt normal operations and pressure the employer to acquiesce to bargaining demands during Section 6 negotiations, although unlawful until after lengthy mediation attempts, the operation could be significantly impacted. Although we have a long track record of fostering good communications, negotiating approaches and developing other strategies to enhance workforce engagement in our long-term vision, unsuccessful attempts to strengthen relationships with union employees or loss of key personnel could divert management’s attention from other projects and issues, which could adversely affect our business and results of operations.
The inability to attract, retain and train qualified personnel, or maintain our culture, could result in guest impacts and adversely affect our business and results of operations.
We compete against other major U.S. airlines for pilots, aircraft technicians and other skilled labor. As more pilots in the industry approach mandatory retirement age, the U.S. airline industry may be affected by a pilot shortage. Attrition beyond normal levels, the inability to attract new pilots, or our key vendors' inability to attract and retain mechanics or other skilled labor positions could negatively impact our operating results. As a result, our business prospects could be harmed. Additionally, we may be required to increase our wage and benefit packages, or pay increased rates to our vendors, to retain these positions. This would result in increased overall costs and may adversely impact our financial position.
Our success is also dependent on cultivating and maintaining a united culture with cohesive values and goals. Much of our continued success is tied to our guest loyalty. Failure to maintain and grow the Alaska culture could strain our ability to maintain relationships with guests, suppliers, employees and other constituencies. As part of this process, we may continue to incur substantial costs for employee programs.
|ITEM 1B. UNRESOLVED STAFF COMMENTS|
The following table describes the aircraft we operate and their average age at December 31, 2019:
|B737 Freighters||— || ||3 || ||— || ||3 || ||18.9 || |
|B737 NextGen||124-178 || ||153 || ||10 || ||163 || ||8.9 || |
|A319/A320||119-150 || ||10 || ||51 || ||61 || ||9.7 || |
|A321neo||185-190 || ||— || ||10 || ||10 || ||1.7 || |
|Total Mainline Fleet||166 || ||71 || ||237 || ||8.9 || |
|Q400||76 || ||26 || ||7 || ||33 || ||11.7 || |
|E175||76 || ||30 || ||32 || ||62 || ||2.3 || |
|Total Regional Fleet||56 || ||39 || ||95 || ||5.6 || |
|Total||222 || ||110 || ||332 || ||8.0 || |
“Management’s Discussion and Analysis of Financial Condition and Results of Operations" discusses future orders and options for additional aircraft. “Liquidity and Capital Resources" provides more information about aircraft that are used to secure long-term debt arrangements or collateralize credit facilities. Note 6 to the Consolidated Financial Statements provides more information regarding leased aircraft as capitalized on our Consolidated Balance Sheets.
Alaska’s leased B737 aircraft have lease expiration dates between 2020 and 2028. Alaska’s leased A319, A320, and A321neo aircraft have expiration dates between 2020 and 2031. Horizon’s leased Q400 aircraft have expiration dates between 2022 and 2023. The leased E175 aircraft are through our capacity purchase agreement with SkyWest, which extends through 2030. Alaska has the option to extend some of the leases for additional periods.
GROUND FACILITIES AND SERVICES
In various cities in the state of Alaska, we own terminal buildings and two multi-bay hangars. We also own several buildings located at or near Seattle-Tacoma International Airport (Sea-Tac). These include a multi-bay hangar and shops complex (used primarily for line maintenance), a flight operations and training center, an air cargo facility, an information technology office and data center, and various other commercial office buildings. Additionally, in 2018 we began developing a property near our existing headquarters facility for additional office space.
At the majority of the airports we serve, we lease ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas. Airport leases contain provisions for periodic adjustments of lease rates. We are typically responsible for maintenance, insurance and other facility-related expenses and services under these agreements. We also lease operations, training, administrative, and data center facilities in Burlingame, CA; Portland, OR; Quincy, WA; and Spokane, WA, line maintenance stations in Boise, ID; San Jose, CA; Redmond, OR; Seattle, WA; Kent, WA; and Spokane, WA, and call center facilities in Phoenix, AZ, Boise, ID, and Kent, WA, and a multi-bay hangar in Portland, OR.
|ITEM 3. LEGAL PROCEEDINGS|
We are a party to routine litigation matters incidental to our business. Management believes the ultimate disposition of these matters is not likely to materially affect our financial position or results of operations. This forward-looking statement is based on management’s current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. On February 4, 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines.
The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal. For these reasons, no loss has been accrued.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
|ITEM 4. MINE SAFETY DISCLOSURES|
|ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES|
As of December 31, 2019, there were 131,812,173 shares of common stock of Alaska Air Group, Inc. issued, 123,000,307 shares outstanding, and 2,131 shareholders of record. In 2019, we paid quarterly dividends of 0.35 per share in March, June, September and December. Our common stock is listed on the New York Stock Exchange (symbol: ALK).
SALES OF NON-REGISTERED SECURITIES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|Total Number of|
Paid per Share
|Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs||Maximum remaining|
dollar value of shares
that can be purchased
under the plan
October 1, 2019 - October 31, 2019 (a)
|117,115 || ||$||66.77 || ||117,115 || |
November 1, 2019 - November 30, 2019 (a)
|97,053 || ||70.06 || ||97,053 || |
December 1, 2019 - December 31, 2019 (a)
|104,633 || ||68.23 || ||104,633 || |
|Total||318,801 || ||$||68.25 || ||318,801 || ||$||487 || |
(a)Purchased pursuant to the $1 billion repurchase plan authorized by the Board of Directors in August 2015.
The following graph compares our cumulative total stockholder return since December 31, 2014 with the S&P 500 Index and the Dow Jones U.S. Airlines Index. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 on December 31, 2014.
|ITEM 6. SELECTED FINANCIAL AND OPERATING DATA|
We have recast our financial information for fiscal years 2017 and 2016 to reflect the impacts of the new revenue recognition accounting standard and retirement benefits accounting standard which both became applicable beginning January 1, 2018. Fiscal year 2015 was not recast to reflect the impacts of these standards, and is presented as was previously reported.
|Year Ended December 31 (in millions, except per-share amounts):||2019||2018||2017||2016||2015|
CONSOLIDATED OPERATING RESULTS (audited)
| || || || || || || || |
|Operating Revenues||$||8,781 || ||$||8,264 || || || ||$||7,894 || || || ||$||5,925 || ||$||5,598 || |
|Operating Expenses||7,718 || ||7,621 || || || ||6,686 || || || ||4,619 || ||4,300 || |
|Operating Income||1,063 || ||643 || || || ||1,208 || || || ||1,306 || ||1,298 || |
Non-operating income (expense), net of interest capitalized(a)
|(47)|| ||(58)|| ||(49)|| ||10 || ||14 || |
|Income before income tax||1,016 || ||585 || || || ||1,159 || || || ||1,316 || ||1,312 || |
|Net Income||$||769 || ||$||437 || || || ||$||960 || || || ||$||797 || ||$||848 || |
|Average basic shares outstanding||123.279 || ||123.230 || || ||123.211 || || ||123.557 || ||128.373 || |
|Average diluted shares outstanding||124.289 || ||123.975 || || ||123.854 || || ||124.389 || ||129.372 || |
|Basic earnings per share||$||6.24 || ||$||3.55 || || ||$||7.79 || || ||$||6.45 || ||$||6.61 || |
|Diluted earnings per share||$||6.19 || ||$||3.52 || || ||$||7.75 || || ||$||6.41 || ||$||6.56 || |
|Cash dividends declared per share||$||1.40 || ||$||1.28 || ||$||1.20 || ||$||1.10 || ||$||0.80 || |
CONSOLIDATED FINANCIAL POSITION (audited)
| || || || || || || |
|At End of Period (in millions):|| || || || || || || |
|Total assets||$||12,993 || ||$||10,912 || || || ||$||10,746 || || || ||$||9,968 || ||$||6,530 || |
|Long-term debt, including current portion||$||1,499 || ||$||2,103 || || || ||$||2,569 || || || ||$||2,964 || ||$||683 |