Alaska Airlines and Horizon Air 2007 Annual Report Download - page 149

Variable Incentive Pay
Variable incentive pay increased $12.4 million,
or 81.0%, over 2005, primarily as a result of a
significant improvement in Air Group’s 2006
profit, as defined in the incentive agreements.
Aircraft Fuel
Aircraft fuel increased $281.0 million, or 59.0%,
in 2006 compared to 2005. The elements of the
change are illustrated in the following table:
Year Ended December 31
(in millions, except per-gallon
amounts) 2006 2005 % Change
Fuel gallons consumed ..... 354.3 346.4 2.3
Raw price per gallon ....... $ 2.16 $ 1.84 17.4
Total raw fuel expense ...... $765.6 $ 637.9 20.0
Impact on fuel expense from
value changes in the fuel
hedge portfolio (gain) ..... (8.6) (161.9) NM
Aircraft fuel expense ....... $757.0 $ 476.0 59.0
NM = Not meaningful
Fuel gallons consumed increased by 2.3%
primarily as a result of the increased capacity
and the addition of new aircraft. Raw fuel cost
per gallon increased by 17.4% as a result of
higher West Coast jet fuel prices driven by the
sharp increase in average world oil prices.
During 2006, we recorded a $78.4 million
mark-to-market loss, reflecting a decline in the
value of our fuel hedge portfolio between
December 31, 2005 and December 31, 2006. In
2005, we recorded a $53.1 million
mark-to-market gain, reflecting an increase in the
value of the portfolio from the previous year.
These mark-to-market adjustments are largely
driven by the closing price of crude oil on the last
date of the reporting period and can fluctuate
significantly from period to period.
The total cash benefit from hedges that settled
during the period declined from $108.8 million in
2005 to $87.0 million in 2006. Our economic
fuel expense is calculated as follows:
Year Ended December 31
(in millions, except per-gallon
amounts) 2006 2005 % Change
Raw fuel expense ......... $765.6 $ 637.9 20.0
Less: cash received from
settled hedges .......... (87.0) (108.8) NM
Economic fuel expense ..... $678.6 $ 529.1 28.3
Fuel gallons consumed ..... 354.3 346.4 2.3
Economic fuel cost per
gallon ................. $ 1.92 $ 1.53 25.5
NM = Not meaningful
Aircraft Maintenance
Aircraft maintenance decreased by $28.4 million,
or 15.3%, mostly as a result of fewer high-dollar
engine maintenance events, a decline in the
number and change in the mix of airframe
events, lower per-event costs due to
renegotiated contracts with our outside vendors,
and savings from process improvement
initiatives.
Aircraft Rent
Aircraft rent decreased by $5.9 million, or 5.1%,
primarily as a result of the buyout of five MD-80
aircraft from leases during the third quarter of
2006, offset by two new B737-800 operating
leases entered into in the fourth quarter of
2006.
Landing Fees and Other Rentals
Landing fees and other rentals increased slightly
by $2.0 million, or 1.3%, as a result of slightly
higher airport and security costs, specifically at
Los Angeles International Airport (LAX) where a
retroactive increase to the beginning of 2006
was imposed on certain carriers late in the year.
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ŠForm 10-K