UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 8-K

CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

October 25, 2012
(Date of earliest event reported)

ALASKA AIR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of Incorporation)

1-8957
 
91-1292054
(Commission File Number)
 
(IRS Employer Identification No.)

19300 International Boulevard, Seattle, Washington
 
98188
(Address of Principal Executive Offices)
 
(Zip Code)

(206) 392-5040
(Registrant's Telephone Number, Including Area Code)


(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 





ITEM 2.02.  Results of Operations And Financial Condition
Alaska Air Group, Inc. today issued a press release reporting financial results for the third quarter of 2012. The press release is filed as Exhibit 99.1.


ITEM 7.01.  Regulation FD Disclosure
Pursuant to 17 CFR Part 243 (“Regulation FD”), the Company is submitting information relating to its financial and operational outlook in an Investor Update as attached in Exhibit 99.2.

In accordance with General Instruction B.2 of Form 8-K, the information under this item and Exhibit 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.  This report will not be deemed an admission as to the materiality of any information required to be disclosed solely to satisfy the requirements of Regulation FD.


ITEM 9.01  Financial Statements and Other Exhibits

Exhibit 99.1                                Third Quarter 2012 Earnings Press Release dated October 25, 2012
Exhibit 99.2                                Investor Update dated October 25, 2012


Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALASKA AIR GROUP, INC.                                                                           
Registrant

Date: October 25, 2012

/s/ Brandon S. Pedersen                                                                                
Brandon S. Pedersen
Vice President/Finance and Chief Financial Officer






Exhibit 99.1
Media contact:
 
Investor/analyst contact:
Bobbie Egan
 
Chris Berry
Media Relations Manager
 
Managing Director of Investor Relations
(206) 392-5134
 
(206) 392-5260

FOR IMMEDIATE RELEASE 
 
Oct 25, 2012

ALASKA AIR GROUP REPORTS RECORD THIRD QUARTER RESULTS

Third quarter highlights with comparison to 2011:
•
Reported record third quarter net income, excluding special items, of $150.3 million, or $2.09 per diluted share, compared to adjusted net income of $131.1 million, or $1.79 per diluted share. This quarter's results compare to a First Call mean estimate of $2.08 per share.
•
Earned net income under Generally Accepted Accounting Principles (GAAP) of $163.4 million, or $2.27 per diluted share, compared to net income of $77.5 million, or $1.06 per diluted share.
•
Held the No. 1 spot in U.S. Department of Transportation on-time performance among the 10 largest U.S. airlines for the twelve months ended August 2012.
•
Announced a new $250 million share repurchase program, representing approximately 10% of our market capitalization, while completing our previously announced $50 million share repurchase program.
•
Achieved trailing twelve-month return on invested capital of 12.7 percent, compared to 12.0 percent in the twelve months ended September 30, 2011.
•
Lowered adjusted debt-to-total capitalization ratio by 8 points, to 54 percent, since December 31, 2011.
•
Held $1.2 billion in unrestricted cash and marketable securities as of September 30, 2012.
•
Received "2012 Global Vision Award" by Travel + Leisure magazine for Alaska Airlines' sustainability efforts.
New routes:
•
Began new service from Seattle to Fort Lauderdale, Portland to Washington, D.C. and Seattle to San Antonio in the third quarter.
•
Announced expanded service between Los Angeles and Anchorage beginning in the summer of 2013.
Boeing order:
•
Signed an aircraft purchase agreement with the Boeing Company for 50 new 737 aircraft, including 37 of Boeing's new 737 MAX aircraft with deliveries expected in 2015 through 2024. This order positions Alaska to replace aging aircraft over the next decade and grow the fleet, assuming profitability and return-on-invested-capital targets can be met.

SEATTLE — Alaska Air Group, Inc. (NYSE: ALK) today reported third quarter 2012 GAAP net income of $163.4 million, or $2.27 per diluted share, compared to $77.5 million, or $1.06 per diluted share in 2011. Excluding the favorable impact of mark-to-market fuel hedge adjustments of $21.2 million ($13.1 million after tax, or $0.18 per diluted share), the


1


company reported record third quarter 2012 net income of $150.3 million, or $2.09 per diluted share, compared to net income excluding special items of $131.1 million, or $1.79 per diluted share, in 2011.
"We're very pleased to report the best quarterly profit in our history," Alaska Air Group CEO Brad Tilden said. "Our pretax profit margin was one of the best in the industry, and it was made possible by the great service our people provide, low fares, and strong demand. We recognize this is a difficult industry, but we're committed to working together to sustain this high level of performance in the quarters and years ahead."
The following table reconciles the company's reported GAAP net income and earnings per diluted share (EPS) during the third quarters of 2012 and 2011 to adjusted amounts:
 
Three Months Ended September 30,
 
2012
 
2011
(in millions, except per share amounts)
Dollars
 
Diluted EPS
 
Dollars
 
Diluted EPS
Reported GAAP net income
$
163.4

 
$
2.27

 
$
77.5

 
$
1.06

Fleet transition costs, net of tax
—

 
—

 
1.2

 
0.02

Mark-to-market fuel hedge adjustments, net of tax
(13.1
)
 
(0.18
)
 
52.4

 
0.71

Non-GAAP adjusted income and per share amounts
$
150.3

 
$
2.09

 
$
131.1

 
$
1.79

 
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 via the Internet at 9:00 a.m. Pacific time on October 25, 2012. It can be accessed through the company's website at alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call at alaskaair.com/investors.
###
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. and Horizon Air Industries, Inc. are referred to as “Alaska” and “Horizon,” 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 December 31, 2011. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. 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, a subsidiary of Alaska Air Group (NYSE: ALK), together with its partner regional airlines, serves 95 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines has ranked “Highest in Customer Satisfaction Among Traditional Network Carriers” in the J.D. Power and Associates North America Airline Satisfaction StudySM for five consecutive years from 2008 to 2012. For reservations, visit www.alaskaair.com. For more news and information, visit the Alaska Airlines newsroom at www.alaskaair.com/newsroom.



2


CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share amounts)
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Operating Revenues:
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
904.6

 
$
835.6

 
8.3
 %
 
$
2,490.7

 
$
2,269.1

 
9.8
 %
Regional
198.1

 
196.1

 
1.0
 %
 
558.5

 
536.7

 
4.1
 %
Total passenger revenue
1,102.7

 
1,031.7

 
6.9
 %
 
3,049.2

 
2,805.8

 
8.7
 %
Freight and mail
29.6

 
29.9

 
(1.0
)%
 
84.6

 
83.9

 
0.8
 %
Other - net
139.9

 
136.5

 
2.5
 %
 
390.9

 
383.8

 
1.8
 %
Total Operating Revenues
1,272.2

 
1,198.1

 
6.2
 %
 
3,524.7

 
3,273.5

 
7.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Wages and benefits
255.1

 
245.1

 
4.1
 %
 
770.6

 
737.2

 
4.5
 %
Variable incentive pay
23.7

 
19.1

 
24.1
 %
 
61.2

 
53.4

 
14.6
 %
Aircraft fuel, including hedging gains and losses
336.6

 
420.1

 
(19.9
)%
 
1,087.2

 
1,012.1

 
7.4
 %
Aircraft maintenance
55.7

 
49.9

 
11.6
 %
 
160.3

 
152.3

 
5.3
 %
Aircraft rent
29.2

 
28.8

 
1.4
 %
 
86.2

 
88.3

 
(2.4
)%
Landing fees and other rentals
61.5

 
62.0

 
(0.8
)%
 
184.5

 
179.8

 
2.6
 %
Contracted services
50.3

 
46.1

 
9.1
 %
 
148.5

 
136.2

 
9.0
 %
Selling expenses
45.9

 
47.4

 
(3.2
)%
 
131.2

 
133.0

 
(1.4
)%
Depreciation and amortization
65.9

 
62.2

 
5.9
 %
 
195.4

 
184.2

 
6.1
 %
Food and beverage service
20.2

 
17.6

 
14.8
 %
 
57.6

 
49.8

 
15.7
 %
Other
58.6

 
54.6

 
7.3
 %
 
184.3

 
173.5

 
6.2
 %
Fleet transition costs
—

 
2.0

 
NM

 
—

 
38.9

 
NM

Total Operating Expenses
1,002.7

 
1,054.9

 
(4.9
)%
 
3,067.0

 
2,938.7

 
4.4
 %
Operating Income
269.5

 
143.2

 
88.2
 %
 
457.7

 
334.8

 
36.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating Income (Expense):
 
 
 
 
 
 
 
 
 
 
 
Interest income
4.5

 
4.5

 
 
 
14.5

 
18.4

 
 
Interest expense
(15.1
)
 
(25.7
)
 
 
 
(48.9
)
 
(69.1
)
 
 
Interest capitalized
4.4

 
2.1

 
 
 
12.4

 
5.5

 
 
Other - net
2.3

 
1.2

 
 
 
5.6

 
3.4

 
 
 
(3.9
)
 
(17.9
)
 
(78.2
)%
 
(16.4
)
 
(41.8
)
 
(60.8
)%
Income Before Income Tax
265.6

 
125.3

 
112.0
 %
 
441.3

 
293.0

 
50.6
 %
Income tax expense
102.2

 
47.8

 
 
 
169.6

 
112.5

 
 
Net Income
$
163.4

 
$
77.5

 
110.8
 %
 
$
271.7

 
$
180.5

 
50.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
2.30

 
$
1.08

 
 
 
$
3.83

 
$
2.51

 
 
Diluted Earnings Per Share:
$
2.27

 
$
1.06

 
 
 
$
3.77

 
$
2.46

 
 
Shares Used for Computation:
 
 
 
 
 
 
 
 
 
 
 
Basic
70.963

 
71.954

 
 
 
70.852

 
71.968

 
 
Diluted
71.883

 
73.238

 
 
 
72.059

 
73.450

 
 

NM - Not Meaningful

3


CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
(in millions)
September 30, 2012

 
December 31, 2011

 
 
 
 
Cash and marketable securities
$
1,185.6

 
$
1,140.9

 
 

 
 

Total current assets
1,716.5

 
1,595.5

Property and equipment-net
3,547.5

 
3,401.5

Other assets
172.1

 
198.0

Total assets
$
5,436.1

 
$
5,195.0

 
 

 
 

Current liabilities
$
1,528.8

 
$
1,509.6

Long-term debt
898.9

 
1,099.0

Other liabilities and credits
1,569.2

 
1,413.2

Shareholders' equity
1,439.2

 
1,173.2

Total liabilities and shareholders' equity
$
5,436.1

 
$
5,195.0

 
 

 
 

Debt to Capitalization, adjusted for operating leases
54%:46%

 
62%:38%

 
 

 
 

Number of common shares outstanding
70.165

 
70.950




4


OPERATING STATISTICS SUMMARY (unaudited)
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
Change
 
2012
 
2011
 
Change
Consolidated Operating Statistics:(a)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
6,950

 
6,709

 
3.6
%
 
19,510

 
18,707

 
4.3
%
RPMs (000,000) "traffic"
7,186

 
6,703

 
7.2
%
 
20,287

 
18,849

 
7.6
%
ASMs (000,000) "capacity"
8,274

 
7,748

 
6.8
%
 
23,557

 
22,329

 
5.5
%
Load factor
86.9
%
 
86.5
%
 
0.4 pts

 
86.1
%
 
84.4
%
 
1.7 pts

Yield

15.35
¢
 

15.39
¢
 
(0.3
%)
 

15.03
¢
 

14.89
¢
 
0.9
%
PRASM

13.33
¢
 

13.32
¢
 
0.1
%
 

12.94
¢
 

12.57
¢
 
2.9
%
RASM

15.38
¢
 

15.46
¢
 
(0.5
%)
 

14.96
¢
 

14.66
¢
 
2.0
%
CASM excluding fuel and fleet transition costs(b)

8.05
¢
 

8.17
¢
 
(1.5
%)
 

8.40
¢
 

8.45
¢
 
(0.6
%)
Economic fuel cost per gallon(c)
$
3.24

 
$
3.24

 
—
%
 
$
3.35

 
$
3.13

 
7.0
%
Fuel gallons (000,000)
110.3

 
103.8

 
6.3
%
 
316.1

 
299.8

 
5.4
%
Average number of full-time equivalent employees
12,035

 
11,859

 
1.5
%
 
11,944

 
11,850

 
0.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Mainline Operating Statistics:
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
4,985

 
4,839

 
3.0
%
 
14,012

 
13,479

 
4.0
%
RPMs (000,000) "traffic"
6,483

 
6,035

 
7.4
%
 
18,351

 
17,011

 
7.9
%
ASMs (000,000) "capacity"
7,419

 
6,936

 
7.0
%
 
21,124

 
19,991

 
5.7
%
Load factor
87.4
%
 
87.0
%
 
0.4 pts

 
86.9
%
 
85.1
%
 
1.8 pts

Yield

13.95
¢
 

13.85
¢
 
0.7
%
 

13.57
¢
 

13.34
¢
 
1.7
%
PRASM

12.19
¢
 

12.05
¢
 
1.2
%
 

11.79
¢
 

11.35
¢
 
3.9
%
RASM

14.21
¢
 

14.15
¢
 
0.4
%
 

13.78
¢
 

13.40
¢
 
2.8
%
CASM excluding fuel(b)

7.17
¢
 

7.27
¢
 
(1.4
%)
 

7.50
¢
 

7.50
¢
 
—
%
Economic fuel cost per gallon(c)
$
3.24

 
$
3.23

 
0.3
%
 
$
3.34

 
$
3.13

 
6.7
%
Fuel gallons (000,000)
96.4

 
90.6

 
6.4
%
 
276.1

 
260.8

 
5.9
%
Average number of full-time equivalent employees
9,307

 
8,960

 
3.9
%
 
9,161

 
8,914

 
2.8
%
Aircraft utilization
11.0

 
10.7

 
2.8
%
 
10.7

 
10.5

 
1.9
%
Average aircraft stage length
1,156

 
1,105

 
4.6
%
 
1,152

 
1,109

 
3.9
%
Operating fleet
120

 
117

 
3 a/c

 
120

 
117

 
3 a/c

 
 
 
 
 
 
 
 
 
 
 
 
Regional Operating Statistics:(d)
 
 
 
 
 
 
 
 
 
 
 
Revenue passengers (000)
1,965

 
1,870

 
5.1
%
 
5,498

 
5,228

 
5.2
%
RPMs (000,000) "traffic"
703

 
668

 
5.2
%
 
1,936

 
1,838

 
5.3
%
ASMs (000,000) "capacity"
855

 
812

 
5.3
%
 
2,433

 
2,338

 
4.1
%
Load factor
82.2
%
 
82.3
%
 
(0.1 pts
)
 
79.6
%
 
78.6
%
 
1.0 pts

Yield

28.18
¢
 

29.36
¢
 
(4.0
%)
 

28.85
¢
 

29.20
¢
 
(1.2
%)
PRASM

23.17
¢
 

24.15
¢
 
(4.1
%)
 

22.96
¢
 

22.96
¢
 
—
%
Operating fleet (Horizon only)
50

 
48

 
2 a/c

 
50

 
48

 
2 a/c

(a) 
Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.
(b) 
See a reconciliation of operating expenses excluding fuel and certain special items and Note A for a discussion of why these measures may be important to investors in the accompanying pages.
(c) 
See a reconciliation of economic fuel cost in the accompanying pages.
(d) 
Data presented includes information related to flights operated by Horizon Air and third-party carriers.

5


OPERATING SEGMENTS (unaudited)
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2012
 
Alaska
 
 
 
 
 
 
 
 
 
 
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
904.6

 
$
—

 
$
—

 
$
—

 
$
904.6

 
$
—

 
$
904.6

Regional
—

 
198.1

 
—

 
—

 
198.1

 
—

 
198.1

Total passenger revenues
904.6

 
198.1

 
—

 
—

 
1,102.7

 
—

 
1,102.7

CPA revenues
—

 
—

 
96.1

 
(96.1
)
 
—

 
—

 
—

Freight and mail
28.4

 
1.1

 
0.1

 
—

 
29.6

 
—

 
29.6

Other-net
121.5

 
16.7

 
1.7

 
—

 
139.9

 
—

 
139.9

Total operating revenues
1,054.5

 
215.9

 
97.9

 
(96.1
)
 
1,272.2

 
—

 
1,272.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
531.7

 
144.9

 
86.2

 
(96.7
)
 
666.1

 
—

 
666.1

Economic fuel
312.0

 
45.8

 
—

 
—

 
357.8

 
(21.2
)
 
336.6

Total operating expenses
843.7

 
190.7

 
86.2

 
(96.7
)
 
1,023.9

 
(21.2
)
 
1,002.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
4.7

 
—

 
—

 
(0.2
)
 
4.5

 
—

 
4.5

Interest expense
(11.3
)
 
—

 
(4.0
)
 
0.2

 
(15.1
)
 
—

 
(15.1
)
Other
6.5

 
—

 
0.3

 
(0.1
)
 
6.7

 
—

 
6.7

 
(0.1
)
 
—

 
(3.7
)
 
(0.1
)
 
(3.9
)
 
—

 
(3.9
)
Income before income tax
$
210.7

 
$
25.2

 
$
8.0

 
$
0.5

 
$
244.4

 
$
21.2

 
$
265.6

 
Three Months Ended September 30, 2011
 
Alaska
 
 
 
 
 
 
 
 
 
 
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
835.6

 
$
—

 
$
—

 
$
—

 
$
835.6

 
$
—

 
$
835.6

Regional
—

 
196.1

 
—

 
—

 
196.1

 
—

 
196.1

Total passenger revenues
835.6

 
196.1

 
—

 
—

 
1,031.7

 
—

 
1,031.7

CPA revenues
—

 
—

 
91.2

 
(91.2
)
 
—

 
—

 
—

Freight and mail
28.8

 
1.1

 
—

 
—

 
29.9

 
—

 
29.9

Other-net
117.0

 
17.5

 
2.0

 
—

 
136.5

 
—

 
136.5

Total operating revenues
981.4

 
214.7

 
93.2

 
(91.2
)
 
1,198.1

 
—

 
1,198.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel(b)
504.1

 
136.5

 
82.9

 
(90.7
)
 
632.8

 
2.0

 
634.8

Economic fuel
292.4

 
43.4

 
—

 
—

 
335.8

 
84.3

 
420.1

Total operating expenses
796.5

 
179.9

 
82.9

 
(90.7
)
 
968.6

 
86.3

 
1,054.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
4.6

 
—

 
—

 
(0.1
)
 
4.5

 
—

 
4.5

Interest expense
(21.8
)
 
—

 
(4.0
)
 
0.1

 
(25.7
)
 
—

 
(25.7
)
Other
3.4

 
—

 
0.1

 
(0.2
)
 
3.3

 
—

 
3.3

 
(13.8
)
 
—

 
(3.9
)
 
(0.2
)
 
(17.9
)
 
—

 
(17.9
)
Income (loss) before income tax
$
171.1

 
$
34.8

 
$
6.4

 
$
(0.7
)
 
$
211.6

 
$
(86.3
)
 
$
125.3



6


OPERATING SEGMENTS (unaudited)
 
 
 
 
 
 
 
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2012
 
Alaska
 
 
 
 
 
 
 
 
 
 
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
2,490.7

 
$
—

 
$
—

 
$
—

 
$
2,490.7

 
$
—

 
$
2,490.7

Regional
—

 
558.5

 
—

 
—

 
558.5

 
—

 
558.5

Total passenger revenues
2,490.7

 
558.5

 
—

 
—

 
3,049.2

 
—

 
3,049.2

CPA revenues
—

 
—

 
272.3

 
(272.3
)
 
—

 
—

 
—

Freight and mail
81.4

 
3.1

 
0.1

 
—

 
84.6

 
—

 
84.6

Other-net
339.7

 
45.8

 
5.4

 
—

 
390.9

 
—

 
390.9

Total operating revenues
2,911.8

 
607.4

 
277.8

 
(272.3
)
 
3,524.7

 
—

 
3,524.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,583.5

 
420.7

 
247.6

 
(272.0
)
 
1,979.8

 
—

 
1,979.8

Economic fuel
923.1

 
135.6

 
—

 
—

 
1,058.7

 
28.5

 
1,087.2

Total operating expenses
2,506.6

 
556.3

 
247.6

 
(272.0
)
 
3,038.5

 
28.5

 
3,067.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
14.0

 
—

 
—

 
0.5

 
14.5

 
—

 
14.5

Interest expense
(36.6
)
 
—

 
(12.1
)
 
(0.2
)
 
(48.9
)
 
—

 
(48.9
)
Other
16.9

 
—

 
1.1

 
—

 
18.0

 
—

 
18.0

 
(5.7
)
 
—

 
(11.0
)
 
0.3

 
(16.4
)
 
—

 
(16.4
)
Income (loss) before income tax
$
399.5

 
$
51.1

 
$
19.2

 
$
—

 
$
469.8

 
$
(28.5
)
 
$
441.3

 
Nine Months Ended September 30, 2011
 
Alaska
 
 
 
 
 
 
 
 
 
 
(in millions)
Mainline
 
Regional
 
Horizon
 
Consolidating
 
Air Group Adjusted(a)
 
Special Items
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger
 
 
 
 
 
 
 
 
 
 
 
 
 
Mainline
$
2,269.1

 
$
—

 
$
—

 
$
—

 
$
2,269.1

 
$
—

 
$
2,269.1

Regional
—

 
536.7

 
—

 
—

 
536.7

 
—

 
536.7

Total passenger revenues
2,269.1

 
536.7

 
—

 
—

 
2,805.8

 
—

 
2,805.8

CPA revenues
—

 
—

 
279.3

 
(279.3
)
 
—

 
—

 
—

Freight and mail
80.7

 
3.0

 
0.2

 
—

 
83.9

 
—

 
83.9

Other-net
329.7

 
48.0

 
6.1

 
—

 
383.8

 
—

 
383.8

Total operating revenues
2,679.5

 
587.7

 
285.6

 
(279.3
)
 
3,273.5

 
—

 
3,273.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel(b)
1,500.2

 
408.0

 
256.9

 
(277.4
)
 
1,887.7

 
38.9

 
1,926.6

Economic fuel
816.0

 
122.9

 
—

 
—

 
938.9

 
73.2

 
1,012.1

Total operating expenses
2,316.2

 
530.9

 
256.9

 
(277.4
)
 
2,826.6

 
112.1

 
2,938.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
20.4

 
—

 
—

 
(2.0
)
 
18.4

 
—

 
18.4

Interest expense
(57.8
)
 
—

 
(13.1
)
 
1.8

 
(69.1
)
 
—

 
(69.1
)
Other
8.0

 
—

 
1.0

 
(0.1
)
 
8.9

 
—

 
8.9

 
(29.4
)
 
—

 
(12.1
)
 
(0.3
)
 
(41.8
)
 
—

 
(41.8
)
Income (loss) before income tax
$
333.9

 
$
56.8

 
$
16.6

 
$
(2.2
)
 
$
405.1

 
$
(112.1
)
 
$
293.0

(a) 
The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain charges. See Note A for further information in the accompanying pages.
(b) 
Special charges related to CRJ-700 fleet transitions costs.

7


FUEL RECONCILIATIONS (unaudited)
Alaska Air Group, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
2012
 
2011
(in millions, except per gallon amounts)
Dollars

 
Cost/Gal

 
Dollars

 
Cost/Gal

Raw or "into-plane" fuel cost
$
358.3

 
$
3.25

 
$
337.4

 
$
3.25

Minus gains, or plus the losses, during the period on settled hedges
(0.5
)
 
(0.01
)
 
(1.6
)
 
(0.01
)
Consolidated economic fuel expense
$
357.8

 
$
3.24

 
$
335.8

 
$
3.24

Adjustments to reflect timing of (gain) or loss recognition resulting from mark-to-market accounting
(21.2
)
 
(0.19
)
 
84.3

 
0.81

GAAP fuel expense
$
336.6

 
$
3.05

 
$
420.1

 
$
4.05

Fuel gallons
110.3

 
 
 
103.8

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2012
 
2011
(in millions, except per gallon amounts)
Dollars

 
Cost/Gal

 
Dollars

 
Cost/Gal

Raw or "into-plane" fuel cost
$
1,046.0

 
$
3.31

 
$
969.5

 
$
3.23

Minus gains, or plus the losses, during the period on settled hedges
12.7

 
0.04

 
(30.6
)
 
(0.10
)
Consolidated economic fuel expense
$
1,058.7

 
$
3.35

 
$
938.9

 
$
3.13

Adjustments to reflect timing of (gain) or loss recognition resulting from mark-to-market accounting
28.5

 
0.09

 
73.2

 
0.25

GAAP fuel expense
$
1,087.2

 
$
3.44

 
$
1,012.1

 
$
3.38

Fuel gallons
316.1

 
 
 
299.8

 
 
 
 
 
 
 
 
 
 
Breakout of Fuel Expense:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2012
 
2011
 
2012
 
2011
Mainline economic fuel expense
$
312.0

 
$
292.4

 
$
923.1

 
$
816.0

Regional economic fuel expense
45.8

 
43.4

 
135.6

 
122.9

Consolidated economic fuel expense
$
357.8

 
$
335.8

 
$
1,058.7

 
$
938.9

 
 
 
 
 
 
 
 
Mainline Economic Cost per Gallon Reconciliation:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per gallon amounts)
2012
 
2011
 
2012
 
2011
Mainline economic fuel expense
$
312.0

 
$
292.4

 
$
923.1

 
$
816.0

Mainline fuel gallons
96.4

 
90.6

 
276.1

 
260.8

Mainline economic cost per gallon
$
3.24

 
$
3.23

 
$
3.34

 
$
3.13


8



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

•
By eliminating fuel expense and certain special items from our cost and unit cost metrics, we believe that we have better visibility into the results of 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 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 Taxes and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all Air Group employees.

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

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

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

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


9


Glossary of Terms

Alaska Mainline - the 737 part of Alaska's business with average stage lengths greater than 1,000 miles.

Alaska Regional - Alaska's shorter distance network. In this segment, we record actual onboard passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under Capacity Purchase Agreements (CPA).

Horizon - Horizon operates regional aircraft. All of Horizon's capacity is sold to Alaska under a CPA. Expenses included those typically borne by regional airlines such as crew costs, ownership costs, and maintenance costs.

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.

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

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

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

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

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

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.

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

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

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

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

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

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



10



Exhibit 99.2
Investor Update - October 25, 2012

References in this update to “Air Group,” “Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.

This update includes forecasted operational and financial information for our mainline and consolidated operations. Our disclosure of operating cost per available seat mile, excluding fuel and other items, provides us (and may provide investors) with the ability to measure and monitor our performance without these items. The most directly comparable GAAP measure is total operating expenses per available seat mile. However, due to the large fluctuations in fuel prices, we are unable to predict total operating expenses for any future period with any degree of certainty. In addition, we believe the disclosure of fuel expense on an economic basis is useful to investors in evaluating our ongoing operational performance. Please see the cautionary statement under “Forward-Looking Information.”

We are providing information about estimated fuel prices and our hedging program. Management believes it is useful to compare results between periods on an “economic basis.” Economic fuel expense is defined as the raw or “into-plane” fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period. Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.


Forward-Looking Information
This update contains 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 December 31, 2011. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. 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 - MAINLINE
Forecast Information
 
Forecast
Q4 2012
 
Change
Y-O-Y
 
Forecast
Full Year 2012
 
Change
Y-O-Y
 
Prior Guidance Sep 14, 2012
Capacity (ASMs in millions)
7,000 - 7,050
 
~ 7.5%
 
28,125 - 28,175
 
~ 6%
 
28,100 - 28,200
Cost per ASM excluding fuel and special items (cents)
7.70 - 7.75
 
~ (2%)
 
7.55 - 7.60
 
~ (0.5%)
 
7.55 - 7.60
Fuel gallons (000,000)
92
 
~ 7.5%
 
368
 
~ 6%
 
365 - 370
Economic fuel cost per gallon(a)
$3.46
 
~ 4%
 
(a) 
 
(a) 
 
(a) 
(a) 
Our economic fuel cost per gallon estimate for the fourth quarter includes the following per-gallon assumptions:  crude oil cost - $2.15 ($90 per barrel), refining margin - $1.04, cost of settled hedges - 7 cents, with the remaining difference due to taxes and other into-plane costs. Because of the volatility of fuel prices, we do not provide full-year economic fuel estimates.

Changes in Advance Booked Load Factors (percentage of ASMs that are sold)(a) 
 
October
 
November
 
December
Point Change Y-O-Y
+ 2.5 pts
 
+ 1.0 pts
 
- 0.5 pts
Prior Guidance Sep 14, 2012 - Point Change Y-O-Y
+ 4.5 pts
 
+ 1.5 pts
 
N/A
(a) 
Percentage point change compared to the same point in time last year.

AIR GROUP - CONSOLIDATED
Forecast Information
 
Forecast
Q4 2012
 
Change
Y-O-Y
 
Forecast
Full Year 2012
 
Change
Y-O-Y
 
Prior Guidance Sep 14, 2012
Capacity (ASMs in millions)
7,800 - 7,850
 
~ 7%
 
31,350 - 31,400
 
~ 6%
 
31,350 - 31,450
Cost per ASM excluding fuel and special items (cents)
8.60 - 8.65
 
~ (2.5%)
 
8.45 - 8.50
 
~ (1%)
 
8.45 - 8.50
Fuel gallons (000,000)
105
 
~ 6.5%
 
421
 
~ 5.5%
 
420 - 425
Economic fuel cost per gallon(a)
$3.46
 
~ 4%
 
(a) 
 
(a) 
 
(a) 
(a) 
Because of the volatility of fuel prices, we do not provide full-year economic fuel estimates.

Changes in Advance Booked Load Factors (percentage of ASMs that are sold)(a) 
 
October
 
November
 
December
Point Change Y-O-Y
+ 2.5 pts
 
+ 1.0 pts
 
- 0.5 pts
Prior Guidance Sep 14, 2012 - Point Change Y-O-Y
+ 4.0 pts
 
+ 1.5 pts
 
N/A
(a) 
Percentage point change compared to the same point in time last year.

Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $4 million and $6 million in the fourth quarter of 2012.



AIR GROUP - CONSOLIDATED (continued)

Capital Expenditures(a) 

Total expected capital expenditures are as follows (in millions): 
 
2012
 
2013
 
2014
 
2015
Aircraft and aircraft purchase deposits - firm
$
430

 
$
330

 
$
285

 
$
235

Other flight equipment
25

 
20

 
$
20

 
$
20

Other property and equipment
45

 
70

 
$
65

 
$
65

Total property and equipment additions
$
500

 
$
420

 
$
370

 
$
320

Aircraft and aircraft deposits related to Alaska options, if exercised(b)
$
—

 
$
35

 
$
190

 
$
480

Aircraft and aircraft deposits related to Horizon options, if exercised(b)
$
—

 
$
75

 
$
105

 
$
50

(a) 
Capital expenditures and options are subject to change.
(b) 
Alaska has options to acquire 69 737 aircraft with deliveries in 2015 through 2024. Horizon has options to acquire 10 Q400 aircraft with deliveries in 2013 to 2015.

Projected Fleet Count(a) 
 
 
 
 
Actual Fleet Count
 
Expected Fleet Activity
Aircraft
 
Seats
 
Dec 31, 2011
 
Sep 30, 2012
 
2012
Changes
 
Dec 31, 2012
 
2013
Changes
 
Dec 31, 2013
 
2014
Changes
 
Dec 31, 2014
737-400
 
144

 
24

 
24

 
—

 
24

 
(3
)
 
21

 
(5
)
 
16

737-400F(b)
 
—

 
1

 
1

 
—

 
1

 
—

 
1

 
2

 
3

737-400C(b)
 
72

 
5

 
5

 
—

 
5

 
—

 
5

 
(5
)
 
—

737-700
 
124

 
17

 
17

 
—

 
17

 
(3
)
 
14

 
—

 
14

737-800
 
157

 
58

 
61

 
—

 
61

 
—

 
61

 
—

 
61

737-900
 
172

 
12

 
12

 
—

 
12

 
—

 
12

 
—

 
12

737-900ER
 
181

 
—

 
—

 
4

 
4

 
9

 
13

 
10

 
23

Q400
 
76

 
48

 
50

 
(2
)
 
48

 
—

 
48

 
—

 
48

Totals
 
 
 
165

 
170

 
2

 
172

 
3

 
175

 
2

 
177

(a) 
Projected fleet counts at December 31, 2012, 2013 and 2014 are subject to change.
(b) 
F-Freighter; C-Combination freighter/passenger.






AIR GROUP - CONSOLIDATED (continued)

Future Fuel Hedge Positions(a) 
We use both call options on crude oil futures and swap instruments on LA Jet refining margins to hedge against price volatility of future jet fuel consumption. We have refining margin swaps in place for approximately 50% of our fourth quarter 2012 estimated jet fuel purchases at an average price of 97 cents per gallon. Our crude oil positions are as follows:
 
Approximate % of Expected Fuel Requirements
 
Weighted-Average Crude Oil Price per Barrel
 
Average Premium Cost per Barrel
   Remainder of 2012
50%
 
$100
 
$10
First Quarter 2013
50%
 
$98
 
$12
Second Quarter 2013
50%
 
$99
 
$12
Third Quarter 2013
50%
 
$101
 
$11
Fourth Quarter 2013
43%
 
$101
 
$11
   Full Year 2013
48%
 
$100
 
$12
First Quarter 2014
38%
 
$102
 
$11
Second Quarter 2014
33%
 
$101
 
$11
Third Quarter 2014
27%
 
$100
 
$10
Fourth Quarter 2014
21%
 
$102
 
$9
   Full Year 2014
30%
 
$101
 
$11
First Quarter 2015
16%
 
$101
 
$9
Second Quarter 2015
11%
 
$98
 
$8
Third Quarter 2015
6%
 
$105
 
$7
   Full Year 2015
8%
 
$101
 
$8
(a)
All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we benefit from a decline in crude oil prices, as there is no cash outlay other than the premiums we pay to enter into the contracts.

Fuel Price Sensitivity
The following table depicts a forward-looking sensitivity of our full year 2012 economic fuel price per gallon given actual economic costs incurred to date, our current crude oil and refining margin positions, and a range of possible future crude oil and refining margin prices during the fourth quarter of 2012.
 
 
 
Crude Price per Barrel
 
 
 
$
80

 
$
90

 
$
100

 
$
110

 
$
120

Refining Margin
(cents per Gallon)
70

 
$
3.28

 
$
3.33

 
$
3.38

 
$
3.42

 
$
3.45

80

 
$
3.29

 
$
3.34

 
$
3.39

 
$
3.43

 
$
3.47

90

 
$
3.30

 
$
3.36

 
$
3.40

 
$
3.44

 
$
3.48

100

 
$
3.31

 
$
3.37

 
$
3.42

 
$
3.46

 
$
3.49

110

 
$
3.33

 
$
3.38

 
$
3.43

 
$
3.47

 
$
3.50