ALK 10-Q2 2013 use


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

T    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013
 
OR

£    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.
 
Delaware
 
91-1292054
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

 
19300 International Boulevard, Seattle, Washington 98188
Telephone: (206) 392-5040

 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 T  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
 
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 (Check one):
Large accelerated filer   T
Accelerated filer  £ 
Non-accelerated filer   £
Smaller reporting company   £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes £ No T
 
The registrant has 69,869,025 common shares, par value $1.00, outstanding at July 31, 2013.




ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

 TABLE OF CONTENTS

 

As used in this Form 10-Q, 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. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” respectively, and together as our “airlines.”
 

2




CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q 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. Some of the things that could cause our actual results to differ from our expectations are:

changes in our operating costs, primarily fuel, which can be volatile;
general economic conditions, including the impact of those conditions on customer travel behavior;
the competitive environment in our industry;
our ability to meet our cost reduction goals;
operational disruptions;
an aircraft accident or incident;
labor disputes and our ability to attract and retain qualified personnel;
the concentration of our revenue from a few key markets;
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
our reliance on automated systems and the risks associated with changes made to those systems;
changes in laws and regulations.

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, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2012. Please consider our forward-looking statements in light of those risks as you read this report.


3



PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions)
June 30, 2013
 
December 31, 2012
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
57

 
$
122

Marketable securities
1,372

 
1,130

Total cash and marketable securities
1,429

 
1,252

Receivables - net
195

 
130

Inventories and supplies - net
59

 
58

Deferred income taxes
175

 
148

Fuel hedge contracts
14

 
26

Prepaid expenses and other current assets
114

 
123

Total Current Assets
1,986

 
1,737

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
4,405

 
4,248

Other property and equipment
867

 
855

Deposits for future flight equipment
443

 
369

 
5,715

 
5,472

Less accumulated depreciation and amortization
1,990

 
1,863

Total Property and Equipment - Net
3,725

 
3,609

 
 
 
 
Fuel Hedge Contracts
13

 
39

 
 
 
 
Other Assets
128

 
120

 
 
 
 
Total Assets
$
5,852

 
$
5,505


See accompanying notes to consolidated financial statements.


4


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in millions, except share amounts)
June 30, 2013
 
December 31, 2012
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
71

 
$
65

Accrued wages, vacation and payroll taxes
140

 
184

Other accrued liabilities
711

 
557

Air traffic liability
724

 
534

Current portion of long-term debt
110

 
161

Total Current Liabilities
1,756

 
1,501

 
 
 
 
Long-Term Debt, Net of Current Portion
814

 
871

Other Liabilities and Credits
 

 
 

Deferred income taxes
496

 
446

Deferred revenue
455

 
443

Obligation for pension and postretirement medical benefits
470

 
489

Other liabilities
318

 
334

 
1,739

 
1,712

Commitments and Contingencies


 


Shareholders' Equity
 

 
 

Preferred stock, $1 par value Authorized: 5,000,000 shares, none issued or outstanding

 

Common stock, $1 par value, Authorized: 100,000,000 shares, Issued: 2013 - 70,009,327 shares; 2012 - 70,376,543 shares
70

 
70

Capital in excess of par value
629

 
660

Accumulated other comprehensive loss
(424
)
 
(436
)
Retained earnings
1,268

 
1,127

 
1,543

 
1,421

Total Liabilities and Shareholders' Equity
$
5,852

 
$
5,505


See accompanying notes to consolidated financial statements.


5


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share amounts)
2013
 
2012
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
Mainline
$
896

 
$
863

 
$
1,692

 
$
1,586

Regional
192

 
188

 
374

 
361

Total passenger revenue
1,088

 
1,051

 
2,066

 
1,947

Freight and mail
30

 
31

 
56

 
55

Other - net
138

 
132

 
268

 
251

Total Operating Revenues
1,256

 
1,214

 
2,390

 
2,253

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 

 
 

Wages and benefits
258

 
259

 
522

 
515

Variable incentive pay
21

 
22

 
42

 
38

Aircraft fuel, including hedging gains and losses
372

 
433

 
753

 
751

Aircraft maintenance
67

 
54

 
133

 
105

Aircraft rent
30

 
29

 
59

 
57

Landing fees and other rentals
75

 
60

 
136

 
123

Contracted services
54

 
50

 
107

 
98

Selling expenses
51

 
44

 
89

 
85

Depreciation and amortization
68

 
66

 
136

 
129

Food and beverage service
21

 
20

 
41

 
37

Other
65

 
61

 
133

 
126

Total Operating Expenses
1,082

 
1,098

 
2,151

 
2,064

Operating Income
174

 
116

 
239

 
189

 
 
 
 
 
 
 
 
Nonoperating Income (Expense)
 
 
 
 
 

 
 

Interest income
4

 
5

 
9

 
10

Interest expense
(14
)
 
(17
)
 
(29
)
 
(34
)
Interest capitalized
5

 
3

 
9

 
8

Other - net

 
2

 
1

 
3

 
(5
)
 
(7
)
 
(10
)
 
(13
)
Income before income tax
169

 
109

 
229

 
176

Income tax expense
65

 
41

 
88

 
67

Net Income
$
104

 
$
68

 
$
141

 
$
109

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
1.49

 
$
0.95

 
$
2.00

 
$
1.53

Diluted Earnings Per Share:
$
1.47

 
$
0.93

 
$
1.98

 
$
1.50

Shares used for computation:
 
 
 
 
 
 
 

Basic
70.252

 
70.996

 
70.342

 
71.069

Diluted
71.159

 
72.200

 
71.297

 
72.325


See accompanying notes to consolidated financial statements.

6


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net Income
$
104

 
$
68

 
$
141

 
$
109

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Related to marketable securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
(11
)
 
1

 
(12
)
 
4

Reclassification of (gain) loss into net income (within Nonoperating Income (Expense), Other - net)
(1
)
 
(2
)
 
(2
)
 
(2
)
Income tax effect
4

 

 
5

 
(1
)
Total
(8
)
 
(1
)
 
(9
)
 
1

 
 
 
 
 
 
 
 
Related to employee benefit plans:
 
 
 
 
 
 
 
Reclassification of losses into net income (within Wages & benefits)
11

 
10

 
21

 
20

Income tax effect
(3
)
 
(4
)
 
(7
)
 
(8
)
Total
8

 
6

 
14

 
12

 
 
 
 
 
 
 
 
Related to interest rate derivative instruments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
7

 
(8
)
 
10

 
(6
)
Reclassification of (gain) loss into net income (within Aircraft rent)
2

 
1

 
3

 
3

Income tax effect
(4
)
 
3

 
(6
)
 
(1
)
Total
5

 
(4
)
 
7

 
(4
)
 
 
 
 
 
 
 
 
Other comprehensive income
5

 
1

 
12

 
9

 
 
 
 
 
 
 
 
Comprehensive income
$
109

 
$
69

 
$
153

 
$
118


See accompanying notes to consolidated financial statements.


7


ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Six Months Ended June 30,
(in millions)
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
141

 
$
109

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
136

 
129

Stock-based compensation and other
17

 
6

Changes in certain assets and liabilities:
 
 
 
Changes in fair values of open fuel hedge contracts
39

 
45

Changes in deferred income taxes
16

 
58

Increase in air traffic liability
190

 
178

Increase in deferred revenue
12

 
4

Increase (decrease) in other long-term liabilities
(5
)
 
5

Other - net
46

 
(79
)
Net cash provided by operating activities
592

 
455

 
 
 
 
Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(233
)
 
(228
)
Other flight equipment
(12
)
 
(7
)
Other property and equipment
(13
)
 
(20
)
Total property and equipment additions
(258
)
 
(255
)
Assets constructed for others (Terminal 6 at LAX)

 
(50
)
Purchases of marketable securities
(720
)
 
(537
)
Sales and maturities of marketable securities
465

 
430

Proceeds from disposition of assets and changes in restricted deposits
1

 
1

Net cash used in investing activities
(512
)
 
(411
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Long-term debt payments
(109
)
 
(165
)
Proceeds from sale-leaseback transactions

 
49

Common stock repurchases
(51
)
 
(26
)
Proceeds and tax benefit from issuance of common stock
13

 
14

Other financing activities
2

 
17

Net cash used in financing activities
(145
)
 
(111
)
Net decrease in cash and cash equivalents
(65
)
 
(67
)
Cash and cash equivalents at beginning of year
122

 
102

Cash and cash equivalents at end of the period
$
57

 
$
35

 
 
 
 
Supplemental disclosure:
 

 
 

Cash paid (received) during the period for:
 
 
 
Interest (net of amount capitalized)
$
21

 
$
25

Income taxes
6

 
(3
)
Non-cash transactions:
 
 
 
Assets constructed related to Terminal 6 at LAX

 
26

See accompanying notes to consolidated financial statements.

8



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The interim condensed consolidated financial statements include the accounts of Alaska Air Group, Inc. (Air Group or the Company) and its subsidiaries, Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon), through which the Company conducts substantially all of its operations. All intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in the Form 10-K for the year ended December 31, 2012. In the opinion of management, all adjustments have been made that are necessary to present fairly the Company’s financial position as of June 30, 2013, as well as the results of operations for the three and six months ended June 30, 2013 and 2012. The adjustments made were of a normal recurring nature.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions and other factors, operating results for the three and six months ended June 30, 2013, are not necessarily indicative of operating results for the entire year.

NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Components for cash, cash equivalents and marketable securities (in millions):
June 30, 2013
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
4

 
$

 
$

 
$
4

Cash equivalents
53

 

 

 
53

Cash and cash equivalents
57

 

 

 
57

U.S. government and agency securities
412

 

 
(3
)
 
409

Foreign government bonds
24

 

 

 
24

Asset-back securities
120

 

 

 
120

Mortgage-back securities
141

 
1

 
(1
)
 
141

Corporate notes and bonds
657

 
4

 
(4
)
 
657

Municipal securities
21

 

 

 
21

Marketable securities
1,375

 
5

 
(8
)
 
1,372

Total
$
1,432

 
$
5

 
$
(8
)
 
$
1,429



9



December 31, 2012
Cost Basis
 
Unrealized
Gains
 
Unrealized Losses
 
Fair Value
Cash
$
28

 
$

 
$

 
$
28

Cash equivalents
94

 

 

 
94

Cash and cash equivalents
122

 

 

 
122

U.S. government and agency securities
271

 
1

 

 
272

Foreign government bonds
50

 
1

 

 
51

Asset-back securities
61

 
1

 

 
62

Mortgage-back securities
137

 
1

 
(1
)
 
137

Corporate notes and bonds
577

 
8

 

 
585

Municipal securities
23

 

 

 
23

Marketable securities
1,119

 
12

 
(1
)
 
1,130

Total
$
1,241

 
$
12

 
$
(1
)
 
$
1,252


Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of June 30, 2013.

Activity for marketable securities (in millions):  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Proceeds from sales and maturities
$
226

 
$
242

 
$
465

 
$
430

Gross realized gains
1

 
2

 
3

 
4

Gross realized losses

 

 
(1
)
 
(1
)
 
Marketable securities maturities (in millions):
June 30, 2013
Cost Basis
 
Fair Value
Due in one year or less
$
232

 
$
232

Due after one year through five years
1,140

 
1,137

Due after five years through 10 years
3

 
3

Total
$
1,375

 
$
1,372


NOTE 3. DERIVATIVE INSTRUMENTS

Fuel Hedge Contracts

The Company’s operations are inherently dependent upon the price and availability of aircraft fuel. To manage economic risks associated with fluctuations in aircraft fuel prices, the Company periodically enters into call options for crude oil and swap agreements for jet fuel refining margins.

As of June 30, 2013, the Company had fuel hedge contracts outstanding covering 419 million gallons of crude oil that will be settled from July 2013 to March 2016. Refer to the contractual obligations and commitments section of Item 2 for further information.

Interest Rate Swap Agreements

The Company has interest rate swap agreements with a third party designed to hedge the volatility of the underlying variable interest rate in the Company's aircraft lease agreements for six Boeing 737-800 aircraft. The agreements stipulate that the Company pay a fixed interest rate over the term of the contract and receive a floating interest rate. All significant terms of the swap agreement match the terms of the lease agreements, including interest-rate index, rate reset dates, termination dates and underlying notional values. The agreements expire from February 2020 through March 2021 to coincide with the lease termination dates.

10




Fair Values of Derivative Instruments

Fair values of derivative instruments on the consolidated balance sheet (in millions):
 
June 30, 2013
 
December 31, 2012
Derivative Instruments Not Designated as Hedges
 
 
 
Fuel hedge contracts
 
 
 
Fuel hedge contracts, current assets
$
14

 
$
26

Fuel hedge contracts, noncurrent assets
13

 
39

Fuel hedge contracts, current liabilities
(2
)
 
(1
)
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
Interest rate swaps
 
 
 
Other accrued liabilities
(6
)
 
(6
)
Other liabilities
(14
)
 
(27
)
Losses in accumulated other comprehensive loss (AOCL)
(20
)
 
(33
)

The net cash received (paid) for new positions and settlements was $(9) million and $(11) million during the three months ended June 30, 2013 and 2012, respectively. The net cash received (paid) for new positions and settlements was $(9) million and $(18) million during the six months ended June 30, 2013 and 2012, respectively.

Pretax effect of derivative instruments on earnings (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Derivative Instruments Not Designated as Hedges
 
 
 
 
 
 
 
Fuel hedge contracts
 
 
 
 
 
 
 
Gains (losses) recognized in aircraft fuel expense
$
(25
)
 
$
(82
)
 
$
(49
)
 
$
(63
)
 
 
 
 
 
 
 
 
Derivative Instruments Designated as Hedges
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
Losses recognized in aircraft rent
(2
)
 
(1
)
 
(3
)
 
(3
)
Gains (losses) recognized in other comprehensive income (OCI)
7

 
(8
)
 
10

 
(6
)

The amounts shown as recognized in aircraft rent for cash flow hedges (interest rate swaps) represent the realized losses transferred out of AOCL to aircraft rent. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period. The Company expects $6 million to be reclassified from OCI to aircraft rent within the next twelve months.

Credit Risk and Collateral

The Company is exposed to credit losses in the event of non-performance by counterparties to these derivative instruments. To mitigate exposure, the Company periodically reviews the counterparties' nonperformance by monitoring the absolute exposure levels and credit ratings. The Company maintains security agreements with a number of its counterparties which may require the Company to post collateral if the fair value of the selected derivative instruments fall below specified mark-to-market thresholds. The posted collateral does not offset the fair value of the derivative instruments and is included in "Prepaid expenses and other current assets" on the consolidated balance sheet.


11



The Company posted collateral of $9 million and $15 million as of June 30, 2013 and December 31, 2012, respectively. The collateral was provided to one counterparty associated with the net liability position of the interest rate swap agreements offset by the net asset position of the fuel hedge contracts under a master netting arrangement.

NOTE 4. FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments on a Recurring Basis

Fair values of financial instruments on the consolidated balance sheet (in millions):
June 30, 2013
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
409

 
$

 
$
409

Foreign government bonds

 
24

 
24

Asset-back securities

 
120

 
120

Mortgage-back securities

 
141

 
141

Corporate notes and bonds

 
657

 
657

Municipal securities

 
21

 
21

Derivative instruments
 
 
 
 
 
Call options

 
27

 
27

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Fuel hedge contracts

 
(2
)
 
(2
)
Interest rate swap agreements

 
(20
)
 
(20
)

December 31, 2012
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
272

 
$

 
$
272

Foreign government bonds

 
51

 
51

Asset-back securities

 
62

 
62

Mortgage-back securities

 
137

 
137

Corporate notes and bonds

 
585

 
585

Municipal securities

 
23

 
23

Derivative instruments
 
 
 
 
 
Call options

 
65

 
65

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Fuel hedge contracts

 
(1
)
 
(1
)
Interest rate swap agreements

 
(33
)
 
(33
)

The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government's bonds, asset-back securities, mortgage-back securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on industry standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.

The Company uses the market approach and the income approach to determine the fair value of derivative instruments. Fuel hedge contracts that are not traded on a public exchange are Level 2 as the fair value is primarily based on inputs which are readily available in active markets or can be derived from information available in active markets. The fair value for call

12



options is determined utilizing an option pricing model based on inputs that are readily available in active markets, or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. The fair value of jet fuel refining margins (fuel hedge contracts) is determined based on inputs readily available in public markets and provided by brokers who regularly trade these contracts. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by the total notional value.

The Company has no financial assets that are measured at fair value on a nonrecurring basis at June 30, 2013.

Fair Value of Other Financial Instruments

The Company used the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash and Cash Equivalents: Carried at amortized cost, which approximates fair value.

Debt: The carrying amount of the Company's variable-rate debt approximates fair values. For fixed-rate debt, the Company uses the income approach to determine the estimated fair value, by using discounted cash flow using borrowing rates for comparable debt over the weighted life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):
 
June 30, 2013
 
December 31, 2012
Carrying amount
$
746

 
$
844

Fair value
807

 
915


NOTE 5. MILEAGE PLAN

Alaska's Mileage Plan liabilities and deferrals on the consolidated balance sheets (in millions):
 
June 30, 2013
 
December 31, 2012
Current Liabilities:
 
 
 
Other accrued liabilities
$
319

 
$
285

Other Liabilities and Credits:
 
 
 
Deferred revenue
442

 
428

Other liabilities
17

 
17

Total
$
778

 
$
730

 
Alaska's Mileage Plan revenue included in the consolidated statements of operations (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Passenger revenues
$
50

 
$
48

 
$
96

 
$
91

Other-net revenues
56

 
55

 
110

 
103

Total
$
106

 
$
103

 
$
206

 
$
194



13



NOTE 6. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
June 30,
2013
 
December 31,
2012
Fixed-rate notes payable due through 2024
$
746

 
$
844

Variable-rate notes payable due through 2023
178

 
188

Long-term debt
924

 
1,032

Less current portion
110

 
161

Total
$
814

 
$
871

 
 
 
 
Weighted-average fixed-interest rate
5.7
%
 
5.8
%
Weighted-average variable-interest rate
1.8
%
 
2.0
%

During the six months ended June 30, 2013, the Company made debt payments of $109 million.

At June 30, 2013, long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2013
$
53

2014
117

2015
113

2016
111

2017
116

Thereafter
414

Total
$
924

 
Bank Lines of Credit
 
The Company has two $100 million credit facilities. Both facilities have variable interest rates based on LIBOR plus a specified margin. One of the $100 million facilities, which expires in August 2015, is secured by aircraft. The other $100 million facility, which expires in March 2017, is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has no immediate plans to borrow using either of these facilities. These facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company is in compliance with this covenant at June 30, 2013.

NOTE 7. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs recognized included the following components for the three months ended June 30, 2013 (in millions): 
 
Three Months Ended June 30,
 
Qualified
 
Nonqualified
 
Postretirement Medical
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
12

 
$
9

 
$
1

 
$

 
$
1

 
$
1

Interest cost
18

 
18

 

 
1

 
1

 
2

Expected return on assets
(28
)
 
(23
)
 

 

 

 

Amortization of prior service cost

 

 

 

 

 

Recognized actuarial loss
11

 
10

 

 

 

 

Total
$
13

 
$
14

 
$
1

 
$
1

 
$
2

 
$
3



14



Net periodic benefit costs recognized included the following components for the six months ended June 30, 2013 (in millions):
 
Six Months Ended June 30,
 
Qualified
 
Nonqualified
 
Postretirement Medical
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
23

 
$
19

 
$
1

 
$

 
$
2

 
$
2

Interest cost
36

 
37

 
1

 
1

 
2

 
3

Expected return on assets
(55
)
 
(47
)
 

 

 

 

Amortization of prior service cost

 
(1
)
 

 

 

 

Recognized actuarial loss
21

 
20

 

 

 

 

Total
$
25

 
$
28

 
$
2

 
$
1

 
$
4

 
$
5


NOTE 8. COMMITMENTS

Future minimum fixed payments for commitments (in millions):
June 30, 2013
Aircraft Leases
 
Facility Leases
 
Aircraft Commitments
 
Capacity Purchase Agreements
 
Engine Maintenance
Remainder of 2013
$
44

 
$
21

 
$
205

 
$
19

 
$
6

2014
126

 
41

 
414

 
38

 
10

2015
105

 
30

 
259

 
31

 
10

2016
82

 
22

 
221

 
18

 

2017
51

 
17

 
329

 
19

 

Thereafter
79

 
126

 
1,456

 
8

 

Total
$
487

 
$
257

 
$
2,884

 
$
133

 
$
26


Lease Commitments

At June 30, 2013, the Company had lease contracts for 63 aircraft, which have remaining noncancelable lease terms ranging from 2013 to 2021. Of these aircraft, 14 are non-operating (i.e. not in the Company's fleet) with 11 that are subleased to third-party carriers. The majority of airport and terminal facilities are also leased. Rent expense was $83 million and $68 million for the three months ended June 30, 2013 and 2012, respectively and $153 million and $138 million for the six months ended June 30, 2013 and 2012, respectively.

Aircraft Commitments
 
As of June 30, 2013, the Company is committed to purchasing 67 B737 aircraft (30 B737-900ER aircraft and 37 B737 MAX aircraft) and three Q400 aircraft, with deliveries in 2013 through 2022. In addition, the Company has options to purchase an additional 69 B737 aircraft and seven Q400 aircraft.

Capacity Purchase Agreements (CPAs)
 
At June 30, 2013, Alaska had CPAs with three carriers, including the Company's wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest Airlines, Inc. (SkyWest) to fly certain routes and Peninsula Airways, Inc. (PenAir) to fly in the state of Alaska. Under these agreements, Alaska pays the third-party carriers an amount which is based on a determination of their cost of operating those flights and other factors. The costs paid by Alaska to Horizon are based on similar data and are intended to approximate market rates for those services. Future payments (excluding Horizon) are based on contractually required minimum levels of flying by the third-party carriers, which could differ materially due to variable payments based on actual levels of flying and certain costs associated with operating flights such as fuel.


15



Engine Maintenance
 
The Company has a power-by-the-hour maintenance agreement for the B737-700 and B737-900 engines. This agreement transfers risk to third-party service provider and fixes the amount the Company pays per flight hour in exchange for maintenance and repairs under a predefined maintenance program. Future payments are based on minimum flight hours.

NOTE 9. SHAREHOLDERS' EQUITY

Common Stock Repurchase

In September 2012, the Board of Directors authorized a $250 million share repurchase program, which does not have an expiration date, but is expected to be completed by the end of December 2014. In February 2012, the Board of Directors authorized a $50 million share repurchase program, which was completed in September 2012. In June 2011, the Board of Directors authorized a $50 million share repurchase program, which was completed in January 2012.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
2012 Repurchase Program - $250 million
544,597

 
$
32

 

 
$

 
917,782

 
$
51

 

 
$

2012 Repurchase Program - $50 million

 

 
506,000

 
18

 

 

 
709,000

 
24

2011 Repurchase Program - $50 million

 

 

 

 

 

 
46,340

 
2

Total
544,597

 
$
32

 
506,000

 
$
18

 
917,782

 
$
51

 
755,340

 
$
26

 
Accumulated Other Comprehensive Loss
 
Components of accumulated other comprehensive income (loss) (in millions):
 
June 30,
2013
 
December 31,
2012
Marketable securities
$
(2
)
 
$
7

Employee benefit plans
(409
)
 
(423
)
Interest rate derivatives
(13
)
 
(20
)
Total
$
(424
)
 
$
(436
)

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average common shares outstanding plus additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and six months ended June 30, 2013 and 2012, anti-dilutive shares excluded from the calculation of EPS were not material.
 
Quarterly Cash Dividend

On July 11, 2013, Air Group's Board of Directors (the Board) declared a $0.20 per share dividend to be paid on Aug. 22, 2013, to all shareholders of record as of August 6, 2013. The Board determined the amount of the dividend by considering the company's track record of profitability, current outlook, committed and planned capital spending, the company's current financial position and overall capital allocation strategy, and prospects for increasing the dividend over the long-term. The quarterly dividend will be paid using operating cash flow and existing cash on hand.


16



NOTE 10. OPERATING SEGMENT INFORMATION
 
Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. Horizon sells 100% of its capacity to Alaska under a CPA, which is eliminated upon consolidation. In addition, Alaska has CPAs with SkyWest to fly certain routes and PenAir to fly in the state of Alaska. The Company attributes revenue between Mainline and Regional based on the coupon fare in effect on the date of issuance relative to the origin and destination of each flight segment. To manage the two operating airlines and the revenues and expenses associated with the CPAs, management views the business in three operating segments.
Alaska Mainline - Flying Boeing 737 jets and all associated revenues and costs.
Alaska Regional - Alaska's CPAs with Horizon, SkyWest and Penair. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective CPAs. Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, and other administrative costs incurred by Alaska and on behalf of Horizon.
Horizon - Horizon operates turboprop Q400 aircraft. All of Horizon's capacity is sold to Alaska under a CPA.  Expenses include those typically borne by regional airlines such as crew costs, ownership costs, and maintenance costs. The results of Horizon's operations are eliminated upon consolidation.
Additionally, the following table reports “Air Group adjusted,” which is not a measure determined in accordance with GAAP. The Company's chief operating decision-makers and others in management use this measure to evaluate operational performance and determine resources allocations. Adjustments are further explained below in reconciling to consolidated GAAP results. Operating segment information is as follows (in millions):
 
Three Months Ended June 30, 2013
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
896

 
$

 
$

 
$

 
$
896

 
$

 
$
896

Regional


 
192

 

 

 
192

 

 
192

Total passenger revenues
896

 
192

 

 

 
1,088

 

 
1,088

CPA revenues

 

 
91

 
(91
)
 

 


 

Freight and mail
29

 
1

 

 

 
30

 

 
30

Other-net
120

 
16

 
2

 

 
138

 

 
138

Total operating revenues
1,045

 
209

 
93

 
(91
)
 
1,256

 

 
1,256

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
569

 
149

 
84

 
(92
)
 
710

 

 
710

Economic fuel(b)
327

 
44

 

 

 
371

 
1

 
372

Total operating expenses
896

 
193

 
84

 
(92
)
 
1,081

 
1

 
1,082

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
4

 

 

 

 
4

 

 
4

Interest expense
(9
)
 

 
(4
)
 
(1
)
 
(14
)
 

 
(14
)
Other
6

 
(1
)
 
1

 
(1
)
 
5

 

 
5

 
1

 
(1
)
 
(3
)
 
(2
)
 
(5
)
 

 
(5
)
Income (loss) before income tax
$
150

 
$
15

 
$
6

 
$
(1
)
 
$
170

 
$
(1
)
 
$
169



17



 
Three Months Ended June 30, 2012
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
863

 
$

 
$

 
$

 
$
863

 
$

 
$
863

Regional

 
188

 

 

 
188

 

 
188

Total passenger revenues
863

 
188

 

 

 
1,051

 

 
1,051

CPA revenues

 

 
89

 
(89
)
 

 

 

Freight and mail
30

 
1

 

 

 
31

 

 
31

Other-net
115

 
15

 
2

 

 
132

 

 
132

Total operating revenues
1,008

 
204

 
91

 
(89
)
 
1,214

 

 
1,214

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
532

 
139

 
83

 
(89
)
 
665

 

 
665

Economic fuel(b)
317

 
46

 

 

 
363

 
70

 
433

Total operating expenses
849

 
185

 
83

 
(89
)
 
1,028

 
70

 
1,098

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
4

 

 

 
1

 
5

 

 
5

Interest expense
(12
)
 

 
(4
)
 
(1
)
 
(17
)
 

 
(17
)
Other
5

 

 

 

 
5

 

 
5

 
(3
)
 

 
(4
)
 

 
(7
)
 

 
(7
)
Income (loss) before income tax
$
156

 
$
19

 
$
4

 
$

 
$
179

 
$
(70
)
 
$
109


 
Six Months Ended June 30, 2013
 
Alaska
 
 
 
 
 
 
 
 
 
 
 
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
1,692

 
$

 
$

 
$

 
$
1,692

 
$

 
$
1,692

Regional

 
374

 

 

 
374

 

 
374

Total passenger revenues
1,692

 
374

 

 

 
2,066

 

 
2,066

CPA revenues

 

 
186

 
(186
)
 

 

 

Freight and mail
54

 
2

 

 

 
56

 

 
56

Other-net
234

 
31

 
3

 

 
268

 

 
268

Total operating revenues
1,980

 
407

 
189

 
(186
)
 
2,390

 

 
2,390

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel