Alaska Airlines and Horizon Air 2007 Annual Report Download - page 176

evaluated for purposes of determining whether
those misstatements are material to the
Company’s financial statements. SAB 108 was
effective for fiscal years ending after
November 15, 2006. The Company adopted SAB
108 in the fourth quarter of 2006 with an
effective date of January 1, 2006. See Note 16
for further discussion.
FIN 48 was adopted by the Company and
became effective January 1, 2007. See Note 13
for a discussion of the impact of this
interpretation on the Company’s financial
position.
Fourth Quarter Adjustments
There were no significant adjustments in the
fourth quarters of 2007 or 2005. Fourth quarter
2006 adjustments included a favorable $7.6
million adjustment to restructuring charges to
adjust for the number of employees that
withdrew their participation in the severance
program. See Note 10 for further discussion.
NOTE 2. FLEET TRANSITION AND IMPAIRMENT
Alaska Transition to All-Boeing 737 Fleet
In March 2006, the Company’s Board approved
a plan to accelerate the retirement of its MD-80
fleet (15 owned and 11 leased aircraft at the
time) and remove those aircraft from service by
the end of 2008. As a result of this decision, the
Company evaluated impairment as required by
SFAS No. 144 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
(pretax) to write down the fleet to its estimated
fair market value.
During the third quarter of 2006, the Company
purchased five MD-80 aircraft from lessors and,
in conjunction with the purchases, terminated
the leases for those five aircraft, resulting in a
pretax charge of $58.4 million.
During the second quarter of 2007, the Company
sold 19 of its 20 owned MD-80s, and sold the
20th aircraft subsequent to the end of the third
quarter. The majority of these aircraft are being
leased from the buyer under short-term lease
arrangements that will allow the Company to
maintain the current MD-80 retirement schedule
through December 2008.
Alaska currently has four MD-80 aircraft under
long-term lease arrangements that it plans to
cease operating before the end of the lease
term. Management anticipates that once these
aircraft have been removed from operation, the
Company will dispose of these aircraft through a
lease buy-out, a sublease arrangement, or store
them at a long-term storage facility. It is likely
that the Company will record a charge in its
statement of operations if any of these options
occurs.
Horizon Fleet Transition
During the third quarter of 2006, Horizon signed
a letter of intent with another carrier to sublease
up to 16 of its Bombardier Q200 aircraft. Each
sublease will result in a loss for Horizon
approximating the difference between the lease
payments and the sublease receipts. The loss
on each aircraft will be recorded when the
specific aircraft leave Horizon’s fleet and the
sublease arrangement begins. In 2007, 11 of
the aircraft were delivered to the other carrier,
resulting in a sublease loss of $14.1 million. The
Company expects the loss of the remaining five
aircraft to average approximately $1.3 million per
aircraft. These aircraft are expected to leave the
fleet in the first half of 2008.
On April 23, 2007, Horizon announced an order
for 15 additional Q400 aircraft, with options to
purchase 20 more. These aircraft will be
delivered in 2008 and 2009. With this order,
Horizon plans to phase out the remaining Q200
aircraft by the end of 2009 and is in the process
of negotiating transactions that would allow it to
dispose of these aircraft. Since all of Horizon’s
Q200 aircraft are leased, the Company may have
a loss on the phase-out of the remaining Q200s,
depending on market conditions at that time.
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