Alaska Airlines and Horizon Air 2007 Annual Report Download - page 155

Under SFAS No. 158, pension expense is
recognized on an accrual basis over employees’
approximate service periods and is generally
independent of funding decisions or
requirements. We recognized expense for our
qualified defined-benefit pension plans of $62.6
million, $78.3 million, and $71.7 million in
2007, 2006, and 2005, respectively.
The calculation of pension expense and the
corresponding liability requires the use of a
number of important assumptions, including the
expected long-term rate of return on plan assets
and the assumed discount rate. Changes in
these assumptions can result in different
expense and liability amounts, and future actual
experience can differ from these assumptions.
Pension expense increases as the expected rate
of return on pension plan assets decreases. As
of December 31, 2007, we estimate that the
pension plan assets will generate a long-term
rate of return of 7.75%. This rate was developed
using historical data as well as long-term
inflation assumptions. We regularly review the
actual asset allocation and periodically rebalance
investments as appropriate. This expected long-
term rate of return on plan assets at
December 31, 2007 is based on an allocation of
U.S. and non-U.S. equities and U.S. fixed income
securities. Decreasing the expected long-term
rate of return by 0.5% (from 7.75% to 7.25%)
would increase our estimated 2008 pension
expense by approximately $4.5 million.
Pension liability and future pension expense
increase as the discount rate is reduced. We
discounted future pension obligations using a
rate of 6.00% and 5.75% at December 31, 2007
and 2006, respectively. The discount rate is
determined based on the current rates earned on
high-quality long-term bonds. Decreasing the
discount rate by 0.5% (from 6.00% to 5.50%)
would increase our projected benefit obligation at
December 31, 2007 by approximately $79.1
million and increase estimated 2008 pension
expense by approximately $9.4 million.
With the exception of the plan covering Alaska’s
pilots, all of our defined-benefit pension plans
are closed to new entrants.
Future changes in plan asset returns, assumed
discount rates and various other factors related
to the participants in our pension plans will
impact our future pension expense and
liabilities. We cannot predict what these factors
will be in the future.
LONG-LIVED ASSETS
As of December 31, 2007, we had approximately
$3.0 billion of property and equipment and
related assets, net of accumulated depreciation.
In accounting for these long-lived assets, we
make estimates about the expected useful lives
of the assets, changes in fleet plans, the
expected residual values of the assets, and the
potential for impairment based on the fair value
of the assets and the cash flows they generate.
Factors indicating potential impairment include,
but are not limited to, significant decreases in
the market value of the long-lived assets,
management decisions regarding the future use
of the assets, a significant change in the long-
lived assets condition, and operating cash flow
losses associated with the use of the long-lived
asset.
In March 2006, our Board approved a plan to
accelerate the retirement of our MD-80 fleet (15
owned and 11 leased aircraft at the time) and
remove those aircraft from service by the end of
2008, which is earlier than the original
retirement schedule. As a result of this decision,
we evaluated impairment as required by SFAS
No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, and concluded
that the carrying value of the MD-80 fleet was no
longer recoverable when compared to the
estimated remaining future cash flows.
Accordingly, during the first quarter of 2006, the
Company recorded an impairment charge totaling
$131.1 million to write down the fleet to its
estimated fair market value. Additionally, during
the third quarter of 2006, we bought five MD-80
aircraft from lessors and terminated the leases
for those five aircraft. The total purchase price
for the five aircraft was $80.9 million, including
assumed debt of $11.6 million. Immediately
upon purchase of the aircraft, we evaluated
impairment and concluded that the carrying value
was not recoverable. As a result, we recorded an
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ŠForm 10-K