Alaska Airlines and Horizon Air 2007 Annual Report Download - page 139

• an increase in the number of flight
attendants as we transition to B737-
800s, which have four flight attendants,
compared to three in the MD-80 aircraft
that are being replaced; and
• normal step, scale and market-based
wage increases.
These increases were offset by the following:
• 2006 included a $2.7 million contract-
signing bonus paid to our flight
attendants and a $1.9 million contract-
signing bonus paid to our clerical, office
and passenger service employees and
our ramp service and stores agents; and
• a reduction of $15.6 million in expenses
associated with our defined-benefit plans
as more of our employees transition over
to an enhanced defined-contribution
plan, offset by a $1.2 million increase in
defined-contribution plan expense.
We currently expect wages and benefits to
increase slightly in 2008 but decline on a
per-ASM basis. This expectation is exclusive of
any potential change in pilot wages that may
result from our current contract negotiations.
Variable Incentive Pay
Variable incentive pay for 2007 decreased $14.2
million or 51.3%, compared to 2006. The
decrease results from lower annual expense
under the various Air Group profit-based incentive
plans as our profitability was lower than originally
expected, offset by higher expenses associated
with our Operational Performance Rewards plan.
For purposes of our incentive pay plans, profit is
generally defined as results excluding fleet
transition costs, restructuring charges, and other
amounts specified in the various incentive plan
documents and with fuel stated on an economic
basis. Air Group maintains several incentive
plans that collectively cover all of our employees
and create alignment for employees, customers
and shareholders. These plans include both
operational and financial performance metrics
that, to a large extent, are based on certain
annual financial targets.
Aircraft Fuel
Aircraft fuel expense includes both raw fuel
expense (as defined below) plus the effect of
mark-to-market adjustments to our fuel hedge
portfolio that we include in our income statement
as the value of the portfolio increases and
decreases. By definition, our aircraft fuel
expense is very volatile, even between quarters,
because it includes these gains or losses when
the underlying instrument increases or
decreases in value as crude oil prices increase
or decrease. Raw fuel expense is defined as the
price that we generally pay at the airport, or the
“into-plane” price, including taxes. Raw fuel
prices are impacted by world oil prices and
refining costs, which can vary by region in the
U.S. Raw fuel expense approximates cash paid
to suppliers.
Aircraft fuel expense decreased $19.5 million, or
2.6%, compared to 2006. The elements of the
change are illustrated in the following table:
Years Ended December 31
(in millions, except
per-gallon amounts) 2007 2006
%
Change
Fuel gallons consumed .... 354.3 354.3 0.0
Raw price per gallon ...... $ 2.33 $ 2.16 7.9
Total raw fuel expense .... $825.7 $765.6 7.9
Impact on fuel expense
from changes in value of
the fuel hedge portfolio
(gain) ................ (88.2) (8.6) NM
Aircraft fuel expense ...... $737.5 $757.0 (2.6)
NM = Not meaningful
Fuel gallons consumed were flat on a 4.0%
increase in capacity because of the improved
fuel efficiency of our fleet as we transition out of
the less-efficient MD-80 aircraft to newer, more-
efficient B737-800 aircraft.
The raw fuel price per gallon increased by 7.9%
as a result of higher West Coast jet fuel prices
driven by higher crude oil costs.
During 2007, we recorded mark-to-market gains
reflecting an increase in the value of our fuel
hedge portfolio between December 31, 2006
and December 31, 2007. In 2006, we recorded
a mark-to-market loss, as oil prices on
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ŠForm 10-K