ALK
$65.63
Alaska Air Group
($.56)
(.85%)
Earnings Details
3rd Quarter September 2017
Wednesday, October 25, 2017 8:00:00 AM
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Summary

Alaska Air Group Misses

Alaska Air Group (ALK) reported 3rd Quarter September 2017 earnings of $2.24 per share on revenue of $2.1 billion. The consensus earnings estimate was $2.25 per share on revenue of $2.2 billion. The Earnings Whisper number was $2.33 per share. Revenue grew 35.4% on a year-over-year basis.

Alaska Air Group Inc through its subsidiaries, provides passenger air, freight and mail services within the state of Alaska and on the West Coast.

Results
Reported Earnings
$2.24
Earnings Whisper
$2.33
Consensus Estimate
$2.25
Reported Revenue
$2.12 Bil
Revenue Estimate
$2.18 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Alaska Air Group reports Third Quarter 2017 results

Financial Highlights:

Reported net income for the third quarter under Generally Accepted Accounting Principles ("GAAP") of $266 million or $2.14 per diluted share, compared to net income of $256 million, or $2.07 per diluted share in 2016. As the acquisition of Virgin America Inc. ("Virgin America") closed on Dec. 14, 2016, third quarter 2017 information reflects the results of Virgin America, including the impacts associated with purchase accounting. Third quarter 2016 results do not include Virgin America.

Reported third quarter net income, excluding merger-related costs and mark-to-market fuel hedging adjustments, of $278 million, compared to $272 million in the third quarter of 2016. Adjusted diluted earnings per share were $2.24, compared to $2.20 in the third quarter of 2016.

Virgin America results were accretive to EPS in the three and nine months ending Sept. 30, 2017.

Paid $0.30 per-share quarterly cash dividend in the third quarter, a 9% increase over the dividend paid in the third quarter of 2016.

Repurchased approximately 0.6 million shares of common stock for $50 million in the first nine months of 2017.

Generated approximately $1.4 billion of operating cash flow and used approximately $840 million for capital expenditures, resulting in approximately $520 million of free cash flow in the first nine months of 2017.

-- Held $1.7 billion in unrestricted cash and marketable securities as of Sept. 30, 2017.

Reduced debt-to-capitalization ratio to 53% as of Sept. 30, 2017, compared to 59% as of Dec. 31, 2016.

Operational Highlights:

Launched twenty new routes during the quarter, continuing the most significant network expansion in Alaska Air Group’s 85-year history, bringing the total new markets since the merger to 37.

Overall, the integration of Virgin America is going well and a number of significant milestones are expected to be achieved in the next seven months.

Announced a seven-year partnership to be the official airline of the San Francisco Giants which includes, among other things, exclusive naming rights to the AT&T Park Club Level which will now be called the "Alaska Airlines Club Level."

Signed an exclusive multi-year partnership with Golden State Warriors star, Kevin Durant, and named him our "Advisor to the CEO."

-- Added Singapore Airlines as a global Mileage Plan partner.

Selected Gogo to provide next-generation satellite-based Wi-Fi across the entire Boeing and Airbus fleets, providing guests a faster and more-reliable internet connection.

Dropped fees for bikes, golf clubs, skis, surfboards, and other sporting equipment that exceed Alaska’s normal checked baggage weight and dimensions to $25.

Took delivery of four Embraer 175 jets, bringing the total operated by Horizon to ten as of Sept. 30, 2017.

Placed the world’s first Boeing 737-700 converted from a passenger plane to a freighter into service.

Recognition and Awards:

Ranked as the top U.S. airline in the Dow Jones Sustainability Index (DJSI), receiving perfect scores for "efficiency" and "reliability".

Mileage Plan ranked first in the U.S. News & World Report’s list of Best Airline Rewards Programs for the third consecutive year.

Virgin America named "Best U.S. Airline" by Cond? Nast Traveler in their 2017 Reader’s Choice Awards for the 10th year in a row.

Ranked Best Airline in Customer Service in the 2017 worldwide SimpliFlying Awards for Excellence in Social Media.

Named Favorite Airline in North America for the second consecutive year by Trazee Travel.

-- Mileage Plan ranked Best Airline Elite Status Program in the U.S. by The Points Guy.

Recognized by the Puget Sound Business Journal as the 2017 Board Diversity Champion, for diversifying Air Group’s board composition over the last five years.

Named one of the overall five-star major regional airlines at the Passenger Choice Awards during the APEX EXPO. Virgin America received a five-star rating for low-cost carrier, and received a top honor with a Passenger Choice Award for "Best Seat Comfort."

Alaska Air Group, Inc., (ALK) today reported third quarter 2017 GAAP net income of $266 million, or $2.14 per diluted share, compared to $256 million, or $2.07 per diluted share in the third quarter of 2016. Excluding the impact of merger-related costs and mark-to-market fuel hedge adjustments, the company reported adjusted net income of $278 million, or $2.24 per diluted share, compared to $272 million, or $2.20 per diluted share, in 2016.

"Our people delivered very strong results again this quarter," said CEO Brad Tilden. "At roughly the halfway point in our integration with Virgin America, and despite some unrelated challenges in our regional operation, our business is performing well, and we are very happy with the response we’ve seen in California and throughout the West to our expanding network, our focus on hospitality, and to our industry-leading mileage plan. I want to thank our talented people for their commitment and dedication."

The following table reconciles the company’s reported GAAP net income and earnings per diluted share ("diluted EPS") for the three and nine months ended Sept. 30, 2017, and 2016 to adjusted amounts:

Three Months Ended September 30,
2017
2016
(in millions, except per-share amounts)
Dollars
Diluted EPS
Dollars
Diluted EPS
Reported GAAP net income and diluted EPS
$
266
$
2.14
$
256
$
2.07
Mark-to-market fuel hedge adjustments
(5)
(0.04)
3
0.02
Special items--merger-related costs
24
0.20
22
0.18
Income tax effect on special items and fuel hedge adjustments (7)
(0.06)
(9)
(0.07)
Non-GAAP adjusted net income and diluted EPS
$
278
$
2.24
$
272
$
2.20
Nine Months Ended September 30,
2017
2016
(in millions, except per-share amounts)
Dollars
Diluted EPS
Dollars
Diluted EPS
Reported GAAP net income and diluted EPS
$
661
$
5.31
$
700
$
5.63
Mark-to-market fuel hedge adjustments
7
0.06
(9)
(0.07)
Special items--merger-related costs
88
0.70
36
0.29
Income tax effect on special items and fuel hedge adjustments (35)
(0.28)
(10)
(0.08)
Non-GAAP adjusted net income and diluted EPS
$
721
$
5.79
$
717
$
5.77

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

A conference call regarding the third quarter results will be simulcast online at 8:30 a.m. Pacific time on October 25, 2017. It can be accessed through the company’s website at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

References in this news release to "Air Group," "company," "we," "us" and "our" refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc., Horizon Air Industries, Inc., and Virgin America Inc. are referred to as "Alaska," "Horizon," and "Virgin America" respectively, and together as our "airlines."

This news release may contain forward-looking statements subject to the safe harbor protection provided by 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. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the Company’s Annual Report on Form 10-K for the year ended Dec. 31, 2016, as well as in other documents filed by the Company with the SEC after the date thereof. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, changes in laws and regulations and risks inherent in the achievement of anticipated synergies and the timing thereof in connection with the acquisition of Virgin America. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. 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.

Alaska Airlines, together with Virgin America and its regional partners, flies 40 million guests a year to 118 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada, Costa Rica and Cuba. With Alaska and Alaska Global Partners, guests can earn and redeem miles on flights to more than 900 destinations worldwide. Alaska Airlines ranked "Highest in Customer Satisfaction Among Traditional Carriers in North America" in the J.D. Power North America Satisfaction Study for 10 consecutive years from 2008 to 2017. Learn more about Alaska’s award-winning service at newsroom.alaskaair.com and blog.alaskaair.com. Alaska Airlines, Virgin America and Horizon Air are subsidiaries of Alaska Air Group (ALK).

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.
As the acquisition closed on December 14, 2016, amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior periods.
Three Months Ended September 30,
Nine Months Ended September 30,
(in millions, except per-share amounts)
2017
2016
Change(a)
2017
2016
Change(a)
Operating Revenues:
Passenger
Mainline
$
1,562
$
1,073
46
%
$
4,390
$
3,036
45
%
Regional
262
249
5
%
725
682
6
%
Total passenger revenue
1,824
1,322
38
%
5,115
3,718
38
%
Freight and mail
32
31
3
%
88
82
7
%
Other--net
264
213
24
%
768
607
27
%
Total Operating Revenues
2,120
1,566
35
%
5,971
4,407
35
%
Operating Expenses:
Wages and benefits
475
340
40
%
1,392
1,008
38
%
Variable incentive pay
40
31
29
%
98
95
3
%
Aircraft fuel, including hedging gains and losses 368
225
64
%
1,051
593
77
%
Aircraft maintenance
88
64
38
%
271
197
38
%
Aircraft rent
70
25
180
%
204
80
155
%
Landing fees and other rentals
124
89
39
%
338
232
46
%
Contracted services
76
63
21
%
234
183
28
%
Selling expenses
91
58
57
%
269
162
66
%
Depreciation and amortization
95
101
(6)%
275
281
(2)%
Food and beverage service
50
31
61
%
145
93
56
%
Third-party regional carrier expense
30
25
20
%
84
72
17
%
Special items--merger-related costs
24
22
9
%
88
36
144
%
Other
150
92
63
%
424
267
59
%
Total Operating Expenses
1,681
1,166
44
%
4,873
3,299
48
%
Operating Income
439
400
10
%
1,098
1,108
(1)%
Nonoperating Income (Expense):
Interest income
9
7
25
20
Interest expense
(26)
(11)
(77)
(33)
Interest capitalized
5
6
13
21
Other--net
--
--
(1)
(2)
Total Nonoperating Income (Expense)
(12)
2
(40)
6
Income Before Income Tax
427
402
1,058
1,114
Income tax expense
161
146
397
414
Net Income
$
266
$
256
$
661
$
700
Basic Earnings Per Share:
$
2.15
$
2.08
$
5.35
$
5.66
Diluted Earnings Per Share:
$
2.14
$
2.07
$
5.31
$
5.63
Shares Used for Computation:
Basic
123.467
123.149
123.501
123.648
Diluted
124.220
123.833
124.341
124.393
Cash dividend declared per share:
$
0.300
$
0.275
$
0.900
$
0.825
(a) See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
Alaska Air Group, Inc.
(in millions)
September 30, 2017
December 31, 2016
Cash and marketable securities
$
1,740
$
1,580
Total current assets
2,214
2,050
Property and equipment--net
6,230
5,666
Goodwill
1,934
1,934
Intangible assets
135
143
Other assets
226
169
Total assets
10,739
9,962
Air traffic liability
1,103
849
Current portion of long-term debt
334
319
Other current liabilities
1,328
1,367
Current liabilities
2,765
2,535
Long-term debt
2,367
2,645
Other liabilities and credits
2,116
1,851
Shareholders’ equity
3,491
2,931
Total liabilities and shareholders’ equity
$
10,739
$
9,962
Debt-to-capitalization ratio, adjusted for operating leases(a) 53
%
59
%
Number of common shares outstanding
123.387
123.328
(a) Calculated using the present value of remaining aircraft lease payments.
OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.
As the acquisition closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior periods.
Three Months Ended September 30,
Nine Months Ended September 30,
2017
2016
Change(d)
2017
2016
Change(d)
Consolidated Operating Statistics:(a)
Revenue passengers (000)
11,645
9,054
28.6%
33,063
25,536
29.5%
RPMs (000,000) "traffic"
13,811
9,601
43.8%
39,073
27,569
41.7%
ASMs (000,000) "capacity"
16,164
11,212
44.2%
46,170
32,728
41.1%
Load factor
85.4%
85.6%
(0.2) pts
84.6%
84.2%
0.4 pts
Yield
13.21?
13.77?
(4.1)%
13.09?
13.49?
(3.0)%
PRASM
11.29?
11.79?
(4.2)%
11.08?
11.36?
(2.5)%
RASM
13.12?
13.97?
(6.1)%
12.93?
13.47?
(4.0)%
CASMex(b)
7.98?
8.20?
(2.7)%
8.09?
8.16?
(0.9)%
Economic fuel cost per gallon(b)
$1.80
$1.58
13.9%
$1.76
$1.47
19.7%
Fuel gallons (000,000)
207
140
47.9%
592
410
44.4%
ASM’s per gallon
78.1
80.1
(2.5)%
78.0
79.8
(2.3)%
Average number of full-time equivalent employees (FTE) 20,743
14,674
41.4%
19,723
14,500
36.0%
Mainline Operating Statistics:
Revenue passengers (000)
9,142
6,507
40.5%
25,875
18,432
40.4%
RPMs (000,000) "traffic"
12,694
8,595
47.7%
36,046
24,767
45.5%
ASMs (000,000) "capacity"
14,796
9,987
48.2%
42,398
29,216
45.1%
Load factor
85.8%
86.1%
(0.3) pts
85.0%
84.8%
0.2 pts
Yield
12.31?
12.49?
(1.4)%
12.18?
12.26?
(0.7)%
PRASM
10.56?
10.75?
(1.8)%
10.36?
10.39?
(0.3)%
RASM
12.40?
12.96?
(4.3)%
12.22?
12.53?
(2.5)%
CASMex(b)
7.28?
7.28?
--%
7.32?
7.21?
1.5%
Economic fuel cost per gallon(b)
$1.79
$1.57
14.0%
$1.76
$1.46
20.5%
Fuel gallons (000,000)
183
119
53.8%
526
350
50.3%
ASM’s per gallon
80.9
83.9
(3.6)%
80.6
83.5
(3.5)%
Average number of FTE’s
15,862
11,397
39.2%
15,439
11,260
37.1%
Aircraft utilization
16.1
10.6
51.9%
15.7
10.7
46.7%
Average aircraft stage length
1,300
1,203
8.1%
1,296
1,218
6.4%
Operating fleet
218
154
64 a/c
218
154
64 a/c
Regional Operating Statistics:(c)
Revenue passengers (000)
2,503
2,547
(1.7)%
7,188
7,105
1.2%
RPMs (000,000) "traffic"
1,117
1,006
11.0%
3,027
2,801
8.1%
ASMs (000,000) "capacity"
1,368
1,225
11.7%
3,772
3,512
7.4%
Load factor
81.7%
82.1%
(0.4) pts
80.2%
79.8%
0.4 pts
Yield
23.48?
24.75?
(5.1)%
23.95?
24.35?
(1.6)%
PRASM
19.17?
20.32?
(5.7)%
19.22?
19.43?
(1.1)%
Operating fleet
83
69
14 a/c
83
69
14 a/c
(a) Except for FTEs, data includes information related to third-party regional capacity purchase flying arrangements.
(b) See a reconciliation of this non-GAAP measure and Note A for a discussion of potential importance of this measure to investors in the accompanying pages.
(c) Data presented includes information related to flights operated by Horizon and third-party carriers.
(d) See Combined Comparative information in the accompanying pages for year-over-year comparisons including Virgin America.

SUPPLEMENTARY COMBINED COMPARATIVE FINANCIAL AND OPERATING INFORMATION (unaudited)

We believe that analysis of specific financial and operational results on a combined basis provides more meaningful year-over-year comparisons. The table below provides "Combined Comparative" results for the three and nine months ended September 30, 2016, determined as the sum of the historical consolidated results of Air Group and of Virgin America. Virgin America’s financial information has been conformed to reflect Air Group’s historical financial statement presentation for each period presented. This information does not purport to reflect what our financial and operational results would have been had the acquisition been consummated at the beginning of the periods presented.

Three Months Ended September 30,
Nine Months Ended September 30,
(in millions, except operating statistics) 2017
2016
Change
2017
2016
Change
As Reported Combined
As Reported Combined
Combined Comparative Operating Results
Passenger revenue
$
1,824
$
1,724
6%
$
5,115
$
4,833
6%
Other revenue
296
288
3%
856
808
6%
Total Operating Revenues
2,120
2,012
5%
5,971
5,641
6%
Non-fuel operating expense
1,313
1,216
8%
3,822
3,518
9%
Fuel expense
368
306
20%
1,051
822
28%
Total Operating Expenses
1,681
1,522
10%
4,873
4,340
12%
Operating Income
439
490
(10)%
1,098
1,301
(16)%
Nonoperating income (expense)
(12)
(3)
300%
(40)
(8)
400%
Income Before Tax
427
487
(12)%
1,058
1,293
(18)%
Special items--merger-related costs
24
24
--%
88
44
100%
Mark-to-market fuel hedge adjustments
(5)
3
(267)%
7
(11)
(164)%
Adjusted Income Before Tax
$
446
$
514
(13)%
$
1,153
$
1,326
(13)%
Combined Comparative Operating Statistics
Revenue passengers (000)
11,645
11,229
3.7%
33,063
31,565
4.7%
RPMs (000,000)
13,811
12,922
6.9%
39,073
36,670
6.6%
ASMs
(000,000)
16,164
15,079
7.2%
46,170
43,549
6.0%
Load Factor
85.4%
85.7%
(0.3) pts
84.6%
84.2%
0.4 pts
PRASM
11.29?
11.43?
(1.2)%
11.08?
11.10?
(0.2)%
RASM
13.12?
13.34?
(1.6)%
12.93?
12.95?
(0.2)%
CASMex
7.98?
7.90?
1.0%
8.09?
7.98?
1.4%

2016 Combined Comparative Operating Results and Statistics

Refer to our Investor Update issued on April 12, 2017 on Form 8-K for combined comparative operating results and statistics for each of the quarters, including the the calculation of the three and nine months ended September 30, 2016 combined data, and full year 2016.

OPERATING SEGMENTS (unaudited)
Alaska Air Group, Inc.
As the acquisition closed on December 14, 2016, Consolidated and Mainline amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior periods.
Three Months Ended September 30, 2017
(in millions)
Mainline
Regional
Horizon
Consolidating
Air Group
Special
Consolidated
& Other
Adjusted(a)
Items(b)
Operating revenues
Passenger
Mainline
$
1,562
$
--
$
--
$
--
$
1,562
$
--
$
1,562
Regional
--
262
--
--
262
--
262
Total passenger revenues
1,562
262
--
--
1,824
--
1,824
CPA revenues
--
--
112
(112)
--
--
--
Freight and mail
30
1
1
--
32
--
32
Other--net
242
21
1
--
264
--
264
Total operating revenues
1,834
284
114
(112)
2,120
--
2,120
Operating expenses
Operating expenses, excluding fuel
1,077
219
105
(112)
1,289
24
1,313
Economic fuel
328
45
--
--
373
(5)
368
Total operating expenses
1,405
264
105
(112)
1,662
19
1,681
Nonoperating income (expense)
Interest income
11
--
--
(2)
9
--
9
Interest expense
(23)
--
(4)
1
(26)
--
(26)
Other
5
--
--
--
5
--
5
Total Nonoperating income (expense) (7)
--
(4)
(1)
(12)
--
(12)
Income (loss) before income tax
$
422
$
20
$
5
$
(1)
$
446
$
(19)
$
427
Three Months Ended September 30, 2016
(in millions)
Mainline
Regional
Horizon
Consolidating
Air Group
Special
Consolidated
& Other
Adjusted(a)
Items(b)
Operating revenues
Passenger
Mainline
$
1,073
$
--
$
--
$
--
$
1,073
$
--
$
1,073
Regional
--
249
--
--
249
--
249
Total passenger revenues
1,073
249
--
--
1,322
--
1,322
CPA revenues
--
--
109
(109)
--
--
--
Freight and mail
30
1
--
--
31
--
31
Other--net
190
21
1
1
213
--
213
Total operating revenues
1,293
271
110
(108)
1,566
--
1,566
Operating expenses
Operating expenses, excluding fuel
727
202
99
(109)
919
22
941
Economic fuel
188
34
--
--
222
3
225
Total operating expenses
915
236
99
(109)
1,141
25
1,166
Nonoperating income (expense)
Interest income
7
--
--
--
7
--
7
Interest expense
(7)
--
(2)
(2)
(11)
--
(11)
Other
5
--
--
1
6
--
6
Total Nonoperating income (expense) 5
--
(2)
(1)
2
--
2
Income (loss) before income tax
$
383
$
35
$
9
$
--
$
427
$
(25)
$
402
(a) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.
(b) Includes merger-related costs and mark-to-market fuel hedge accounting adjustments.
Nine Months Ended September 30, 2017
(in millions)
Mainline
Regional
Horizon
Consolidating
Air Group
Special
Consolidated
& Other
Adjusted(a) Items(b)
Operating revenues
Passenger
Mainline
$
4,390
$
--
$
--
$
--
$
4,390
$
--
$
4,390
Regional
--
725
--
--
725
--
725
Total passenger revenues
4,390
725
--
--
5,115
--
5,115
CPA revenues
--
--
317
(317)
--
--
--
Freight and mail
84
3
1
--
88
--
88
Other--net
708
57
3
--
768
--
768
Total operating revenues
5,182
785
321
(317)
5,971
--
5,971
Operating expenses
Operating expenses, excluding fuel
3,101
625
324
(316)
3,734
88
3,822
Economic fuel
924
120
--
--
1,044
7
1,051
Total operating expenses
4,025
745
324
(316)
4,778
95
4,873
Nonoperating income (expense)
Interest income
27
--
--
(2)
25
--
25
Interest expense
(68)
--
(9)
--
(77)
--
(77)
Other
11
--
1
--
12
--
12
Total Nonoperating income (expense) (30)
--
(8)
(2)
(40)
--
(40)
Income (loss) before income tax
$
1,127
$
40
$
(11)
$
(3)
$
1,153
$
(95)
$
1,058
Nine Months Ended September 30, 2016
(in millions)
Mainline
Regional
Horizon
Consolidating
Air Group
Special
Consolidated
& Other
Adjusted(a) Items(b)
Operating revenues
Passenger
Mainline
$
3,036
$
--
$
--
$
--
$
3,036
$
--
$
3,036
Regional
--
682
--
--
682
--
682
Total passenger revenues
3,036
682
--
--
3,718
--
3,718
CPA revenues
--
--
322
(322)
--
--
--
Freight and mail
79
3
--
--
82
--
82
Other--net
546
57
3
1
607
--
607
Total operating revenues
3,661
742
325
(321)
4,407
--
4,407
Operating expenses
Operating expenses, excluding fuel
2,107
580
305
(322)
2,670
36
2,706
Economic fuel
512
90
--
--
602
(9)
593
Total operating expenses
2,619
670
305
(322)
3,272
27
3,299
Nonoperating income (expense)
Interest income
19
--
1
--
20
--
20
Interest expense
(23)
--
(7)
(3)
(33)
--
(33)
Other
15
--
--
4
19
--
19
Total Nonoperating income (expense) 11
--
(6)
1
6
--
6
Income (loss) before income tax
$
1,053
$
72
$
14
$
2
$
1,141
$
(27)
$
1,114
(a) The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocation and does not include certain charges. See Note A in the accompanying pages for further information.
(b) Includes merger-related costs and mark-to-market fuel hedge accounting adjustments.
GAAP TO NON-GAAP RECONCILIATIONS (unaudited)
Alaska Air Group, Inc.
As the acquisition closed on December 14, 2016, amounts presented below include Virgin America results for the three and nine months ended September 30, 2017 but not for the prior period.
CASM Excluding Fuel and Special Items Reconciliation
Three Months Ended
Nine Months Ended
September 30,
September 30,
2017
2016
2017
2016
Consolidated:
CASM
10.40
?
10.40
?
10.55
?
10.08
?
Less the following components:
Aircraft fuel, including hedging gains and losses 2.27
2.01
2.27
1.81
Special items--merger-related costs
0.15
0.19
0.19
0.11
CASM excluding fuel and special items
7.98
?
8.20
?
8.09
?
8.16
?
Mainline:
CASM
9.63
?
9.41
?
9.72
?
9.06
?
Less the following components:
Aircraft fuel, including hedging gains and losses 2.19
1.91
2.19
1.72
Special items--merger-related costs
0.16
0.22
0.21
0.13
CASM excluding fuel and special items
7.28
?
7.28
?
7.32
?
7.21
?
Fuel Reconciliation
Three Months Ended September 30,
2017
2016
(in millions, except for per-gallon amounts) Dollars
Cost/Gallon
Dollars
Cost/Gallon
Raw or "into-plane" fuel cost
$
368
$
1.78
$
218
$
1.55
Losses on settled hedges
5
0.02
4
0.03
Consolidated economic fuel expense
373
1.80
222
1.58
Mark-to-market fuel hedge adjustment
(5)
(0.02)
3
0.02
GAAP fuel expense
$
368
$
1.78
$
225
$
1.60
Fuel gallons
207
140
Nine Months Ended September 30,
2017
2016
(in millions, except for per gallon amounts) Dollars
Cost/Gallon
Dollars
Cost/Gallon
Raw or "into-plane" fuel cost
$
1,030
$
1.74
$
590
$
1.44
Losses on settled hedges
14
0.02
12
0.03
Consolidated economic fuel expense
$
1,044
$
1.76
$
602
$
1.47
Mark-to-market fuel hedge adjustment
7
0.01
(9)
(0.02)
GAAP fuel expense
$
1,051
$
1.77
$
593
$
1.45
Fuel gallons
592
410

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

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

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

Adjusted income before income tax and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan, which covers the majority of Air Group employees.

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

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

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

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 the present value of future operating lease payments) 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

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 and Airbus 320 family jets and all associated revenues and costs

PRASM - passenger revenue per ASM; commonly called "passenger unit revenue"

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

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

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

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

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

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SOURCE Alaska Air Group, Inc.

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