Alaska Airlines and Horizon Air 2007 Annual Report Download - page 142

non-fuel cost-reduction initiatives. Our
industry is highly competitive and is
characterized by high fixed costs, so
even a small reduction in non-fuel
operating costs can result in a
significant improvement in operating
results. In addition, we believe that all
domestic carriers are similarly impacted
by changes in jet fuel costs over the long
run, so it is important for management
(and thus investors) to understand the
impact of (and trends in) company-
specific cost drivers such as labor rates
and productivity, airport costs,
maintenance costs, etc., which are more
controllable by management.
• Mainline cost per ASM excluding fuel is
a measure commonly used by industry
analysts, and we believe it is the basis
by which they compare our airlines to
others in the industry. The measure is
also the subject of frequent questions
from holders of our common stock.
• Disclosure of the individual impact of
certain noted items provides investors
the ability to measure and monitor
performance both with and without these
special items. We believe that disclosing
the impact of items such as the fleet
transition costs and restructuring
charges is important because it provides
information on significant items that are
not necessarily indicative of future
performance. Industry analysts and
investors consistently measure the
Company’s performance without these
items for better comparability between
periods and among other airlines.
• Although we disclose our “mainline”
passenger unit revenues for Alaska, we
do not (nor are we able to) evaluate
mainline unit revenues excluding the
impact that rising fuel costs have had on
ticket prices. Fuel represents nearly 30%
of our total mainline operating expenses,
and fluctuations in our fuel prices often
drive changes in unit revenues in the
mid-to-long term. Although we believe it
is useful to evaluate non-fuel unit costs
for the reasons noted above, we would
caution readers of these financial
statements not to place undue reliance
on unit costs excluding fuel as a
measure or predictor of future
profitability because of the significant
impact of fuel costs on our business.
Our mainline unit costs excluding fuel and other
special items for the first quarter and full year
2008 are expected to remain flat from similar
measures in 2007. Our primary goal in 2008 is
to improve our operational reliability, including
our on-time performance, completion of
scheduled flights, and baggage delivery metrics,
with a special focus on our Seattle operations.
Purchased Capacity Costs
Purchased capacity costs increased $288.5
million, from $14.3 million in 2006 to $302.8
million in 2007. Of the total, $283.4 million was
paid to Horizon under the new CPA for 1.4 billion
ASMs. The balance includes amounts paid to a
third party for the Dutch Harbor flying (which
approximates the amount paid in 2006) and
certain administrative and information technology
costs borne by Alaska that are allocated to
purchased capacity flying costs.
In the aggregate, costs of purchased capacity
exceeded revenues in these markets by $21.4
million. The markets covered by the CPA with
Horizon are both “flow” markets that provide
connecting traffic to Alaska and “local” markets
where Horizon’s regional jets are used to
maximize returns (or minimize losses) to Air
Group and allow Alaska to deploy its larger jets
to other routes. Generally speaking, revenues in
the flow markets exceed costs. However,
revenue in most of the local markets falls short
of costs. With high fuel prices and relatively high
non-fuel costs, some of these routes operated by
Horizon are unprofitable with CRJ-700s and are
too small to support 737 service. We are
evaluating alternatives to improve the results of
these routes. Alternatives include reducing the
size of the CRJ-700 fleet, moving some of the
flying to the Q400, and having a portion of the
capacity in these markets performed by a third
party with larger, more efficient aircraft.
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