NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska and Horizon. Our consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and their preparation requires the use of management’s estimates. Actual results may differ from these estimates.
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates market value. The Company reduces cash balances when funds are disbursed. Due to the time delay in funds clearing the banks, the Company normally maintains a negative balance in its cash disbursement accounts, which is reported as a current liability. The amount of the negative cash balance was $5 million and $7 million at December 31, 2020 and 2019, and is included in accounts payable, with the change in the balance during the year included in other financing activities in the consolidated statements of cash flows.
The Company's restricted cash balances are not material and are classified as Other noncurrent assets. Restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. They consist of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.
Marketable Securities
Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash equivalents and short-term investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in market value are reflected in accumulated other comprehensive loss (AOCL).
The Company evaluates the investment portfolio on a quarterly basis for expected credit losses. The Company uses a systematic methodology that groups assets by relevant market sector, and considers available quantitative and qualitative evidence in evaluating potential allowances for credit losses. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, the Company's intent and ability to hold, or plans to sell, the investment. Once a decline in fair value is determined to be the result of an expected credit loss, an allowance is recorded to Other—net in the consolidated statements of operations.
Inventories and Supplies—net
Expendable aircraft parts, materials and supplies are stated at average cost and are included in Inventories and supplies—net. An obsolescence allowance for expendable parts is accrued based on estimated lives of the corresponding fleet type and salvage values. The allowance for expendable inventories was $46 million and $41 million at December 31, 2020 and 2019. Removals from the reserve in 2020 were immaterial. Inventory and supplies—net also includes fuel inventory of $15 million and $28 million at December 31, 2020 and 2019. Repairable and rotable aircraft parts inventories are included in flight equipment.
Property, Equipment and Depreciation
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives less an estimated salvage value, which are as follows:
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Estimated Useful Life
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Estimated Salvage Value
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Aircraft and other flight equipment:
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Boeing 737 and E175 aircraft
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20-25 years
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10%
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Bombardier Q400 aircraft
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15 years
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5%
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Buildings
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25 - 40 years
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10%
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Minor building and land improvements
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10 years
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—%
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Capitalized leases and leasehold improvements
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Generally shorter of lease term or
estimated useful life
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—%
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Computer hardware and software
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3-10 years
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—%
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Other furniture and equipment
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5-10 years
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—%
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Near the end of an asset's estimated useful life, management updates the salvage value estimates based on current market conditions and expected use of the asset. Repairable and rotable aircraft parts are included in Aircraft and other flight equipment, and are depreciated over the associated fleet life.
Capitalized interest, based on the Company’s weighted-average borrowing rate, is added to the cost of the related asset, and is depreciated over the estimated useful life of the asset.
Maintenance and repairs, other than engine maintenance on B737-800 engines, are expensed when incurred. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated period of use. Maintenance on B737-800 engines is covered under a power-by-the-hour agreement with a third party, whereby the Company pays a determinable amount, and transfers risk, to a third party. The Company expenses the contract amounts based on engine usage.
The Company evaluates long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the total carrying amount of an asset or asset group may not be recoverable. The Company groups assets for purposes of such reviews at the lowest level at which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities, which is generally the fleet level. An impairment loss is considered when estimated future undiscounted cash flows expected to result from the use of the asset or asset group and its eventual disposition are less than its carrying amount. If the asset or asset group is not considered recoverable, a write-down equal to the excess of the carrying amount over the fair value will be recorded. For these purposes, the fair value is estimated using a combination of Level 2 inputs, including published market value estimates for the assets being assessed, and Level 3 inputs, including Company-specific and asset-specific indicators. See Note 2 for a discussion of impairments and related charges recorded in 2020.
Goodwill
Goodwill represents the excess of purchase price over the fair value of the related net assets acquired in the Company's acquisition of Virgin America and is not amortized. The total balance of goodwill is associated with the Mainline reporting unit. The Company reviews goodwill for impairment annually in the fourth quarter, or more frequently if events or circumstances indicate than an impairment may exist. The assessment utilizes either a qualitative or quantitative approach. The qualitative approach considers factors such as Alaska Air Group market capitalization and other market trends, and unobservable inputs, including Company specific cash flow and performance information. If it is determined that it is more likely than not that the asset may be impaired, management utilizes a quantitative approach to assess the asset's fair value and the amount of impairment and a charge may be recorded. In 2020, we performed a quantitative analysis using a market approach through which the fair value of the reporting unit was based on quoted market prices and an assumed market participant acquisition premium. The fair value of the reporting unit with goodwill substantially exceeded its carrying value.
Intangible Assets
Intangible assets are comprised primarily of indefinite-lived airport slots and finite-lived customer relationships recorded in conjunction with the acquisition of Virgin America. Finite-lived intangibles were recorded at fair value upon acquisition and are amortized over their estimated useful lives. Indefinite-lived intangibles were recorded at fair value upon acquisition are not amortized, but are tested at least annually for impairment using a similar methodology to goodwill, as described above. See Note 2 for a discussion of intangible asset impairments recorded in 2020.
Aircraft Maintenance Deposits
Certain Airbus leases include contractually required maintenance deposit payments to the lessor, which collateralize the lessor for future maintenance events should the Company not perform required maintenance. Most of the lease agreements provide that maintenance deposits are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance deposits held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event. The Company establishes accounting maintenance deposits as assets on the balance sheet using estimates of the anticipated timing and cost of the specific major maintenance events, such that the accounting deposits do not exceed the amount qualified for reimbursement. Aircraft maintenance deposits recorded on the consolidated balance sheets were $242 million and $143 million as of December 31, 2020 and December 31, 2019.
Leased Aircraft Return Costs
Costs of returning leased aircraft are accrued when the costs are probable and reasonably estimable, usually over the twelve months prior to the lease return, unless a determination is made that the leased asset is removed from operation. If the leased aircraft is removed from the operating fleet, the estimated cost of return is accrued at the time of removal. Any accrual is based on the time remaining on the lease, planned aircraft usage and the provisions included in the lease agreement, although the actual amount due to any lessor upon return may not be known with certainty until lease termination.
As leased aircraft are returned, payments made reduce the outstanding lease return liability. Of the total outstanding liability, $54 million is included in Other accrued liabilities and $246 million is included in Other liabilities on our consolidated balance sheets as of December 31, 2020. The accrual was not material as of December 31, 2019. Expense associated with lease returns in the standard course of operating the aircraft is included in Aircraft maintenance in the consolidated statements of operations. Expense associated with lease returns when aircraft are permanently parked is recorded as a one-time charge at the date the aircraft is permanently parked, regardless of contractual return date, and is classified as Special items - impairment charges and other in the consolidated statements of operations. See Note 2 for further discussion of these special items.
Advertising Expenses
The Company's advertising expenses include advertising, sponsorship and promotional costs. Advertising production costs are expensed as incurred. Advertising expense was $41 million, $72 million and $79 million during the years ended December 31, 2020, 2019 and 2018.
Derivative Financial Instruments
The Company's operations are significantly impacted by changes in aircraft fuel prices and interest rates. In an effort to manage exposure to these risks, the Company periodically enters into fuel and interest rate derivative instruments. These derivative instruments are recognized at fair value on the balance sheet and changes in the fair value are recognized in AOCL or in the consolidated statements of operations, depending on the nature of the instrument.
The Company does not apply hedge accounting to its derivative fuel hedge contracts, nor does it hold or issue them for trading purposes. For cash flow hedges related to interest rate swaps, the effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in interest expense.
Fair Value Measurements
Accounting standards define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The standards also establish a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company has elected not to use the fair value option provided in the accounting standards for non-financial instruments. Accordingly, those assets and liabilities, including property, plant and equipment, goodwill, intangible assets and certain other assets and liabilities are carried at amortized cost. For financial instruments, the assets and liabilities are carried at fair value, which is determined based on the market approach or income approach, depending upon the level of inputs used. The leveling of inputs for financial and non-financial instruments are disclosed in this note, and Note 5.
Income Taxes
The Company uses the asset and liability approach for accounting for and reporting income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance would be established, if necessary, for the amount of any tax benefits that, based on available evidence, are not expected to be realized. As of December 31, 2020, there is a partial valuation allowance against net deferred tax assets. The Company accounts for unrecognized tax benefits in accordance with the applicable accounting standards.
See Note 8 to the consolidated financial statements for more discussion of income taxes.
Stock-Based Compensation
Accounting standards require companies to recognize expense over the service period based on the fair value of stock options and other equity-based compensation issued to employees estimated as of the grant date. These standards apply to all stock awards that the Company grants to employees as well as the Company’s Employee Stock Purchase Plan (ESPP), which features a look-back provision and allows employees to purchase stock at a 15% discount. All stock-based compensation expense is recorded in wages and benefits in the consolidated statements of operations.
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. In 2019 and 2018, anti-dilutive stock options excluded from the calculation of EPS were not material.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The ASU requires the use of an "expected credit loss model" on certain financial instruments. The ASU also amends the impairment model for available-for-sale debt securities, and requires the estimation of credit losses to be recorded as allowances instead of reductions to amortized cost. The ASU was effective for the Company beginning January 1, 2020, and was adopted prospectively, but it did not have a significant impact on the Company's financial statements and disclosures.
NOTE 2. COVID-19 PANDEMIC
The public health and economic crises resulting from the outbreak of COVID-19 has had an unprecedented impact on the Company. Travel restrictions, event cancellations and social distancing guidelines implemented throughout the country drove significant declines in demand beginning in February, and adversely impacted revenues beginning in March 2020. Although the Company has experienced several months of modest improvement in demand, traffic remains well below 2019 levels. It is uncertain when the impacts of the crisis may resolve and when demand may return to normal levels.
In response to the COVID-19 pandemic, the Company implemented a "Peace-of-Mind" waiver, which allows travelers to book tickets for travel for a specified period of time that can be changed or canceled without incurring change fees, which was extended to cover all ticketed travel purchased through March 31, 2021. Also in 2020 the Company announced all change fees will be eliminated for first class and main cabin fares. Cancellations and postponement of travel exceeded new bookings in March and April 2020, and had a material impact on passenger revenues, air traffic liability, and cash position. Refer to Note 3 for further discussion.
The Company has taken decisive action to reduce costs and preserve cash and liquidity. The Company implemented a company-wide hiring freeze, reduced salaries of senior management and hours for management employees, suspended or canceled annual pay increases and solicited voluntary leaves of absence. In addition to these cost saving measures, the Company has actively negotiated with vendor partners to reduce contractual minimums and spending in line with the reduction in demand. Management also made the difficult decision to reduce the Company's workforce through voluntary and involuntary leaves.
With demand dramatically depressed, the Company has significantly reduced its planned flying capacity. As a result, many aircraft have been parked or removed from service. As of December 31, 2020, 32 mainline aircraft remain temporarily grounded and 40 Airbus aircraft have been permanently removed from the operating fleet. As of December 31, 2020, all operating regional aircraft were in service.
Valuation of long-lived assets
The Company reviews its long-lived assets for impairment whenever events or changes indicate that the total carrying amount
of an asset or asset group may not be recoverable.
To determine if impairment exists, a recoverability test is performed comparing the sum of estimated undiscounted future cash flows expected to be directly generated by the assets to the asset carrying value. Assets are grouped at the individual fleet level, which is the lowest level for which identifiable cash flows are available. The Company developed estimates of future cash flows utilizing historical results, adjusted for the current operating environment, including the impact of parked aircraft.
Given the temporary and permanent parking of certain aircraft described above, the Company performed impairment tests on certain long-lived assets in each of the quarters of 2020. All individual fleets passed the recoverability test, except for the Q400
fleet and the 40 permanently parked Airbus aircraft. Q400 aircraft, including operating and held-for-sale assets, were written down to their fair value, resulting in an impairment charge of $61 million. Airbus aircraft, including owned and leased aircraft and associated capital improvements, were written off in full resulting in an impairment charge of $302 million.
A summary of the impairment charges recorded for aircraft and other flight equipment for the year ended December 31, 2020 is as follows (in millions):
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Airbus Aircraft
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Q400 Aircraft
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Total Impairment
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Aircraft and other flight equipment, net
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$
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146
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$
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58
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$
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204
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|
Operating lease assets
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|
154
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|
|
—
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|
|
154
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|
Inventory and supplies - net
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2
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|
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—
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|
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2
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|
Prepaid expenses and other current assets
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—
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3
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3
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|
Total impairment and related charges - Long-lived assets
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$
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302
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|
|
$
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61
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|
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$
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363
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|
The Company will continue to evaluate the need for further impairment of long-lived assets as expectations of future demand, market conditions and fleet decisions evolve.
Lease Return Costs
As a result of removing certain leased Airbus aircraft from operating service, an estimate of the expected future lease return costs was recorded. Lease return costs that were recorded for aircraft that were permanently parked were classified as Special items - impairment charges and other in the consolidated statements of operations. Included in the total net charge of $209 million is the write off of associated maintenance deposits, as the Company no longer expects to perform maintenance events covered by those deposits.
Valuation of intangible assets and goodwill
The Company reviews definite- and indefinite-lived intangible assets and goodwill for impairment on an annual basis in the fourth quarter, or more frequently should events or circumstances indicate that an impairment may exist.
Given the strain in the general economic environment and a significant decline in Alaska Air Group market capitalization, the Company performed impairment tests on all three asset types at the end of each quarter in 2020. As a result of these analyses, indefinite-lived intangible assets and goodwill were deemed recoverable, and no impairment charges were recorded. Of the company’s definite-lived intangibles, leased gates at Dallas-Love Field (DAL Gates) were deemed not recoverable and an impairment charge of $10 million was recorded. No additional impairment charges were identified for definite-lived intangibles.
Workforce restructuring
The Company expects that demand will remain depressed into 2021, but will continue rebuilding towards 2019 capacity levels throughout 2021. Accordingly, the Company reduced its workforce to better align with the expected size of the business. To mitigate the need for involuntary furloughs, various early-out and voluntary leave programs were made available to all frontline work groups, in addition to incentive leave programs made available to Alaska pilots and mechanics. Through these programs over 600 employees took permanent early-outs, and over 3,300 employees took voluntary or incentive leaves. As a result of the participation in these mitigation programs, the involuntary furloughs that became effective October 1, 2020 were limited to approximately 400 employees. As of December 31, 2020, the majority of those involuntarily furloughed have been recalled. In addition to these furloughs, the Company permanently eliminated approximately 300 non-union management positions.
As a result of these programs, the Company recorded expense of $220 million to Special items - restructuring charges in the consolidated statement of operations for the year ended December 31, 2020. The charge is primarily comprised of wages for those pilots and mechanics on incentive leaves, ongoing medical benefit coverage, and lump-sum termination payments. This accrual is based on the Company's best estimate of capacity expectations and training schedules for 2021 as of the date of this filing. The Company has an outstanding liability of $127 million for these charges as of December 31, 2020.
Other considerations
The Company evaluated other outstanding assets for recovery. As part of this process, the Company determined $15 million in existing purchase deposits on-hand with Airbus were not likely to be recoverable. The Company also identified a $5 million receivable from a vendor that filed for bankruptcy, for which management determined that collectability is not probable. The full balance for each of these assets were reserved and charged to Special items - impairment charges and other in the consolidated statements of operations during the year-ended December 31, 2020.
The total of all the special charges summarized in this note, plus certain other immaterial amounts and the recognized subsequent event discussed in Note 12, comprise the $627 million in impairment charges and other special items reported on the Consolidated Statements of Operations for the period ending December 31, 2020.
Refer to Note 6. Long-Term Debt for further information regarding liquidity obtained in response to the COVID-19 crisis.
CARES Act Funding
In 2020, Alaska, Horizon, and McGee finalized agreements with the U.S. Department of the Treasury (the Treasury) through the Payroll Support Program (PSP) under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Under the PSP and associated agreements, Alaska, Horizon, and McGee received total funds of approximately $1.1 billion.
These funds are to be used exclusively toward continuing to pay employee salaries, wages and benefits. The funds received took the form of debt, warrants and a grant. The unsecured debt portion of $290 million was recorded at par, and warrants of
$8 million were recorded on the consolidated balance sheet at fair value determined using the Black-Scholes model. The residual amount of $753 million was recorded as grant proceeds. The grant was recognized into earnings as eligible wages, salaries and benefits were incurred. During the year ended December 31, 2020, the Company recognized $753 million of the PSP grant proceeds as a wage offset. Also included within the annual total offset is approximately $29 million in employee retention credits as stipulated in the CARES Act.
Also in 2020, the Company reached an agreement with the Treasury to participate in the CARES Act loan program. The loan agreement provides for a secured term loan facility, which allows Alaska to borrow up to $1.9 billion. As of December 31, 2020, the Company has borrowed $135 million under the loan facility. Refer to Note 6. Long-Term Debt and Note 11. Shareholders' Equity for further details regarding terms of the CARES Act loan agreement.
In early 2021, Alaska, Horizon and McGee finalized agreements with the Treasury and accepted partial disbursement of funds through an extension of the PSP, made available under the Consolidated Appropriations Act, 2021.
Under these extension agreements, Alaska, Horizon and McGee will receive a total of $546 million to be used exclusively toward continuing to pay employee salaries, wages and benefits. Alaska and Horizon received $266 million on January 15, 2021, with the remainder expected to be received in March 2021. McGee received a disbursement of $6 million on February 5, 2021. Of the funds received, $51 million takes the form of a senior term loan with a 10-year term, bearing an interest rate of 1% in years 1–5, and SOFR + 2% in years 6–10. The loan is prepayable at par at any time. As additional taxpayer protection required under the PSP extension, the Company granted the Treasury 101,227 warrants at a strike price of $52.25, based on the closing price on December 24, 2020. The warrants are non-voting, freely transferable, and may be settled as net shares or in cash at the Company's option.
As a condition to receiving an extension of PSP funds, Alaska, Horizon and McGee agreed to refrain from conducting involuntary furloughs or reducing employee rates of pay or benefits through March 31, 2021, which also includes recalling certain employees involuntarily terminated or furloughed in the fourth quarter of 2020, and to limit executive compensation through October 1, 2022. Alaska Air Group agreed to continue suspension of dividends and share repurchases until March 31, 2022.
NOTE 3. REVENUE
Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. In 2020, the Company eliminated ticket change fees indefinitely from its main cabin and first class fares. Mileage Plan other revenue includes brand and marketing revenue from our co-branded credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.
The Company disaggregates revenue by segment in Note 14. The level of detail within the Company’s consolidated statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.
Passenger Ticket and Ancillary Services Revenue
The primary performance obligation on a typical passenger ticket is to provide air travel to the passenger. Ticket revenue is collected in advance of travel and recorded as Air Traffic Liability (ATL) on the consolidated balance sheets. The Company satisfies its performance obligation and recognizes ticket revenue for each flight segment when the transportation is provided.
Ancillary passenger revenues relate to items such as checked-bag fees, ticket change fees, and on-board food and beverage sales, all of which are provided at time of flight. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue.
Revenue is also recognized for tickets that are expected to expire unused, a concept referred to as “passenger ticket breakage.” Passenger ticket breakage is recorded at the flight date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications.
In addition to selling tickets on its own marketed flights, Alaska has interline agreements with partner airlines under which it sells multi-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline. Each segment in a connecting flight represents a separate performance obligation. Revenue on segments sold
and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to the partner airline is recognized as a selling expense when the related transportation is provided. Revenue on segments operated by a partner airline is deferred for the full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue.
A portion of revenue from the Mileage Plan™ program is recorded in Passenger revenue. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation to the Company. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis. The standalone selling price for loyalty mileage credits issued is discussed in the Loyalty Mileage Credits section of this Note below. The amount allocated to the mileage credits is deferred on the balance sheet. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue.
Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations.
Passenger revenue recognized in the consolidated statements of operations (in millions):
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Twelve Months Ended December 31,
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2020
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2019
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2018
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Passenger ticket revenue, including ticket breakage and net of taxes and fees
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$
|
2,428
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|
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$
|
6,824
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|
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$
|
6,482
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Passenger ancillary revenue
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245
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567
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|
|
530
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Mileage Plan passenger revenue
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346
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|
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704
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|
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619
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|
Total passenger revenue
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$
|
3,019
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|
|
$
|
8,095
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|
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$
|
7,631
|
|
As passenger tickets and related ancillary services are primarily sold via credit cards, certain amounts due from credit card processors are recorded as airline traffic receivables. These credit card receivables and receivables from our affinity credit card partner represent $83 million and $212 million of the outstanding receivables balance on the consolidated balance sheets as of December 31, 2020 and 2019.
For performance obligations with performance periods of less than one year, GAAP provides a practical expedient that allows the Company not to disclose the transaction price allocated to remaining performance obligations and the timing of related revenue recognition. As passenger tickets expire one year from ticketing, if unused or not exchanged, the Company elected to apply this practical expedient.
Mileage Plan™ Loyalty Program
Loyalty mileage credits
The Company’s Mileage Plan™ loyalty program provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. Mileage credits are earned through travel, purchases using the Mileage Plan™ co-branded credit card and purchases from other participating partners. The program has a 24-month expiration period for unused mileage credits from the month of last account activity. In response to the COVID-19 pandemic, the Company suspended expiry of outstanding mileage credits through December 31, 2021. The Company offers redemption of mileage credits through free, discounted or upgraded air travel on flights operated by Alaska and its regional partners or on one of its 17 airline partners, as well as redemption at partner hotels.
The Company uses a relative standalone selling price to allocate consideration to material performance obligations in contracts with customers that include loyalty mileage credits. As directly observable selling prices for mileage credits are not available, the Company determines the standalone selling price of mileage credits primarily using actual ticket purchase prices for similar tickets flown, adjusted for the likelihood of redemption, or breakage. In determining similar tickets flown, the Company considers current market prices, class of service, type of award, and other factors. For mileage credits accumulated through travel on partner airlines, the Company uses actual consideration received from the partners.
Revenue related to air transportation is deferred in the amount of the relative standalone selling price allocated to the loyalty mileage credits as they are issued. The Company satisfies its performance obligation when the mileage credits are redeemed
and the related air transportation is delivered.
The Company estimates breakage for the portion of loyalty mileage credits not expected to be redeemed using a statistical analysis of historical data, including actual mileage credits expiring, slow-moving and low-credit accounts, among other factors. The breakage rate for the twelve months ended December 31, 2020 and 2019 was 17.4%. The Company reviews the breakage rate used on an annual basis.
Co-brand credit card agreements and other
In addition to mileage credits, the co-brand credit card agreements, referred to herein as the Agreements, also include performance obligations for waived bag fees, Companion Fare™ offers to purchase an additional ticket at a discount, marketing, and the use of intellectual property including the brand (unlimited access to the use of the Company’s brand and frequent flyer member lists), which is the predominant element in the Agreement. The co-brand card bank partners are the customer for some elements, including the brand and marketing, while the Mileage Plan™ member is the customer for other elements such as mileage credits, bag waivers, and companion fares.
At the inception of the Agreement, management estimated the selling price of each of the performance obligations. The objective was to determine the price at which a sale would be transacted if the product or service was sold on a stand-alone basis. The Company determined its best estimate of selling price for each element by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded, and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The estimates of the standalone selling prices of each element do not change subsequent to the original valuation of the contract unless the contract is materially modified, but the allocation between elements may change based upon the actual and updated projected volumes of each element delivered during the term of the contract.
Consideration received from the banks is variable and is primarily from consumer spend on the card, among other items. The Company allocates consideration to each of the performance obligations, including mileage credits, waived bag fees, companion fares, and brand and marketing, using their relative standalone selling price. Because the performance obligation related to providing use of intellectual property including the brand is satisfied over time, it is recognized in Mileage PlanTM other revenue in the period that those elements are sold. The Company records passenger revenue related to the air transportation and certificates for discounted companion travel when the transportation is delivered.
In contracts with non-bank partners, the Company has identified two performance obligations in most cases - travel and brand. The travel performance obligation is deferred until the transportation is provided in the amount of the estimated standalone selling price of the ticket, less breakage, and the brand performance obligation is recognized using the residual method as commission revenue when the brand element is sold. Mileage credit sales recorded under the residual approach are immaterial to the overall program.
Partner airline loyalty
Alaska has interline arrangements with certain airlines whereby its members may earn and redeem Mileage Plan™ credits on those airlines, and members of a partner airline’s loyalty program may earn and redeem frequent flyer program credits on flights operated by Alaska and its regional partners. When a Mileage Plan™ member earns credits on a partner airline, the partner airline remits a contractually-agreed upon fee to the Company which is deferred until credits are redeemed. When a Mileage Plan™ member redeems credits on a partner airline, the Company pays a contractually agreed upon fee to the other airline, which is netted against the revenue recognized associated with the award travel. When a member of a partner airline redeems frequent flyer credits on Alaska, the partner airline remits a contractually-agreed upon amount to the Company, recognized as Passenger revenue upon travel. If the partner airline’s member earns frequent flyer program credits on an Alaska flight, the Company remits a contractually-agreed upon fee to the partner airline and records a commission expense.
Mileage Plan revenue included in the consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Passenger revenue
|
$
|
346
|
|
|
$
|
704
|
|
|
$
|
619
|
|
Mileage Plan other revenue
|
374
|
|
|
465
|
|
|
434
|
|
Total Mileage Plan revenue
|
$
|
720
|
|
|
$
|
1,169
|
|
|
$
|
1,053
|
|
Mileage Plan other revenue is primarily brand and marketing revenue from our affinity card products.
Cargo and Other
The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination, or is transferred to a third-party carrier for delivery.
The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue. The transaction price for Cargo and other revenue is the price paid by the customer.
Cargo and other revenue included in the consolidated statements of operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cargo revenue
|
$
|
112
|
|
|
$
|
133
|
|
|
$
|
129
|
|
Other revenue
|
61
|
|
|
88
|
|
|
70
|
|
Total Cargo and other revenue
|
$
|
173
|
|
|
$
|
221
|
|
|
$
|
199
|
|
Air Traffic Liability and Deferred Revenue
Passenger ticket and ancillary services liabilities
Air traffic liability included on the consolidated balance sheets represents the remaining obligation associated with passenger tickets and ancillary services. The air traffic liability balance fluctuates with seasonal travel patterns. The Company recognized Passenger revenue of $502 million and $577 million from the 2019 and 2018 year-end air traffic liability balance during the twelve months ended December 31, 2020 and 2019.
Given the reduction in demand for air travel stemming from the COVID-19 pandemic, advance bookings and associated cash receipts have been significantly depressed. The Company also experienced elevated cancellations beginning in March 2020 and again, although at a lesser rate, in November 2020, which led to cash refunds or the issuance of credits for future travel. During the year, the Company issued cash refunds of approximately $600 million and credits for future travel of approximately $1 billion. At December 31, 2020, such credits, which are included in the air traffic liability balance, totaled $569 million, net of breakage. In January 2021, the Company announced updated expiration terms for these credits, extending to December 31, 2021. At this time, the Company is unable to estimate how and when the air traffic liability will be recognized in earnings given ongoing uncertainty around the return in demand for air travel. As a result, the timing of recognition of these travel credits may differ from current assumptions, which may result in increased breakage in future periods.
Mileage Plantm liabilities
The total deferred revenue liability included on the consolidated balance sheets represents the remaining transaction price that has been allocated to Mileage PlanTM performance obligations not yet satisfied by the Company. In general, the current amounts will be recognized as revenue within 12 months and the long-term amounts will be recognized as revenue over a period of approximately three to four years. This period of time represents the average time that members have historically taken to earn and redeem miles.
The Company records a receivable for amounts due from the affinity card partner and from other partners as mileage credits are sold until the payments are collected. The Company had $48 million and $105 million of such receivables as of December 31, 2020 and December 31, 2019.
Mileage credits are combined into one homogeneous pool and are not specifically identifiable. As such, loyalty revenues disclosed earlier in this Note are comprised of miles that were part of the deferred revenue and liabilities balances at the beginning of the period and miles that were issued during the period. The table below presents a roll forward of the total frequent flyer liability (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
2020
|
|
2019
|
Total Deferred Revenue balance at January 1
|
$
|
1,990
|
|
|
$
|
1,874
|
|
Travel miles and companion certificate redemption - Passenger revenue
|
(346)
|
|
|
(704)
|
|
Miles redeemed on partner airlines - Other revenue
|
(23)
|
|
|
(111)
|
|
Increase in liability for mileage credits issued
|
656
|
|
|
931
|
|
Total Deferred Revenue balance at December 31
|
$
|
2,277
|
|
|
$
|
1,990
|
|
Selling Costs
Certain costs such as credit card fees, travel agency and other commissions paid, as well as Global Distribution Systems (GDS) booking fees, are incurred when the Company sells passenger tickets and ancillary services in advance of the travel date. The Company defers such costs and recognizes them as expenses when the travel occurs. Prepaid expense recorded on the consolidated balance sheets for such costs was $24 million and $27 million as of December 31, 2020 and December 31, 2019. The Company recorded related expense on the consolidated statements of operations of $43 million, $208 million and $217 million for the twelve months ended December 31, 2020, 2019 and 2018.
NOTE 4. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT
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.
As of December 31, 2020, the Company had outstanding fuel hedge contracts covering approximately 300 million gallons of crude oil that will be settled from January 2021 to June 2022.
Interest Rate Swap Agreements
The Company is exposed to market risk from adverse changes in variable interest rates on long-term debt and certain aircraft lease agreements. To manage this risk, the Company periodically enters into interest rate swap agreements. As of December 31, 2020, the Company has an outstanding interest rate swap agreement with a third party designed to hedge the volatility of the underlying variable interest rates on a lease agreement for one B737-800 aircraft, as well as 13 interest rate swap agreements with third parties designed to hedge the volatility of the underlying variable interest rates on $614 million of debt. All of the interest rate swap agreements stipulate that the Company pay a fixed interest rate and receive a floating interest rate over the term of the underlying contracts. The interest rate swap agreement associated with the lease expires in March 2021, corresponding with the aircraft lease term, and December 2021 through August 2029 to coincide with the debt maturity dates. All significant terms of the swap agreements match the terms of the underlying hedged items and have been designated as qualifying hedging instruments, which are accounted for as cash flow hedges.
As qualifying cash flow hedges, the interest rate swaps are recognized at fair value on the balance sheet, and changes in the fair value are recognized in accumulated other comprehensive loss. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is recognized in interest expense, if material.
Fair Values of Derivative Instruments
Fair values of derivative instruments on the consolidated balance sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Fuel hedge contracts (not designated as hedges)
|
|
|
|
Prepaid expenses and other current assets
|
$
|
11
|
|
|
$
|
8
|
|
Other assets
|
4
|
|
|
3
|
|
Interest rate swaps (designated as hedges)
|
|
|
|
Prepaid expenses and other current assets
|
—
|
|
|
1
|
|
Other noncurrent assets
|
—
|
|
|
2
|
|
Other accrued liabilities
|
(10)
|
|
|
(5)
|
|
Other liabilities
|
(15)
|
|
|
(5)
|
|
Losses in accumulated other comprehensive loss (AOCL)
|
(21)
|
|
|
(13)
|
|
The net cash paid for new fuel hedge positions and received from settlements was $14 million, $19 million and $21 million during 2020, 2019, and 2018.
Pretax effect of derivative instruments on earnings and AOCL (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Fuel hedge contracts (not designated as hedges)
|
|
|
|
|
|
Gains (losses) recognized in Aircraft fuel
|
$
|
(10)
|
|
|
$
|
(10)
|
|
|
$
|
1
|
|
Interest rate swaps (designated as hedges)
|
|
|
|
|
|
Losses recognized in Aircraft rent
|
(3)
|
|
|
(3)
|
|
|
(3)
|
|
Gains (losses) recognized in other comprehensive income (OCI)
|
(21)
|
|
|
(13)
|
|
|
—
|
|
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. Losses related to interest rate swaps on variable rate debt of $6 million were recognized in interest expense during 2020. The amounts shown as recognized in OCI are prior to the losses recognized in aircraft rent during the period. The Company expects an insignificant amount to be reclassified from OCI to aircraft rent and $10 million to interest expense within the next twelve months.
NOTE 5. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments on a Recurring Basis
As of December 31, 2020, the total cost basis for marketable securities was $1.9 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.
Fair values of financial instruments on the consolidated balance sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
407
|
|
|
$
|
—
|
|
|
$
|
407
|
|
|
$
|
330
|
|
|
$
|
—
|
|
|
$
|
330
|
|
Equity mutual funds
|
7
|
|
|
—
|
|
|
7
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Foreign government bonds
|
—
|
|
|
20
|
|
|
20
|
|
|
—
|
|
|
31
|
|
|
31
|
|
Asset-backed securities
|
—
|
|
|
224
|
|
|
224
|
|
|
—
|
|
|
211
|
|
|
211
|
|
Mortgage-backed securities
|
—
|
|
|
290
|
|
|
290
|
|
|
—
|
|
|
176
|
|
|
176
|
|
Corporate notes and bonds
|
—
|
|
|
978
|
|
|
978
|
|
|
—
|
|
|
523
|
|
|
523
|
|
Municipal securities
|
—
|
|
|
50
|
|
|
50
|
|
|
—
|
|
|
23
|
|
|
23
|
|
Total Marketable securities
|
414
|
|
|
1,562
|
|
|
1,976
|
|
|
336
|
|
|
964
|
|
|
1,300
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
Fuel hedge contracts - call options
|
—
|
|
|
15
|
|
|
15
|
|
|
—
|
|
|
11
|
|
|
11
|
|
Interest rate swap agreements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Total Assets
|
$
|
414
|
|
|
$
|
1,577
|
|
|
$
|
1,991
|
|
|
$
|
336
|
|
|
$
|
978
|
|
|
$
|
1,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
—
|
|
|
(25)
|
|
|
(25)
|
|
|
—
|
|
|
(10)
|
|
|
(10)
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
(25)
|
|
|
$
|
(25)
|
|
|
$
|
—
|
|
|
$
|
(10)
|
|
|
$
|
(10)
|
|
The Company uses the market and income approach to determine the fair value of marketable securities. U.S. government securities and equity mutual funds are Level 1 as the fair value is based on quoted prices in active markets. The remaining marketable securities instruments are Level 2 as the fair value is based on standard valuation models that calculate values from observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.
The Company uses the market and income approaches to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model that uses inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers exposure to credit losses in the event of non-performance by counterparties. 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.
Activity and Maturities for Marketable Securities
Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses are the result of expected credit losses based on the Company's evaluation of available evidence as of December 31, 2020.
Proceeds from sales of marketable securities were $2.3 billion, $1.7 billion and $1.1 billion in 2020, 2019, and 2018.
Maturities for marketable securities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Cost Basis
|
|
Fair Value
|
Due in one year or less
|
$
|
775
|
|
|
$
|
777
|
|
Due after one year through five years
|
1,146
|
|
|
1,175
|
|
Due after five years through 10 years
|
23
|
|
|
24
|
|
Total
|
$
|
1,944
|
|
|
$
|
1,976
|
|
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 on the consolidated balance sheets.
Cash and Cash Equivalents: These assets are carried at amortized costs which approximate fair value.
Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment was amortized over the life of the associated debt. Following the prepayment of the debt in 2020, this fair valuation adjustment was eliminated. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of December 31, 2020, the Company uses the income approach by discounting cash flows utilizing borrowing rates for comparable debt over the remaining life of the outstanding debt, or using quoted market prices. The estimated fair value of the fixed-rate EETC debt is Level 2, as it is estimated using quoted market prices, while the estimated fair value of $488 million of other fixed-rate debt, including PSP notes payable, is classified as Level 3, as it is not actively traded and is valued using discounted cash flows which is an unobservable input.
Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Total fixed rate debt
|
$
|
1,662
|
|
|
$
|
475
|
|
|
|
|
|
Estimated fair value
|
$
|
1,778
|
|
|
$
|
483
|
|
NOTE 6. LONG-TERM DEBT
Long-term debt obligations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Fixed-rate notes payable due through 2029
|
$
|
198
|
|
|
$
|
475
|
|
Fixed-rate PSP note payable due through 2030
|
290
|
|
|
—
|
|
Fixed-rate EETC payable due through 2025 & 2027
|
1,174
|
|
|
—
|
|
Variable-rate notes payable due through 2029
|
1,866
|
|
|
1,032
|
|
Less debt issuance costs and unamortized debt discount
|
(33)
|
|
|
(8)
|
|
Total debt
|
3,495
|
|
|
1,499
|
|
Less current portion
|
1,138
|
|
|
235
|
|
Long-term debt, less current portion
|
$
|
2,357
|
|
|
$
|
1,264
|
|
|
|
|
|
Weighted-average fixed-interest rate
|
4.3
|
%
|
|
3.3
|
%
|
Weighted-average variable-interest rate
|
1.9
|
%
|
|
2.9
|
%
|
Approximately $614 million of the Company's total variable-rate notes payable are effectively fixed via interest rate swaps at December 31, 2020, bringing the weighted-average interest rate for the full debt portfolio to 3.3%.
The Company's variable-rate debt bears interest at a floating rate per annum equal to a margin plus the one, three or six-month LIBOR in effect at the commencement of each one, three or six-month period, as applicable. As of December 31, 2020, none of the Company's borrowings were restricted by financial covenants.
Debt Activity
During 2020, the Company's total debt increased $2.0 billion, the result of issuances of $2.6 billion, including draws of $400 million on existing bank lines of credit. These issuances were offset by payments of $565 million, including the prepayment of $314 million of debt.
Total issuances include $1.2 billion in Enhanced Equipment Trust Certificates (EETC). The EETC are collateralized by 42 Boeing 737 aircraft and 19 Embraer E175 aircraft. Principal and interest payments are due semiannually, beginning on February 15, 2021. Also included in total issuances is $589 million in secured debt financing backed by a total of 32 aircraft.
CARES Act
Under the terms of the PSP program, Alaska, Horizon and McGee recorded a combined $290 million unsecured senior term loan. The note has a 10-year term, bearing an interest rate of 1% the first five years, and an interest rate equal to the Secured Overnight Financing Rate (SOFR) plus 2% in years 6 through 10. The loan is prepayable at par at any time.
In 2020, the Company also finalized an agreement with the Treasury to obtain up to $1.9 billion via a secured term loan facility. Obligations of the Company under the loan agreement are secured by assets related to, and revenues generated by, Alaska's Mileage PlanTM frequent flyer program, as well as by 34 aircraft and 15 spare engines.
As of December 31, 2020, the Company has drawn $135 million available under the agreement, and may, at its option, borrow additional amounts in up to two subsequent borrowings until May 28, 2021. All proceeds drawn must be used for certain general corporate purposes and operating expenses in accordance with the terms and conditions of the loan agreement and the applicable provisions of the CARES Act.
In conjunction with the initial draw, the Company granted the Treasury 427,080 warrants to purchase ALK common stock at a strike price of $31.61. The value of the warrants was estimated using a Black-Scholes option pricing model, and the relative fair value of the warrants of $6 million was recorded in shareholders' equity, with an offsetting debt discount to the CARES Act Loan issuance.
In early 2021, Alaska, Horizon and McGee finalized agreements with the Treasury and accepted partial disbursement of funds through an extension of the PSP, made available under the Consolidated Appropriations Act, 2021. Under these extension agreements, Alaska and Horizon will receive a total of $546 million to be used exclusively toward continuing to pay employee salaries, wages and benefits. Of the total funds the Company will receive, approximately $130 million takes the form of a senior term loan with a 10-year term, bearing an interest rate of 1% in years 1–5, and SOFR + 2% in years 6–10. The loan is prepayable at par at any time.
Debt Maturity
Long-term debt principal payments for the next five years and thereafter (in millions):
|
|
|
|
|
|
|
Total
|
2021
|
$
|
1,145
|
|
2022
|
371
|
|
2023
|
334
|
|
2024
|
240
|
|
2025
|
396
|
|
Thereafter
|
1,042
|
|
Total principal payments
|
$
|
3,528
|
|
Bank Line of Credit
The Company has three credit facilities with capacity totaling $461 million. All three facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. A second credit facility, which was renegotiated in September 2020, resulting in decreased capacity from $150 million to $120 million, expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. A third credit facility for $91 million expires in June 2021, with a mechanism for annual renewal, and is secured by aircraft.
During the year-ended December 31, 2020, the Company drew $400 million on the first two existing facilities, of which a total of $37 million has been repaid. The total outstanding balance is classified as short-term on the consolidated balance sheet. The Company also has secured letters of credit against the $91 million facility. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at December 31, 2020.
NOTE 7. LEASES
Effective January 1, 2019, the Company adopted ASC 842 - Leases. The Company elected certain practical expedients under the standard, including the practical expedient allowing a policy election to exclude from recognition short-term lease assets and lease liabilities for leases with an initial term of twelve months or less. Such expense was not material for the twelve months ended December 31, 2020 and 2019. Additionally, the Company elected the available package of practical expedients allowing for no reassessment of lease classification for existing leases, no reassessment of expired contracts, and no reassessments of initial direct costs for existing leases.
The Company has five asset classes for operating leases: aircraft, capacity purchase arrangements for aircraft operated by third-party carriers (CPA aircraft), airport and terminal facilities, corporate real estate and other equipment. All capitalized lease assets have been recorded on the consolidated balance sheet as of December 31, 2020 as Operating lease assets, with the corresponding liabilities recorded as Operating lease liabilities. Consistent with past accounting, operating rent expense is recognized on a straight-line basis over the term of the lease.
Operating lease assets balance by asset class was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Aircraft
|
$
|
750
|
|
|
$
|
1,049
|
|
CPA Aircraft
|
579
|
|
|
596
|
|
Airport and terminal facilities
|
16
|
|
|
18
|
|
Corporate real estate and other
|
55
|
|
|
48
|
|
Total Operating lease assets
|
$
|
1,400
|
|
|
$
|
1,711
|
|
Aircraft
At December 31, 2020, Alaska had operating leases for ten Boeing 737 and 71 Airbus aircraft, and Horizon had operating leases for seven Bombardier Q400 aircraft. Of the total Airbus leases, 40 aircraft are no longer in operating service, and the related assets have been fully impaired. Remaining lease terms for these aircraft extend up to eleven years, some with options to extend, subject to negotiation at the end of the term. As extension is not certain, and rates are highly likely to be renegotiated, the extended term is only capitalized when it is reasonably determinable. While aircraft rent is primarily fixed, certain leases contain rental adjustments throughout the lease term which would be recognized as variable expense as incurred. Variable lease expense for aircraft was not material and $4 million for the twelve months ended December 31, 2020 and 2019.
Capacity purchase agreements with aircraft (CPA aircraft)
At December 31, 2020, Alaska had CPAs with two carriers, including the Company’s wholly-owned subsidiary, Horizon. Horizon sells 100% of its capacity under a CPA with Alaska. Alaska also has a CPA with SkyWest covering 32 E175 aircraft to fly certain routes in the Lower 48 and Canada. Under these agreements, Alaska pays the carriers an amount which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. As Horizon is a wholly-owned subsidiary, intercompany leases between Alaska and Horizon have not been recognized under the standard.
Remaining lease terms for CPA aircraft range from 6.5 years to 10 years. Financial arrangements of the CPAs include a fixed component, representing the costs to operate each aircraft which is capitalized. CPAs also include variable rent based on actual levels of flying, which is expensed as incurred. Variable lease expense for CPA aircraft for the twelve months ended December 31, 2020 and 2019 was not material.
Airport and terminal facilities
The Company leases ticket counters, gates, cargo and baggage space, ground equipment, office space and other support areas at numerous airports. For this asset class, the Company has elected to combine lease and non-lease components. The majority of airport and terminal facility leases are not capitalized because they do not meet the definition of controlled assets under the standard, or because the lease payments are entirely variable. For airports where leased assets are identified, and where the contract includes fixed lease payments, operating lease assets and lease liabilities have been recorded. The Company is also commonly responsible for maintenance, insurance and other facility-related expenses and services under these agreements. These costs are recognized as variable expense in the period incurred. Airport and terminal facilities variable lease expense for the twelve months ended December 31, 2020 and 2019 was $286 million and $322 million.
Starting in 2018, the Company leased twelve airport slots at LaGuardia Airport and eight airport slots at Reagan National Airport to a third party. For these leases, the Company recorded $14 million and $13 million of lease income during the twelve months ended December 31, 2020 and 2019.
Corporate real estate and other leases
Leased corporate real estate is primarily for office space in hub cities, data centers, land leases, and reservation centers. For this asset class, the Company has elected to combine lease and non-lease components under the standard. Other leased assets are comprised of other ancillary contracts and items including leased flight simulators and spare engines. Variable lease expense related to corporate real estate and other leases for the twelve months ended December 31, 2020 and 2019 was $12 million and $10 million.
Sale-leaseback transaction
In 2020, Alaska entered into a transaction to sell ten owned Airbus A320 aircraft and replace those aircraft with 13 new leased Boeing 737-9 MAX aircraft. Also included in the transaction is the leaseback of all ten Airbus aircraft in the interim period between the sale of those aircraft and delivery of the first ten 737-9 MAX aircraft.
The 13 contracted lease agreements for Boeing 737-9 MAX aircraft are scheduled for delivery between 2021 and 2022. These deliveries are valued at $453 million, and have non-cancelable lease terms ranging from 2031 to 2034.
Components of Lease Expense
The impact of leases, including variable lease cost, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
2020
|
|
2019
|
Expense
|
|
|
|
|
Aircraft
|
Aircraft rent
|
$
|
215
|
|
|
$
|
246
|
|
CPA Aircraft
|
Aircraft rent
|
80
|
|
|
79
|
|
Airport and terminal facilities
|
Landing fees and other rentals
|
288
|
|
|
324
|
|
Corporate real estate and other
|
Landing fees and other rentals
|
19
|
|
|
19
|
|
Total lease expense
|
|
$
|
602
|
|
|
$
|
668
|
|
Revenue
|
|
|
|
|
Lease income
|
Cargo and other revenues
|
(14)
|
|
|
(13)
|
|
Net lease impact
|
|
$
|
588
|
|
|
$
|
655
|
|
As of December 31, 2018, the Company had commitments for aircraft and facility leases. Facility lease commitments primarily included airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $619 million in 2018.
Supplemental Cash Flow Information
During the year ended December 31, 2020, the Company paid $302 million for capitalized operating leases. The Company also acquired $81 million of operating lease assets in exchange for assumption of the same total of operating lease liabilities, inclusive of lease extensions.
Lease Term and Discount Rate
As most leases do not provide an implicit interest rate, the Company generally utilizes the incremental borrowing rate (IBR) based on information available at the commencement date of the lease to determine the present value of lease payments. The weighted average IBR and weighted average remaining lease term (in years) for all asset classes were as follows at December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average IBR
|
|
Weighted Average Remaining Lease term
|
Aircraft
|
3.9
|
%
|
|
6.4
|
CPA Aircraft
|
2.7
|
%
|
|
8.2
|
Airports and terminal facilities
|
4.1
|
%
|
|
9.3
|
Corporate real estate and other
|
4.1
|
%
|
|
31.6
|
Maturities of Lease Liabilities
Future minimum lease payments under non-cancellable leases as of December 31, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft(a)
|
|
CPA Aircraft
|
|
Airport and Terminal Facilities
|
|
Corporate Real Estate and Other
|
2021
|
$
|
244
|
|
|
$
|
84
|
|
|
$
|
2
|
|
|
$
|
8
|
|
2022
|
195
|
|
|
84
|
|
|
2
|
|
|
7
|
|
2023
|
135
|
|
|
84
|
|
|
2
|
|
|
7
|
|
2024
|
83
|
|
|
84
|
|
|
2
|
|
|
6
|
|
2025
|
76
|
|
|
84
|
|
|
2
|
|
|
4
|
|
Thereafter
|
257
|
|
|
261
|
|
|
9
|
|
|
78
|
|
Total Lease Payments
|
$
|
990
|
|
|
$
|
681
|
|
|
$
|
19
|
|
|
$
|
110
|
|
Less: Imputed interest
|
(114)
|
|
|
(71)
|
|
|
(3)
|
|
|
(54)
|
|
Total
|
$
|
876
|
|
|
$
|
610
|
|
|
$
|
16
|
|
|
$
|
56
|
|
(a) - Future minimum lease payments for aircraft includes commitments for aircraft which have been removed from operating service as the Company remains obligated under existing terms.
NOTE 8. INCOME TAXES
Deferred Income Taxes
Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and such amounts for tax purposes. The Company has a net deferred tax liability, primarily due to differences in depreciation rates for federal income tax purposes and for financial reporting purposes.
Deferred tax (assets) and liabilities comprise the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Excess of tax over book depreciation
|
$
|
1,126
|
|
|
$
|
1,233
|
|
Intangibles - net
|
15
|
|
|
16
|
|
Operating lease assets
|
342
|
|
|
416
|
|
Other - net
|
106
|
|
|
58
|
|
Deferred tax liabilities
|
1,589
|
|
|
1,723
|
|
|
|
|
|
Mileage Plan™
|
(385)
|
|
|
(337)
|
|
Inventory obsolescence
|
(17)
|
|
|
(15)
|
|
|
|
|
|
Employee benefits
|
(215)
|
|
|
(179)
|
|
Net operating losses
|
(27)
|
|
|
(13)
|
|
Operating lease liabilities
|
(381)
|
|
|
(417)
|
|
Leasehold maintenance
|
(73)
|
|
|
—
|
|
Other - net
|
(103)
|
|
|
(48)
|
|
Deferred tax assets
|
(1,201)
|
|
|
(1,009)
|
|
Valuation allowance
|
19
|
|
|
1
|
|
Net deferred tax liabilities
|
$
|
407
|
|
|
$
|
715
|
|
The CARES Act, among other things, permits federal Net Operating Loss (NOL) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company also carried back a portion of NOLs incurred in 2018 as allowed by the CARES Act and has received a refund for those losses.
At December 31, 2020, the Company had federal NOLs of approximately $644 million, the majority of which will be carried back under the CARES Act to be applied against previous years' taxable income. The Company has recorded a receivable of $225 million associated with the federal carry back. The remaining NOL, which resulted from the 2016 Virgin America merger, must be carried forward and will expire in 2036. The Company also has state NOLs of approximately $562 million that expire beginning in 2021 and continuing through 2040. Of these state NOLs, approximately $85 million may be used to offset previous years’ state taxable income due to states’ conformity to the Internal Revenue Code or state specific carryback provisions.
Virgin America experienced multiple “ownership changes” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the most recent being its acquisition by the Company. Section 382 of the Code imposes an annual limitation on the utilization of pre-ownership change NOLs. Any unused annual limitation may, subject to certain limits, be carried over to later years. The combined Company’s ability to use the NOLs will also depend on the amount of taxable income generated in future periods.
Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. The Company has determined it is more likely than not that a portion of the state NOL carryforward will not be realized and, therefore, has provided a valuation allowance of $19 million for that portion as of December 31, 2020. The Company has likewise concluded it is more likely than not that all of its federal and the remaining state deferred income tax assets will be realized and thus no additional valuation allowance has been recorded. The Company reassesses the need for a valuation allowance each reporting period.
Components of Income Tax Expense (Benefit)
The components of income tax expense (benefit) are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current income tax expense (benefit):
|
|
|
|
|
|
Federal
|
$
|
(212)
|
|
|
$
|
26
|
|
|
$
|
(5)
|
|
State
|
(11)
|
|
|
13
|
|
|
9
|
|
Total current income tax expense (benefit)
|
(223)
|
|
|
39
|
|
|
4
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
Federal
|
(246)
|
|
|
175
|
|
|
125
|
|
State
|
(47)
|
|
|
33
|
|
|
19
|
|
Total deferred income tax expense (benefit)
|
(293)
|
|
|
208
|
|
|
144
|
|
Income tax expense (benefit)
|
$
|
(516)
|
|
|
$
|
247
|
|
|
$
|
148
|
|
Income Tax Rate Reconciliation
Income tax expense (benefit) reconciles to the amount computed by applying the 2020 U.S. federal rate of 21% to income (loss) before income tax and for deferred taxes as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Income (loss) before income tax
|
$
|
(1,840)
|
|
|
$
|
1,016
|
|
|
$
|
585
|
|
|
|
|
|
|
|
Expected tax expense (benefit)
|
(386)
|
|
|
213
|
|
|
123
|
|
Nondeductible expenses
|
9
|
|
|
9
|
|
|
9
|
|
State income tax expense (benefit)
|
(62)
|
|
|
36
|
|
|
21
|
|
Tax law changes
|
(93)
|
|
|
(9)
|
|
|
(7)
|
|
Valuation allowance
|
18
|
|
|
—
|
|
|
—
|
|
Other - net
|
(2)
|
|
|
(2)
|
|
|
2
|
|
Actual tax expense (benefit)
|
$
|
(516)
|
|
|
$
|
247
|
|
|
$
|
148
|
|
|
|
|
|
|
|
Effective tax rate
|
28.0
|
%
|
|
24.3
|
%
|
|
25.3
|
%
|
As a result of tax changes signed into law during 2017, with final regulations issued in 2019, the Company recorded a current tax benefit of $9 million in 2019. The Company recorded a current tax benefit of $93 million in 2020 as a result of provisions outlined in the CARES Act.
Uncertain Tax Positions
The Company has identified its federal tax return and its state tax returns in Alaska, Oregon and California as “major” tax jurisdictions. A summary of the Company's jurisdictions and the periods that are subject to examination are as follows:
|
|
|
|
|
|
Jurisdiction
|
Period
|
Federal
|
2007 to 2019
|
Alaska
|
2015 to 2019
|
California
|
2007 to 2019
|
Oregon
|
2003 to 2019
|
Certain tax years are open to the extent of net operating loss carryforwards.
Changes in the liability for gross unrecognized tax benefits during 2020, 2019 and 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance at January 1,
|
$
|
40
|
|
|
$
|
40
|
|
|
$
|
43
|
|
Additions related to prior years
|
1
|
|
|
—
|
|
|
1
|
|
Releases related to prior years
|
(1)
|
|
|
(1)
|
|
|
(4)
|
|
Additions related to current year activity
|
—
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
Releases due to settlements
|
(4)
|
|
|
—
|
|
|
(1)
|
|
Releases due to lapse of statute of limitations
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
Balance at December 31,
|
$
|
35
|
|
|
$
|
40
|
|
|
$
|
40
|
|
As of December 31, 2020, the Company had $35 million of accrued tax contingencies, of which $29 million, if fully recognized, would increase the effective tax rate. As of December 31, 2020, 2019 and 2018, the Company has accrued interest and penalties, net of federal income tax benefit, of $6 million, $7 million, and $6 million. In 2020, the Company recognized a benefit of $1 million, compared to the recognition of expense of $1 million in 2019, and $1 million in 2018, for interest and penalties, net of federal income tax benefit. At December 31, 2020, the Company has unrecognized tax benefits recorded as a liability and some reducing deferred tax assets. The Company reduced $5 million of reserves for uncertain tax positions in 2020, primarily due to settlements on state income taxes and statute lapses on reserved amounts. These uncertain tax positions could change as a result of the Company's ongoing audits, settlement of issues, new audits and status of other taxpayer court cases. The Company cannot predict the timing of these actions. Due to the positions being taken in various jurisdictions, the amounts currently accrued are the Company's best estimate as of December 31, 2020.
NOTE 9. EMPLOYEE BENEFIT PLANS
Four qualified defined-benefit plans, one non-qualified defined-benefit plan, and seven defined-contribution retirement plans cover various employee groups of Alaska, Horizon and McGee Air Services.
The defined-benefit plans provide benefits based on an employee’s term of service and average compensation for a specified period of time before retirement. The qualified defined-benefit pension plans are closed to new entrants.
Accounting standards require recognition of the overfunded or underfunded status of an entity’s defined-benefit pension and other postretirement plan as an asset or liability in the consolidated financial statements and requires recognition of the funded status in AOCL.
Qualified Defined-Benefit Pension Plans
The Company’s four qualified defined-benefit pension plans are funded as required by the Employee Retirement Income Security Act of 1974. The defined-benefit plan assets consist primarily of marketable equity and fixed-income securities. The work groups covered by qualified defined-benefit pension plans include salaried employees, pilots, clerical, office, passenger service employees, mechanics and related craft employees. The Company uses a December 31 measurement date for these plans. All plans are closed to new entrants.
Weighted average assumptions used to determine benefit obligations:
The rates below vary by plan and related work group.
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rates
|
2.43% to 2.58%
|
|
3.33% to 3.47%
|
Rate of compensation increases
|
2.02% to 2.43%
|
|
2.11% to 5.44%
|
Weighted average assumptions used to determine net periodic benefit cost:
The rates below vary by plan and related work group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Discount rates
|
3.33% to 3.47%
|
|
4.37% to 4.46%
|
|
3.69% to 3.78%
|
Expected return on plan assets
|
3.25% to 5.50%
|
|
4.25% to 5.50%
|
|
4.25% to 5.50%
|
Rate of compensation increases
|
2.11% to 5.44%
|
|
2.11% to 3.50%
|
|
2.11% to 16.51%
|
The discount rates are determined using current interest rates earned on high-quality, long-term bonds with maturities that correspond with the estimated cash distributions from the pension plans. At December 31, 2020, the Company selected discount rates for each of the plans using a pool of higher-yielding bonds estimated to be more reflective of settlement rates, as management has taken steps to ultimately terminate or settle plans that are frozen and move toward freezing benefits in active plans in the future. In determining the expected return on plan assets, the Company assesses the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
Plan assets are invested in common commingled trust funds invested in equity and fixed income securities and in certain real estate assets. The target and actual asset allocation of the funds in the qualified defined-benefit plans, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaried Plan(a)
|
|
All other plans
|
|
Target
|
|
2020
|
|
2019
|
|
Target
|
|
2020
|
|
2019
|
Asset category:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equity securities
|
2% - 12%
|
|
7
|
%
|
|
7
|
%
|
|
36% - 46%
|
|
44
|
%
|
|
41
|
%
|
Non-U.S. equity securities
|
0% - 8%
|
|
3
|
%
|
|
3
|
%
|
|
13% - 23%
|
|
18
|
%
|
|
18
|
%
|
Fixed income securities
|
85% - 95%
|
|
90
|
%
|
|
90
|
%
|
|
31% - 41%
|
|
33
|
%
|
|
35
|
%
|
Real estate
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
0% - 10%
|
|
5
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
100
|
%
|
|
100
|
%
|
(a)As our Salaried Plan is frozen and fully funded, our investment strategies differ significantly from that of our other outstanding plans. Investments are in lower-risk securities, with earnings designed to maintain a fully-funded status.
The Company’s investment policy focuses on achieving maximum returns at a reasonable risk for pension assets over a full market cycle. The Company determines the strategic allocation between equities, fixed income and real estate based on current funded status and other characteristics of the plans. As the funded status improves, the Company increases the fixed income allocation of the portfolio and decreases the equity allocation. Actual asset allocations are reviewed regularly and periodically rebalanced as appropriate.
Plan assets invested in common commingled trust funds are fair valued using the net asset values of these funds to determine fair value as allowed using the practical expedient method outlined in the accounting standards. Fair value estimates for real estate are calculated using the present value of expected future cash flows based on independent appraisals, local market conditions and current and projected operating performance.
Plan assets by fund category (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Fair Value Hierarchy
|
Fund type:
|
|
|
|
|
|
U.S. equity market fund
|
$
|
914
|
|
|
$
|
773
|
|
|
1
|
Non-U.S. equity fund
|
384
|
|
|
344
|
|
|
1
|
Credit bond index fund
|
1,088
|
|
|
1,009
|
|
|
1
|
Plan assets in common commingled trusts
|
$
|
2,386
|
|
|
$
|
2,126
|
|
|
|
Real estate
|
96
|
|
|
102
|
|
|
(a)
|
Cash equivalents
|
6
|
|
|
11
|
|
|
1
|
Total plan assets
|
$
|
2,488
|
|
|
$
|
2,239
|
|
|
|
(a)In accordance with Subtopic 820-10, certain investments that are measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
The following table sets forth the status of the qualified defined-benefit pension plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Projected benefit obligation (PBO)
|
|
|
|
Beginning of year
|
$
|
2,602
|
|
|
$
|
2,225
|
|
Service cost
|
52
|
|
|
42
|
|
Interest cost
|
75
|
|
|
89
|
|
Actuarial (gain)/loss
|
339
|
|
|
359
|
|
Benefits paid
|
(134)
|
|
|
(113)
|
|
End of year
|
$
|
2,934
|
|
|
$
|
2,602
|
|
|
|
|
|
Plan assets at fair value
|
|
|
|
Beginning of year
|
$
|
2,239
|
|
|
$
|
1,858
|
|
Actual return on plan assets
|
383
|
|
|
429
|
|
Employer contributions
|
—
|
|
|
65
|
|
Benefits paid
|
(134)
|
|
|
(113)
|
|
End of year
|
$
|
2,488
|
|
|
$
|
2,239
|
|
Unfunded status
|
$
|
(446)
|
|
|
$
|
(363)
|
|
|
|
|
|
Percent funded
|
85
|
%
|
|
86
|
%
|
The accumulated benefit obligation for the combined qualified defined-benefit pension plans was $2.8 billion and $2.4 billion at December 31, 2020 and 2019. During 2020 and 2019 actuarial losses increased the benefit obligation primarily due to the decrease in discount rates.
The amounts recognized in the consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Accrued benefit liability-long term
|
$
|
502
|
|
|
$
|
412
|
|
Plan assets-long term (within Other noncurrent assets)
|
(51)
|
|
|
(49)
|
|
Total liability recognized
|
$
|
451
|
|
|
$
|
363
|
|
The amounts not yet reflected in net periodic benefit cost and included in AOCL (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Prior service credit
|
$
|
(5)
|
|
|
$
|
(6)
|
|
Net loss
|
626
|
|
|
595
|
|
Amount recognized in AOCL (pretax)
|
$
|
621
|
|
|
$
|
589
|
|
Defined benefit plans with projected benefit obligations exceeding fair value of plan assets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
2,207
|
|
|
$
|
1,957
|
|
Fair value of plan assets
|
1,710
|
|
|
1,545
|
|
Defined benefit plans with accumulated benefit obligations exceeding fair value of plan assets are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
2,207
|
|
|
$
|
1,957
|
|
Accumulated benefit obligation
|
2,057
|
|
|
1,539
|
|
Fair value of plan assets
|
1,710
|
|
|
1,545
|
|
Net pension expense for the qualified defined-benefit plans included the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Service cost
|
$
|
46
|
|
|
$
|
42
|
|
|
$
|
48
|
|
Interest cost
|
75
|
|
|
89
|
|
|
79
|
|
Restructuring charges(a)
|
11
|
|
|
—
|
|
|
—
|
|
Expected return on assets
|
(110)
|
|
|
(95)
|
|
|
(107)
|
|
Amortization of prior service credit
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
Recognized actuarial loss
|
35
|
|
|
37
|
|
|
33
|
|
Net pension expense
|
$
|
56
|
|
|
$
|
72
|
|
|
$
|
52
|
|
(a)In conjunction with the workforce reductions stemming from the COVID-19 pandemic, the Company recorded additional expense for employees accepting incentive leaves of absence. Such expense is included in Special items - restructuring charges on the consolidated statement of operations for the year-ended December 31, 2020.
There are no current statutory funding requirements for the Company’s plans in 2021.
Future benefits expected to be paid over the next ten years under the qualified defined-benefit pension plans from the assets of those plans (in millions):
|
|
|
|
|
|
|
Total
|
2021
|
$
|
123
|
|
2022
|
142
|
|
2023
|
143
|
|
2024
|
141
|
|
2025
|
157
|
|
2026– 2030
|
829
|
|
Nonqualified Defined-Benefit Pension Plan
Alaska also maintains an unfunded, noncontributory defined-benefit plan for certain elected officers. This plan uses a December 31 measurement date. The assumptions used to determine benefit obligations and the net period benefit cost for the nonqualified defined-benefit pension plan are similar to those used to calculate the qualified defined-benefit pension plan. The plan's unfunded status, PBO and accumulated benefit obligation are immaterial. The net pension expense in prior year and expected future expense is also immaterial.
Post-retirement Medical Benefits
The Company allows certain retirees to continue their medical, dental and vision benefits by paying all or a portion of the active employee plan premium until eligible for Medicare, currently age 65. This results in a subsidy to retirees, because the premiums received by the Company are less than the actual cost of the retirees’ claims. The accumulated post-retirement benefit obligation for this subsidy is unfunded. The accumulated post-retirement benefit obligation was $138 million and $129 million at December 31, 2020 and 2019. The net periodic benefit cost was not material in 2020 or 2019.
Defined-Contribution Plans
The seven defined-contribution plans are deferred compensation plans under section 401(k) of the Internal Revenue Code. All of these plans require Company contributions. Total expense for the defined-contribution plans was $126 million, $132 million and $126 million in 2020, 2019, and 2018.
The Company also has a noncontributory, unfunded defined-contribution plan for certain elected officers of the Company who are ineligible for the nonqualified defined-benefit pension plan. Amounts recorded as liabilities under the plan are not material to the consolidated balance sheets at December 31, 2020 and 2019.
Pilot Long-term Disability Benefits
Alaska maintains a long-term disability plan for its pilots. The long-term disability plan does not have a service requirement. Therefore, the liability is calculated based on estimated future benefit payments associated with pilots that were assumed to be disabled on a long-term basis as of December 31, 2020 and does not include any assumptions for future disability. The liability includes the discounted expected future benefit payments and medical costs. The total liability was $61 million and $45 million, which was recorded net of a prefunded trust account of $7 million and $6 million, and included in long-term other liabilities on the consolidated balance sheets as of December 31, 2020 and December 31, 2019.
Employee Incentive-Pay Plans
The Company has employee incentive plans that pay employees based on certain financial and operational metrics. These metrics are set and approved annually by the Compensation and Leadership Development Committee of the Board of Directors. The aggregate expense under these plans in 2020, 2019 and 2018 was $130 million, $163 million and $147 million. The incentive plans are summarized below.
•Performance-Based Pay (PBP) is a program that rewards the majority of Alaska and Horizon employees. The program is based on various metrics that adjust periodically, including those related to Air Group profitability, achievement of unit-cost goals, safety, and guest preference and opinion of performance measured as brand strength.
•COVID Business Recovery Incentive Pay Plan (CBRP) is a supplemental program implemented in the third quarter of 2020, aimed at incentivizing employees as the Company manages recovery through the COVID-19 pandemic. The program was based on metrics related to cash preservation and COVID-related safety metrics.
•The Operational Performance Rewards Program (OPR) entitles the majority of Alaska and Horizon employees to quarterly payouts of up to $450 per person if certain monthly operational and customer service objectives are met.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Future minimum payments for commitments as of December 31, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Commitments(a)
|
|
Capacity Purchase Agreements(b)
|
2021
|
|
$
|
873
|
|
|
$
|
166
|
|
2022
|
|
372
|
|
|
174
|
|
2023
|
|
238
|
|
|
179
|
|
2024
|
|
27
|
|
|
184
|
|
2025
|
|
16
|
|
|
189
|
|
Thereafter
|
|
13
|
|
|
690
|
|
Total
|
|
$
|
1,539
|
|
|
$
|
1,582
|
|
(a)Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and contractual aircraft maintenance obligations.
(b)Includes all non-aircraft lease costs associated with capacity purchase agreements.
Aircraft Commitments
Aircraft purchase commitments include non-cancelable contractual commitments for aircrafts and engines. As of December 31, 2020, Alaska had commitments to purchase 32 Boeing 737-9 MAX aircraft with deliveries in 2021 through 2023. Horizon also has commitments to purchase three E175 aircraft with deliveries in 2023 and Alaska has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2024 through 2026. In addition, Alaska has options to purchase 37 737 MAX aircraft and Horizon has options to purchase 30 E175 aircraft. Alaska has an option to increase capacity flown by Skywest with eight additional E175 aircraft with deliveries in 2022. The cancelable purchase commitments and option payments are not reflected in the table above.
In December 2020, Alaska announced an agreement in principle with Boeing to restructure the existing aircraft purchase agreement. Upon execution of the agreement, Alaska will have commitments to purchase an additional 23 737-9 MAX aircraft with deliveries between 2023 and 2024. The agreement in principle also provides for an incremental 15 options to purchase aircraft, which are expected to be available for delivery between 2023 and 2026. The incremental purchase commitments per the agreement in principle, as well as renegotiated payment streams which will lower 2021 cash outflow requirements, are not contractually obligated at December 31, 2020, and are not reflected in the table above.
Aircraft Maintenance and Parts Management
Through its acquisition of Virgin America, the Company has a separate maintenance-cost-per-hour contract for management and repair of certain rotable parts to support Airbus airframe and engine maintenance and repair. In 2017, Alaska entered into a similar contract for maintenance on its B737-800 aircraft engines. These agreements require monthly payments based upon utilization, such as flight hours, cycles and age of the aircraft, and, in turn, the agreement transfers certain risks to the third-party service provider. There are minimum payments under both agreements, which are reflected in the table above. Accordingly, payments could differ materially based on actual aircraft utilization.
Aircraft Maintenance Deposits
Certain Airbus leases include contractually required maintenance deposit payments to the lessor, which collateralize the lessor for future maintenance events should the Company not perform required maintenance. Payments of such deposits follow contractual terms and timing, regardless of operating status of the respective aircraft. Most of the lease agreements provide that maintenance deposits are reimbursable upon completion of the major maintenance event in an amount equal to the lesser of (i) the amount qualified for reimbursement from maintenance deposits held by the lessor associated with the specific major maintenance event or (ii) the qualifying costs related to the specific major maintenance event.
Los Angeles International Airport (LAX) Construction
In May 2019, we executed an amended lease agreement with Los Angeles World Airports, which includes an agreement to renovate and upgrade the fuel system, jet bridges and concourse facilities at Terminal 6 of LAX. Project terms and pre-construction readiness was approved and finalized in 2020. We expect construction will be completed by early 2024. Under the terms of the agreement, we expect to have total reimbursable cash outlays for the project of approximately $230 million. To date, we have made total cash outlays of $24 million and have received reimbursement for $8.7 million of that total.
Contingencies
The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.
In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. The court certified a class of approximately 1,800 flight attendants in November 2016. The Company believes the claims in this case are without factual and legal merit.
In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America, and Alaska Airlines, as a successor-in-interest to Virgin America, responsible for various damages and penalties sought by the class members. In February 2019, the Court entered final judgment against Virgin America and Alaska Airlines in the amount of approximately $78 million. It did not award injunctive relief against Alaska Airlines. In February 2021, an appellate court reversed portions of the lower court decision and significantly reduced the judgment. The determination of total judgment has not been completed as of the date of this filing. The Company accrued its best estimate in the December 31, 2020 financial statements for this recognized subsequent event.
The Company is seeking an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law and for other employment law and improper class certification reasons. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case and agree with the Company's other bases for appeal.
In January 2019, a pilot filed a class action lawsuit seeking to represent all Alaska and Horizon pilots for damages based on alleged violations of the Uniformed Services Employment and Reemployment Rights Act (USERRA). Plaintiff received class certification in August 2020. The case is in discovery. The Company believes the claims in the case are without factual and legal merit and intends to defend the lawsuit.
The Company is involved in other litigation around the application of state and local employment laws, like many air carriers. Our defenses are similar to those identified above, including that the state and local laws are preempted by federal law and are unconstitutional because they impede interstate commerce. None of these additional disputes are material.
NOTE 11. SHAREHOLDERS' EQUITY
Dividends
During 2020, the Board of Directors declared dividends of $0.375 per share. The Company paid dividends of $45 million, $173 million and $158 million to shareholders of record during 2020, 2019 and 2018. In March 2020, the Company suspended dividends indefinitely.
Common Stock Repurchase
In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of December 31, 2020, the Company has repurchased 7.6 million shares for $544 million under this program. In March 2020, the Company suspended the share repurchase program indefinitely.
At December 31, 2020, the Company held 9,349,944 shares in treasury. Management does not anticipate retiring common shares held in treasury for the foreseeable future.
Share repurchase activity (in millions, except shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
2015 Repurchase Program – $1 billion
|
538,078
|
|
|
$
|
31
|
|
|
1,192,820
|
|
|
$
|
75
|
|
|
776,186
|
|
|
$
|
50
|
|
CARES Act Warrant Issuance
As taxpayer protection required under the PSP, during 2020 the Company granted the Treasury a total of 915,930 warrants to purchase Alaska Air Group (ALK) common stock at a strike price of $31.61, based on the closing price on April 9, 2020. The warrants are non-voting, freely transferable, may be settled as net shares or in cash at Alaska's option, and have a five year term.
Additionally, in connection with the execution of the CARES Act loan agreement, the Company agreed to issue warrants to the Treasury to purchase up to an aggregate of 6,099,336 shares of ALK common stock (the Warrant Agreement). Under the Warrant Agreement, warrants will be granted to the Treasury in conjunction with each new borrowing under the Agreement. Warrants to purchase shares shall be equal to 10% of each borrowing, divided by $31.61, the closing price of Air Group common stock on April 9, 2020. Pursuant to the Warrant Agreement, on the closing date, Air Group granted the Treasury 427,080 warrants to purchase ALK common stock at a strike price of $31.61.
Accumulated Other Comprehensive Loss (AOCL)
AOCL consisted of the following (in millions, net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Related to marketable securities
|
$
|
23
|
|
|
$
|
9
|
|
Related to employee benefit plans
|
(498)
|
|
|
(469)
|
|
Related to interest rate derivatives
|
(19)
|
|
|
(5)
|
|
|
$
|
(494)
|
|
|
$
|
(465)
|
|
NOTE 12. SPECIAL ITEMS
In 2020, the Company recognized $627 million in impairment charges and other special items, and $220 million in special restructuring costs. These special items are largely described in Note 2, but also include an amount accrued for a judgment in a class action lawsuit issued subsequent to December 31, 2020 that was a recognized subsequent event. Also in 2020 the Company recognized special items of $6 million for merger-related costs associated with its acquisition of Virgin America. Costs classified as merger-related are directly attributable to merger activities. Additionally, the Company incurred $26 million in swap-break charges and pre-payment penalties related to the early payment of debt associated with the sale of ten owned Airbus aircraft. These charges are reflected as Special charges - net non-operating in the consolidated statements of operations.
In 2019, the Company recognized $44 million in merger-related costs, primarily for expenses associated with a one-time true-up of Airbus flight attendant and pilot vacation balances, as well as certain technology integration costs.
In 2018, the Company recognized $87 million in merger-related costs. The Company incurred a one-time settlement fee of $20 million for the termination of an existing maintenance services agreement and subsequently entered into a new services agreement that provides more flexibility for the timing and scope of engine work. Additionally, the Company incurred $25 million for one-time bonuses paid to employees as a result of tax reform. These charges were recognized as special charges and are included in the Special items - other line on our consolidated statements of operations.
The Company has recognized $370 million in merger-related costs since the acquisition of Virgin America in December 2016. No additional merger-related costs will be incurred subsequent to 2020. Special items recorded as a result of the COVID-19 pandemic are disclosed in Note 2. COVID-19 Pandemic.
The following breaks down merger-related costs incurred in 2020, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Consulting and professional services
|
$
|
5
|
|
|
$
|
18
|
|
|
$
|
45
|
|
Employee-related costs(a)
|
—
|
|
|
15
|
|
|
13
|
|
Legal and accounting fees
|
1
|
|
|
1
|
|
|
1
|
|
Other merger-related costs(b)
|
—
|
|
|
10
|
|
|
28
|
|
Total Merger-related Costs
|
$
|
6
|
|
|
$
|
44
|
|
|
$
|
87
|
|
(a)Employee-related costs consist primarily of vacation balance true-ups, severance, retention bonuses, and training and skill development.
(b)Other merger-related costs consist primarily of costs for marketing and advertising, IT, employee appreciation and company sponsored events, moving expenses, supplies, and other immaterial expenses.
NOTE 13. STOCK-BASED COMPENSATION PLANS
The Company has various equity incentive plans under which it may grant stock awards to directors, officers and employees. The Company also has an employee stock purchase plan.
The table below summarizes the components of total stock-based compensation (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Stock options
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Stock awards
|
14
|
|
|
21
|
|
|
23
|
|
Deferred stock awards
|
1
|
|
|
1
|
|
|
1
|
|
Employee stock purchase plan
|
15
|
|
|
11
|
|
|
9
|
|
Stock-based compensation
|
$
|
34
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
|
|
|
|
Tax benefit related to stock-based compensation
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Unrecognized stock-based compensation for non-vested options and awards and the weighted-average period the expense will be recognized (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Weighted-Average
Period
|
Stock options
|
$
|
5
|
|
|
1.0
|
Stock awards
|
31
|
|
|
1.8
|
Unrecognized stock-based compensation
|
$
|
36
|
|
|
1.7
|
The Company is authorized to issue 17 million shares of common stock under these plans, of which 5,893,374 shares remain available for future grants of either options or stock awards as of December 31, 2020.
Stock Options
Stock options to purchase common stock are granted at the fair market value of the stock on the date of grant. The stock options granted have terms of up to ten years.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected volatility
|
34
|
%
|
|
30
|
%
|
|
30
|
%
|
Expected term
|
6 years
|
|
6 years
|
|
6 years
|
Risk-free interest rate
|
1.03
|
%
|
|
2.41
|
%
|
|
2.61
|
%
|
Expected dividend yield
|
1.73
|
%
|
|
2.09
|
%
|
|
1.94
|
%
|
Weighted-average grant date fair value per share
|
$
|
14.11
|
|
|
$
|
16.84
|
|
|
$
|
17.18
|
|
Estimated fair value of options granted (millions)
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
1
|
|
The expected market price volatility and expected term are based on historical results. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected dividend yield is based on the estimated weighted average dividend yield over the expected term. The expected forfeiture rates are based on historical experience.
The tables below summarize stock option activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Exercise Price Per Share
|
|
Weighted-
Average
Contractual Life (Years)
|
|
Aggregate Intrinsic
Value
(in millions)
|
Outstanding, December 31, 2019
|
794,055
|
|
|
$
|
60.98
|
|
|
6.5
|
|
$
|
7
|
|
Granted
|
398,780
|
|
|
54.81
|
|
|
|
|
|
Exercised
|
(52,674)
|
|
|
18.86
|
|
|
|
|
|
Canceled
|
(15,417)
|
|
|
71.63
|
|
|
|
|
|
Forfeited or expired
|
(13,874)
|
|
|
66.84
|
|
|
|
|
|
Outstanding, December 31, 2020
|
1,110,870
|
|
|
$
|
60.54
|
|
|
6.8
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2020
|
419,667
|
|
|
$
|
60.56
|
|
|
4.6
|
|
$
|
2
|
|
Vested or expected to vest, December 31, 2020
|
1,109,799
|
|
|
$
|
60.54
|
|
|
6.8
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2018
|
Intrinsic value of option exercises
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Cash received from stock option exercises
|
—
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
Fair value of options vested
|
3
|
|
|
3
|
|
|
2
|
|
Stock Awards
Restricted Stock Units (RSUs) are awarded to eligible employees and entitle the grantee to receive shares of common stock at the end of the vesting period. The fair value of the RSUs is based on the stock price on the date of grant. Generally, RSUs “cliff vest” after three years, or the period from the date of grant to the employee’s retirement eligibility, and expense is recognized accordingly. Performance Share Units (PSUs) are awarded to certain executives to receive shares of common stock if specific performance goals and market conditions are achieved. There are several tranches of PSUs which vest when performance goals and market conditions are met.
The following table summarizes information about outstanding stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Units
|
|
Weighted-Average Grant Date Fair Value
|
|
Weighted-
Average
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value (in
millions)
|
Non-vested, December 31, 2019
|
541,613
|
|
|
$
|
71.82
|
|
|
1.4
|
|
$
|
37
|
|
Granted
|
926,418
|
|
|
49.22
|
|
|
|
|
|
Vested
|
(388,032)
|
|
|
67.83
|
|
|
|
|
|
Forfeited
|
(112,955)
|
|
|
54.39
|
|
|
|
|
|
Non-vested, December 31, 2020
|
967,044
|
|
|
$
|
51.85
|
|
|
1.7
|
|
$
|
50
|
|
Deferred Stock Awards
Deferred Stock Units (DSUs) are awarded to members of the Board of Directors as part of their retainers. The underlying common shares are issued upon retirement from the Board, but require no future service period. As a result, the entire intrinsic value of the awards is expensed on the date of grant.
Employee Stock Purchase Plan
The ESPP allows employees to purchase common stock at 85% of the stock price on the first day of the offering period or the specified purchase date, whichever is lower. Employees may contribute up to 10% of their base earnings during the offering period to purchase stock. Employees purchased 1,524,194, 784,786 and 632,145 shares in 2020, 2019 and 2018 under the ESPP.
NOTE 14. OPERATING SEGMENT INFORMATION
Alaska Air Group has two operating airlines—Alaska and Horizon. Each is a regulated airline by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carrier SkyWest, under which Alaska receives all passenger revenues.
Under U.S. General Accepted Accounting Principles, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:
•Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.
•Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. and Canada under CPAs. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.
The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.
The "Consolidating and Other" column reflects parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.
Operating segment information is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Mainline
|
|
Regional
|
|
Horizon
|
|
Consolidating & Other(a)
|
|
Air Group Adjusted(b)
|
|
Special Items(c)
|
|
Consolidated
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenues
|
2,350
|
|
|
669
|
|
|
—
|
|
|
—
|
|
|
3,019
|
|
|
—
|
|
|
3,019
|
|
CPA revenues
|
—
|
|
|
—
|
|
|
386
|
|
|
(386)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mileage Plan other revenue
|
309
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
374
|
|
|
—
|
|
|
374
|
|
Cargo and other
|
170
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
173
|
|
|
—
|
|
|
173
|
|
Total Operating Revenues
|
2,829
|
|
|
734
|
|
|
386
|
|
|
(383)
|
|
|
3,566
|
|
|
—
|
|
|
3,566
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-fuel operating expenses
|
3,630
|
|
|
993
|
|
|
323
|
|
|
(399)
|
|
|
4,547
|
|
|
71
|
|
|
4,618
|
|
Fuel expense
|
569
|
|
|
162
|
|
|
—
|
|
|
—
|
|
|
731
|
|
|
(8)
|
|
|
723
|
|
Total Operating Expenses
|
4,199
|
|
|
1,155
|
|
|
323
|
|
|
(399)
|
|
|
5,278
|
|
|
63
|
|
|
5,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-operating Income (Expense)
|
(19)
|
|
|
—
|
|
|
(22)
|
|
|
2
|
|
|
(39)
|
|
|
(26)
|
|
|
(65)
|
|
Income (Loss) Before Income Tax
|
$
|
(1,389)
|
|
|
$
|
(421)
|
|
|
$
|
41
|
|
|
$
|
18
|
|
|
$
|
(1,751)
|
|
|
$
|
(89)
|
|
|
$
|
(1,840)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Mainline
|
|
Regional
|
|
Horizon
|
|
Consolidating & Other(a)
|
|
Air Group Adjusted(b)
|
|
Special Items(c)
|
|
Consolidated
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenues
|
6,750
|
|
|
1,345
|
|
|
—
|
|
|
—
|
|
|
8,095
|
|
|
—
|
|
|
8,095
|
|
CPA revenues
|
—
|
|
|
—
|
|
|
450
|
|
|
(450)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mileage Plan other revenue
|
419
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
465
|
|
|
—
|
|
|
465
|
|
Cargo and other
|
212
|
|
|
3
|
|
|
1
|
|
|
5
|
|
|
221
|
|
|
—
|
|
|
221
|
|
Total Operating Revenues
|
7,381
|
|
|
1,394
|
|
|
451
|
|
|
(445)
|
|
|
8,781
|
|
|
—
|
|
|
8,781
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-fuel operating expenses
|
4,778
|
|
|
1,097
|
|
|
385
|
|
|
(464)
|
|
|
5,796
|
|
|
44
|
|
|
5,840
|
|
Fuel expense
|
1,589
|
|
|
295
|
|
|
—
|
|
|
—
|
|
|
1,884
|
|
|
(6)
|
|
|
1,878
|
|
Total Operating Expenses
|
6,367
|
|
|
1,392
|
|
|
385
|
|
|
(464)
|
|
|
7,680
|
|
|
38
|
|
|
7,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-operating Income (Expense)
|
(21)
|
|
|
—
|
|
|
(28)
|
|
|
2
|
|
|
(47)
|
|
|
—
|
|
|
(47)
|
|
Income (Loss) Before Income Tax
|
$
|
993
|
|
|
$
|
2
|
|
|
$
|
38
|
|
|
$
|
21
|
|
|
$
|
1,054
|
|
|
$
|
(38)
|
|
|
$
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Mainline
|
|
Regional
|
|
Horizon
|
|
Consolidating & Other(a)
|
|
Air Group Adjusted(b)
|
|
Special Items(c)
|
|
Consolidated
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger revenues
|
6,474
|
|
|
1,157
|
|
|
—
|
|
|
—
|
|
|
7,631
|
|
|
—
|
|
|
7,631
|
|
CPA revenues
|
—
|
|
|
—
|
|
|
508
|
|
|
(508)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mileage Plan other revenue
|
397
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
434
|
|
|
—
|
|
|
434
|
|
Cargo and other
|
192
|
|
|
3
|
|
|
4
|
|
|
—
|
|
|
199
|
|
|
—
|
|
|
199
|
|
Total Operating Revenues
|
7,063
|
|
|
1,197
|
|
|
512
|
|
|
(508)
|
|
|
8,264
|
|
|
—
|
|
|
8,264
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-fuel operating expenses
|
4,577
|
|
|
1,024
|
|
|
465
|
|
|
(513)
|
|
|
5,553
|
|
|
132
|
|
|
5,685
|
|
Fuel expense
|
1,652
|
|
|
262
|
|
|
—
|
|
|
—
|
|
|
1,914
|
|
|
22
|
|
|
1,936
|
|
Total Operating Expenses
|
6,229
|
|
|
1,286
|
|
|
465
|
|
|
(513)
|
|
|
7,467
|
|
|
154
|
|
|
7,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-operating Income (Expense)
|
(25)
|
|
|
(11)
|
|
|
(20)
|
|
|
(2)
|
|
|
(58)
|
|
|
—
|
|
|
(58)
|
|
Income (Loss) Before Income Tax
|
$
|
809
|
|
|
$
|
(100)
|
|
|
$
|
27
|
|
|
$
|
3
|
|
|
$
|
739
|
|
|
$
|
(154)
|
|
|
$
|
585
|
|
(a)Includes consolidating entries, Parent Company, McGee Air Services, and other immaterial business units.
(b)The Air Group Adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and excludes certain income and charges.
(c)Includes payroll support program grant wage offsets, special items and mark-to-market fuel-hedge accounting adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Depreciation and amortization:
|
|
|
|
|
|
Mainline
|
$
|
346
|
|
|
$
|
337
|
|
|
$
|
316
|
|
Horizon
|
74
|
|
|
86
|
|
|
82
|
|
Consolidated
|
$
|
420
|
|
|
$
|
423
|
|
|
$
|
398
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Mainline
|
$
|
194
|
|
|
$
|
605
|
|
|
$
|
571
|
|
Horizon
|
12
|
|
|
91
|
|
|
389
|
|
Consolidated
|
$
|
206
|
|
|
$
|
696
|
|
|
$
|
960
|
|
|
|
|
|
|
|
Total assets at end of period:
|
|
|
|
|
|
Mainline
|
$
|
19,754
|
|
|
$
|
19,207
|
|
|
|
Horizon
|
1,170
|
|
|
1,266
|
|
|
|
Consolidating & Other
|
(6,878)
|
|
|
(7,480)
|
|
|
|
Consolidated
|
$
|
14,046
|
|
|
$
|
12,993
|
|
|
|