Alaska Airlines and Horizon Air 2007 Annual Report Download - page 140

December 31, 2006 were lower than they were a
year earlier. Our hedge portfolio consists
primarily of call options that are based on the
prices of crude oil.
We also evaluate economic fuel expense, which
we define as raw fuel expense less the cash we
receive from hedge counterparties for hedges
that settle during the period, offset by the
premium expense that we recognize. A key
difference between aircraft fuel expense and
economic fuel expense is the timing of gain or
loss recognition. When we refer to economic fuel
expense, we include gains only when they are
realized through a cash receipt from our hedge
contract counterparties. We believe this is the
best measure of the effect that fuel prices are
currently having on our business because it most
closely approximates the net cash outflow
associated with purchasing fuel for our
operation. Accordingly, many industry analysts
evaluate our results using this measure, and it is
the basis for most internal management
reporting and incentive pay plans.
Our economic fuel expense is calculated as
follows:
Years Ended December 31
(in millions, except
per-gallon amounts) 2007 2006
%
Change
Raw fuel expense ......... $825.7 $765.6 7.9
Less: cash received from
settled hedges ......... (44.9) (87.0) NM
Economic fuel expense .... $780.8 $678.6 15.1
Fuel gallons consumed ..... 354.3 354.3 0.0
Economic fuel cost per
gallon ................ $ 2.20 $ 1.92 14.6
NM = Not meaningful
In 2005 and 2006, we realized significant
benefits from in-the-money fuel hedge contracts.
However, our fuel hedge protection declined
substantially in 2007 as the strike price of our
hedges was closer to current oil prices compared
to those in place during the previous two years.
The total cash benefit from hedges that settled
during the period declined to $44.9 million in
2007 down from $87.0 million in 2006 and
$108.8 million in 2005.
We currently expect economic fuel expense to be
higher in 2008 than in 2007 because of high
crude oil prices. For example, if oil were to
average $87 per barrel in 2008, we would expect
our raw fuel expense to be approximately $2.67
per gallon and the cash benefit of settled hedges
to be approximately $55 million, resulting in an
economic fuel price per gallon of approximately
$2.52.
Aircraft Maintenance
Aircraft maintenance declined by $7.0 million, or
4.5%, compared to the prior year largely as a
result of the benefits of our fleet transition as we
replace our aging MD-80s and B737-200C
aircraft with newer B737-800 and converted
B737-400 aircraft, respectively. We currently
expect maintenance expense to increase slightly
in 2008 because of the timing of certain required
maintenance events, offset by additional
benefits to be realized from the fleet transition.
Aircraft Rent
Aircraft rent increased by $1.9 million, or 1.7%,
because of the sale and short-term leaseback of
substantially all of our owned MD-80 aircraft
during the second quarter of 2007 and the
addition of two new leased B737-800 aircraft in
the fourth quarter of 2006, partially offset by the
buyout of five leased MD-80 aircraft in the third
quarter of 2006. We expect a year-over-year
increase in aircraft rent in 2008 as we lease an
additional B737-800, offset by the retirement of
the MD-80s.
Landing Fees and Other Rentals
Landing fees and other rentals increased by
$11.9 million, or 7.5%, compared to 2006 as a
result of higher costs at Seattle-Tacoma
International and other airports. We expect year-
over-year increases in 2008 as a result of fees in
our new Hawaii stations and for the continuing
transition to 737-800 aircraft that are larger than
the outgoing MD-80 aircraft.
Selling Expenses
Selling expenses declined by $12.2 million, or
8.6%, compared to 2006 as a result of lower
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