Alaska Airlines and Horizon Air 2007 Annual Report Download - page 128

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management’s Discussion and
Analysis of Financial Condition and Results of
Operations (MD&A) is intended to help the
reader understand the Company, our operations
and our present business environment. MD&A is
provided as a supplement to – and should be
read in conjunction with – our consolidated
financial statements and the accompanying
notes. All statements in the following discussion
that are not reports of historical information or
descriptions of current accounting policy are
forward-looking statements. Please consider our
forward-looking statements in light of the risks
referred to in this report’s introductory cautionary
note and the risks mentioned in the Company’s
filings with the Securities and Exchange
Commission. This overview summarizes the
MD&A, which includes the following sections:
•Year in Review—highlights from 2007
outlining some of the major events that
happened during the year and how they
affected our financial performance.
•Results of Operations—an in-depth
analysis of the results of operations of
Alaska and Horizon for the three years
presented in our consolidated financial
statements. We believe this analysis will
help the reader better understand our
consolidated statements of operations.
Financial and statistical data for Alaska
and Horizon are also included here. This
section includes forward-looking
statements regarding our view of 2008.
•Critical Accounting Estimates—a
discussion of our accounting estimates
that involve significant judgment and
uncertainties.
•Liquidity and Capital Resources—an
analysis of cash flows, sources and
uses of cash, contractual obligations,
commitments and off-balance sheet
arrangements, an overview of financial
position and the impact of inflation and
changing prices.
YEAR IN REVIEW
In 2007, we reported consolidated net income of
$125.0 million compared to a net loss of $52.6
million in 2006. The 2006 results included the
following items that impact the comparability
between the periods:
• We recorded $189.5 million ($118.5
million after tax) of fleet transition costs
related to our MD-80 fleet.
• We also recorded a $24.8 million ($15.5
million after tax) restructuring charge
associated with the voluntary severance
package offered to certain of our
employees represented by the
International Association of Machinists
and to our flight attendants as part of
new four-year collective bargaining
agreements.
Both periods include adjustments to reflect the
timing of gain or loss recognition resulting from
mark-to-market fuel hedge accounting – we
recorded a $52.2 million gain in 2007 compared
to an $89.9 million loss in 2006.
The revenue environment in 2007 was
characterized by increased competition in our
primary markets and a softer demand
environment in our West Coast market. However,
yield at Alaska (which represents approximately
88% of consolidated revenues) improved slightly
as we and other carriers attempted to raise fares
to cover higher fuel costs. Both Alaska and
Horizon posted higher passenger traffic. These
factors resulted in an increase in total
consolidated revenues of $171.6 million.
Our total operating expenses declined by $127.7
million during 2007 compared to 2006. This
decrease is primarily due to the 2006 fleet
transition and restructuring charges mentioned
above and mark-to-market gains associated with
an increase in the value of our fuel hedge
portfolio, offset by increases in other operating
expenses in 2007. See “Results of Operations”
below for further discussion of changes in
revenues and operating expenses for both
Alaska and Horizon.
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