If any of the following occurs, our business, financial condition and results of operations could suffer. In such case, the trading price of our common stock could also decline. We operate in a conti
nually changing business environment. In this environment, new risks may emerge and already identified risks may vary significantly in terms of impact and likelihood of occurrence. Management cannot predict such developments, nor can it assess the impact, if any, on our business of such new risk factors or of events described in any forward-looking statements.
We have adopted an enterprise Risk Analysis and Oversight Program designed to identify the various risks faced by the organization, assign responsibility for managing those risks to individual executives within management ranks as well as align these risks with appropriate board level oversight. These enterprise level identified risks have been aligned to the risk factors discussed below.
SAFETY, COMPLIANCE AND OPERATIONAL EXCELLENCE
Our reputation and financial results could be harmed in the event of an airline accident or incident.
An accident or incident involving one of our aircraft could involve a signific
ant loss of life and result in a loss of confidence in our airlines by the flying public. We could experience significant potential claims from injured passengers and surviving relatives, as well as costs for the repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. We maintain liability insurance in amounts and of the type generally consistent with industry practice. However, the amount of such coverage may not be adequate to fully cover all claims and we may be forced to bear substantial losses from an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured and even if it does not involve one of our airlines, could cause a public perception that our airlines or the equipment they fly is less safe or reliable than other transportation alternatives, which would harm our business.
Changes in government regulation imposing additional requirements and restrictions on our operations or on the airports at which we operate could increase our operating costs and result in service delays and disruptions.
Airlines are subject to extensive regulatory and legal requirements, both domestically and internationally, that involve significant compliance costs. In the last several years, Congress has passed laws, and the U.S. DOT, the TSA and the FAA have issued regulations that have required signifi
cant expenditures relating to the maintenance and operation of airlines. Similarly, many aspects of an airline’s operations are subject to increasingly stringent federal, state and local laws protecting the environment.
Because of significantly higher security and other costs incurred by airports since September 11, 2001, many airports have increased their rates and charges to air carriers. Additional laws, regulations, taxes, and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce the demand for air travel.
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Although lawmakers may impose these additional fees and view them as “pass-through” costs, we believe that a higher total ticket price will influence consumer purchase and travel decisions and may result in an overall decline in passenger traffic, which would harm our business.
The airline industry continues to face potential security concerns and related costs.
The terrorist attacks of September 11, 2001 and their aftermath negatively affected the airline industry, including our company. Additional terrorist attacks, the fear of such attacks or other hostilities involving the U.S. could have a further significant negative effect on the airline industry, including us, and could:
•
significantly reduce passenger traffic and yields as a result of a potentially dramatic drop in demand for air travel;
• &
nbsp;
significantly increase security and insurance costs;
make war risk or other insurance unavailable or extremely expensive;
increase fuel costs and the volatility of fuel prices;
increase costs from airport shutdowns, flight cancellations and delays resulting from security breaches and perceived safety threats; and
result in a grounding of commercial air traffic by the FAA.
The occurrence of any of these events would harm our business, financial condition and results of operations.
Our operations are often affected by factors beyond our control, including delays, cancellations, and other conditions, which could harm our financial condition and results of operations.
Like other airlines, our operations often are affected by delays, cancellations and ot
her conditions caused by factors largely beyond our control.
Other conditions that might impact our operations include:
air traffic congestion at airports or other air traffic control problems;
adverse weather conditions;
increased security measures or breaches in security;
international or domestic conflicts or terrorist activity; and
other changes in business conditions.
Due to our geographic area of operations, we believe a large portion of our operation is more susceptible to adverse weather conditions than that of many of our competitors. A general reduction in airline passenger traffic as a result of any of the above-mentio
ned factors could harm our business, financial condition and results of operations.
STRATEGY
We depend on a few key markets to be successful.
Our strategy is to focus on serving a few key markets, includi
ng Seattle, Portland, Los Angeles and Anchorage. A significant portion of our flights occurs to and from our Seattle hub. In 2010, passengers to and from Seattle accounted for 63% of our total passengers.
We believe that concentrating our service offerings in this way allows us to maximize our investment in personnel, aircraft, and ground facilities, as well as to gain greater advantage from sales and marketing efforts in those regions. As a result, we remain highly dependent on our key markets. Our business could be harmed by any circumstances causing a reduction in demand for air transportation in our key markets. An increas
e in competition in our key markets could also cause us to reduce fares or take
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We rely on third-party vendors for certain critical activities.
We have historically relied on outside vendors for a variety of services and functions critical to our business, including airframe and engine maintenance, ground handling, fueling, computer reservation system hosting and software maintenance. As part of our cost-reduction efforts, our reliance on outside vendors has increased and may continue to do so in the future. In recent years, Alaska has subcontracted its heavy aircraft maint
enance, fleet service, facilities maintenance, and ground handling services at certain airports, including Seattle-Tacoma International Airport, to outside vendors.
Our use of outside vendors increases our exposure to several risks. In the event that one or more vendors goes into bankruptcy, ceases operation or fails to perform as promised, replacement services may not be readily available at competitive rates, or at all. If one of our vendors fails to perform adequately we may experience increased costs, delays, maintenance issues, safety issues or negative public perception of our airline. Vendor bankruptcies, unionization, regulatory compliance issues or significant changes in the competitive marketplace among suppliers could adversely affect vendor services or force A
laska to renegotiate existing agreements on less favorable terms. These events could result in disruptions in Alaska’s operations or increases in its cost structure.
We are dependent on a limited number of suppliers for aircraft and parts.
Alaska is dependent on Boeing as its sole supplier for aircraft and many aircraft parts. Horizon is similarly dependent on Bombardier. Additionally, each carrier is dependent on sole suppliers for aircraft engines. As a result, we are more vulnera
ble to any problems associated with the supply of those aircraft and parts, including design defects, mechanical problems, contractual performance by the manufacturers, or adverse perception by the public that would result in customer avoidance or in actions by the FAA resulting in an inability to operate our aircraft.
We rely on partner airlines for codeshare and frequent flyer marketing arrangements.
Alaska and Horizon are parties to marketing agreements with a number of domestic and in
ternational air carriers, or “partners," including, but not limited to, American Airlines and Delta Air Lines. These agreements provide that certain flight segments operated by us are held out as partner “codeshare” flights and that certain partner flights are held out for sale as Alaska codeshare flights. In addition, the agreements generally provide that members of Alaska’s Mileage Plan program can earn miles on or redeem miles for partner flights and vice versa. We receive a significant amount of revenue from flights sold under codeshare arrangements. In addition, we believe that the frequent flyer arrangements are an important part of our Mileage Plan program. The loss of a significant partner or certain partner flights could have a negative effect on our revenues or the attractiveness of our Mileage Plan, which we believe is a source of competitive advantage.
FINANCIAL CONDITION AND FINANCIAL MARKETS
Our failure to successfully meet cost reduction goals could harm our business.
We continue to strive toward aggressive cost-reduction goals that are an important part of our business strategy of offering the best value to passengers through competitive fares while achieving acceptabl
e profit margins and return on capital. If we are unable to reduce our non-fuel unit costs over the long-term and achieve sustained targeted return on invested capital, we will likely not be able to grow our business in the future and therefore our financial results may suffer.
Our business, financial condition, and results of operations are substantially exposed to the volatility of jet fuel prices. Increases in jet fuel costs would harm our business.
Fuel costs constitute a significant
portion of our total operating expenses, accounting for 27% and 21% of total operating expenses for the years ended December 31, 2010 and 2009, respectively. Significant increases in average fuel costs during the past several years have negatively affected our results of operations.
Future increases in the price of jet fuel will harm our financial condition and results of operations, unless we are able to increase fares or add additional ancillary fees to attempt to recover i
ncreasing fuel costs.
Economic uncertainty or another recession would likely impact demand for our product and could harm our financial condition and results of operations.
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The 2008 and 2009 economic recession resulted in a decline in demand for air travel. If a similar situation recurs, we will likely need to adjust our capacity plans, which could harm our business, financial condition and results of operations.
Our indebtedness and other fixed obligations could increase the volatility of earnings and otherwise restrict our act
ivities and potentially lead to liquidity constraints.
Although we have reduced our long-term debt balance significantly over the past year, we have, and will continue to have for the foreseeable future, a significant amount of debt. Due to our high fixed costs, including aircraft lease commitments and debt service, a decrease in revenues results in a disproportionately greater decrease in earnings.
Our outstanding long-term debt and other fixed obligations could have important consequences. For example, the
y could:
limit our ability to obtain additional financing to fund our future capital expenditures, acquisitions, working capital or other purposes;
require us to dedicate a material portion of our operating cash flow to fund lease payments and interest payments on indebtedness, thereby reducing funds available for other purposes; and
limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions, including reacting to the current economic slowdown.
Although we have historically been able to generate sufficient cash flow from our operations to pay our debt and other fixed obligations as they become due, we cannot ensure we will be able to do so in the future. If we fail to do so, our business could be harmed.
Alaska is required to comply with specific financial covenants in certain agreements. We cannot be certain that Alaska will be able to comply with these covenants or provisions or that these requirements will not limit our ability to finance our future operations or capital needs.
See “Liquidity and Capital Resources” for more detailed information about our obligations and commitments.
Our continuing obligation to fund our traditional defined-benefit pension plans could neg
atively affect our ability to compete in the marketplace.
Our defined-benefit pension plan assets are subject to market risk. If market returns are poor in the future, any future obligation to make additional cash contributions in accordance with the Pension Protection Act of 2006 could increase and harm our liquidity. Poor market returns also lead to higher pension expense in our statement of operations. The calculation of pension expense is dependent on many assumptions that are more fully described in “Critical Accounting Estimates” and Note 1 to our consolidated financial statements.
Increases in insurance costs or reductions in insurance coverage would harm our business, financial condition and results of operations.
Aviation insurers could increase their premiums in the event of additional terrorist attacks, hijackings, airline accidents or other events adversely affecting the airline industry. Furthermore, the full hull and liability war risk insurance provided by the government is currently mandated through September 30, 2011. Although the government may again extend the deadline for providing such coverage, we cannot be certain that any extension will occur, or if it does, for how long the extension will last. It is expected that
, should the government stop providing such coverage to the airline industry, the premiums charged by aviation insurers for this coverage will be substantially higher than the premiums currently charged by the government and the coverage will be much more limited, including smaller aggregate limits and shorter cancellation periods. Significant increases in insurance premiums would adversely affect our business, financial condition and results of operations.
INFORMATION TECHNOLOGY
We rely heavily on automated systems to operate our business, and a failure of these systems or by their operators could harm our business.
We depend on automated systems to operate our business, including our airline reservation system, our telecommunication systems, our website, our maintenance systems, our kiosk check-in terminals, and other systems. Substantially all of our tickets
17
are issued to passengers as electronic tickets and the majority of our customers check in using our website or our airport kiosks. We depend on our reservation system to be able to issue, track and accept these electronic tickets. In order for our operations to work efficiently, our website, reservation system, and check-in systems must be able to accommodate a high volume of traffic, maintain secure information, and deliver important flight information. Substantial or repeated website, reservations system or telecommunication systems fai
lures could reduce the attractiveness of our services and cause our customers to purchase tickets from another airline. In addition, we rely on other automated systems for crew scheduling, flight dispatch, and other operational needs. Disruption in, changes to, or a breach of these systems could result in the loss of important data, an increase of our expenses and a possible temporary cessation of our operations.
If we do not maintain the privacy and security of customer-related information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
We receive, retain, and transmit certain personal information about our customers. In addition, our online operations at alaskaair.com depend on the secure transmission of confidential information over public networks, including credit card information. A compromise of our security systems or those of other business partners that results in our customers’ personal information being obtained by unauthorized persons could adversely affect our reputation with our customers and others, as well as our operations, results of operations, financial position and liquidity, and could result in litigation against us or the imposition of penalties. In addition, a security breach could require that we expend significant additional resources related to the security of information systems and could result in a disruption of our operations, particularly our online sales operations.
Additionally, the use of individually identifiable data by our business and our business partners is regulated at the international, federal and state levels. Privacy and information security laws and regulations change, and compliance with them may result in cost increases due to necessary systems changes and the development of new administrative processes.
BRAND AND REPUTATION
The rebranding of the Horizon brand may result in some loss of brand recognition.
With this change in structure in 2011, the external Horizon brand will be phased out and the Horizon fleet will be rebranded with Alaska livery. As the Q400 fleet begins flying into new markets, such as in the state of Alaska, we may be subject to certain operational disruptions or subject to severe weather conditions that does not impact jet operation as heavily. Furthermore, with the Horizon brand phase out, there is a potential that we may lose some brand recognition from our customers in areas that Horizon has historically served.
LABOR RELATIONS AND LABOR STRATEGY
A significant increase in labor costs or change in key personnel could adversely affect our business and results of operations.
We compete against the major U.S. airlines and ot
her businesses for labor in many highly skilled positions. If we are unable to hire, train and retain qualified employees at a reasonable cost, or if we lose the services of key personnel, we may be unable to grow or sustain our business. In such case, our operating results and business prospects could be harmed. We may also have difficulty replacing management or other key personnel who leave and, therefore, the loss of any of these individuals could harm our business.
Labor costs are a significant component of our total expenses, accounting for approximately 31% and 34% of our total operating expenses in 2010
and 2009, respectively. As of December 31, 2010, labor unions represented approximately 82% of Alaska’s and 47% of Horizon’s employees. Each of our represented employee groups has a separate collective bargaining agreement, and could make demands that would increase our operating expenses and adversely affect our financial performance if we agree to them. Although we have been successful in negotiating new contracts or extending existing contracts with all of our represented groups in recent years, future uncertainty around open contracts could be a distraction to many employees, reduce employee engagement in our business and divert management’s attention from other projects and issues.
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|
ITEM 1B. UNRESOLVED STAFF COMMENTS |
|
ITEM 1B. UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
AIRCRAFT
The following tables describe the aircraft we operate and their average age at December 31, 2010:
| | | | | | | | | | | | | | | |
Aircraft Type | | Passenger Capacity | | Owned | | Leased | | Total | | Average Age in Years |
Alaska Airlines | | | | | | | | | | |
Boeing: | |
| | | | | | | | | | | | | | 737-400 | | 144 | | | 3 | | | 21 | | | 24 | | | 15.0 | |
737-400C* | | 72 | | | 5 | | | — | | | 5 | | | 18.3 | |
737-400F* | | — | | | 1 | | | — | | | 1 | &n
bsp; | | 11.8 | |
737-700 | | 124 | | | 17 | | | — | | | 17 | | | 10.5 | |
737-800 | | 157 | | | 45 | | | 10 | | | 55 | | | 3.1 | |
737-900 | | 172 | | | 12 | | | — | | | 12 | | | 8.4 | |
Total | | | | | 83 | | | 31 | | | 114 | | | 8.0 | |
| | | | | | | | | | |
Horizon Air | | | | | | | | | | | | | | | |
Bombardier: | | | | | | | | | | | | | | | |
Q400 | | 76 | | | 25 | | | 16 | | | 41 | | | 6.1 | |
CRJ-700 | | 70 | | | 2 | | | 11 | | | 13 | | | 8.0 | |
Total | | | | | 27 | | | 27 | | | 54 | | | 6.5 | |
| | | | | | | | | | | | | | | |
Aircraft Type | | Passenger Capacity | | Owned | | Leased | | Total | | Average Age in Years |
Alaska Airlines | | | | | | | | | | |
Boeing: | |
Aircraft Type
Passenger
Capacity
Owned
Leased
Total
Average
Age in
Years
Alaska Airlines
Boeing:
737-400
144
3
21
24
15.0
737-400C*
72
5
—
18.3
737-400F*
1
&n
bsp;
11.8
737-700
124
17
17
10.5
737-800
157
45
10
55
3.1
737-900
172
12
8.4
Total
83
31
114
8.0
Horizon Air
Bombardier:
Q400
76
25
16
41
6.1
CRJ-700
70
2
11
13
27
54
6.5
* C=Combination freighter/passenger; F=Freighter
Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations," discusses future orders and options for additional aircraft.
Most of our owned aircraft secure long-term debt arrangements or collateralize our revolving credit facility. See further discussion in “Liquidity and Capital Resources."
Alaska’s leased 737-400 and 737-800 aircraft have lease expiration dates between 2012 and 2016, and between 2015 and 2021, respectively. Horizon’s leased Q400 and CRJ-700 aircraft have expiration dates in 2018 and between 2018 and 2020, respectively. Horizon also has a Q400 aircraft on short-term lease which expires in May 2011. Horizon also has 16 leased Q200 aircraft and 3 leased CRJ-700 aircraft that are subleased to third-party carriers. Alaska and Horizon have the option to extend most of the leases for additional periods, or the right to purchase the ai
rcraft at the end of the lease term, usually at the then-fair-market value of the aircraft.
Alaska completed its transition to an all-Boeing operating fleet during 2008. Horizon expects to complete its transition to an all-Q400 operating fleet by June of 2011. The remaining 13 CRJ-700 aircraft will be leased or sub-leased to a third-party carrier upon removal from the operating fleet.
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The following table displays the currently anticipated fleet counts for Alaska and Horizon as of the end of each quarter in 2011:
| | | | | | | | | | | |
| 31-Mar-11 | | | 30-Jun-11 | | | 30-Sep-11 | | | 31-Dec-11
|
Alaska Airlines | | | | | | | |
737-400 | 24 | | | 24 | | | 24 | | | 24 | |
737-400C* | 5 | | | 5 | | | 5 | | |
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
Alaska Airlines
5
1
737-700
737-800
58
12
Totals
117