Alaska Airlines and Horizon Air 2007 Annual Report Download - page 116

ITEM 1A. RISK FACTORS
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. These risk
factors may not be exhaustive. We operate in a
continually changing business environment and
new risk factors emerge from time to time.
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.
The airline industry is highly competitive and
subject to rapid change. We may be unable to
compete effectively against other airlines with
greater financial resources or lower operating
costs, or to adjust rapidly enough in the event the
nature of competition in our markets changes.
The airline industry is highly competitive as to
fares, flight frequency, frequent flyer benefits,
routes and service. The industry is particularly
susceptible to price discounting because airlines
incur only nominal costs to provide service to
passengers occupying otherwise unsold seats.
Over the past few years, airlines have reduced
domestic routes and the number of planes
available, which has resulted in reduced
domestic industry capacity and a trend towards
increased fares. Although capacity has declined
based on a nationwide average, capacity on the
West Coast has actually increased. If airlines
decide to increase their capacity further in the
future, this could cause fares to decline, which
may adversely affect our business and results of
operations. Many of our competitors are larger
than our airlines and therefore, may have
significantly greater financial resources and
name recognition or lower operating costs than
we do. In addition, competitors who have
successfully reorganized out of bankruptcy have
lowered their operating costs as a result of
renegotiated labor, supply and financing
agreements. From time to time in the past, some
of these competitors have chosen to add
service, reduce their fares, or take other such
competitive steps in our key markets. We may be
unable to compete effectively against such other
airlines that introduce service or discounted
fares in the markets that we serve.
The airline industry, and particularly regional
airlines like Horizon, also faces competition from
ground transportation alternatives, such as
buses, trains or automobiles.
The U.S. and Mexico recently amended their
bilateral agreement relating to commercial air
service. The amendments expand authorized
service levels to cities we serve in Mexico. Other
airlines have added service to many of the city
pairs we currently serve, which has increased
competition and has negatively affected our
results of operations. Further increases in
competition in these markets may result in
additional negative pressure on our results of
operations.
Our business, financial condition, and results of
operations are substantially exposed to the
current high prices and variability of jet fuel.
Further increases in jet fuel costs would harm
our business.
Fuel costs constitute a significant portion of our
total operating expenses, accounting for 27%
and 26% of total operating expenses for the
years ended December 31, 2007 and 2006,
respectively. Significant increases in fuel costs
during the past several years have negatively
affected our results of operations. Further
increases will harm our financial condition and
results of operations, unless we are able to
increase fares.
Historically, fuel costs and availability have been
unpredictable and subject to wide price
fluctuations based on geopolitical issues and
supply and demand. We have not generally been
able to increase fares to offset increases in the
price of fuel until recently and we may not be
able to do so in the future.
We utilize fuel hedges as a form of insurance
against the volatility of fuel prices. To manage the
risk of fuel price increases, we purchase call
options that are designed to cap a portion of our
fuel costs at designated per-barrel oil prices. Even
with hedges, we are substantially and increasingly
exposed to increases in jet fuel costs as the price
at which we are hedged increases.
16