Alaska Airlines and Horizon Air 2009 Annual Report Download - page 131

partially offset by higher wages and benefits and
new pilot contract transition costs.
We believe it is useful to summarize operating
expenses as follows, which is consistent with
the way expenses are reported internally and
evaluated by management:
Years Ended December 31
(in millions) 2009 2008
%
Change
Mainline fuel
expense ....... $ 549.0 $1,162.4 (52.8)
Mainline non-fuel
expenses ...... 1,946.7 1,874.1 3.9
Mainline operating
expenses ...... $2,495.7 $3,036.5 (17.8)
Purchased capacity
costs .......... 281.5 313.7 (10.3)
Total Operating
Expenses ...... $2,777.2 $3,350.2 (17.1)
Mainline Operating Expenses
Total mainline operating expenses declined
$540.8 million or 17.8% during 2009 compared
to the prior year. Significant operating expense
variances from 2008 are more fully described
below.
Wages and Benefits
Wages and benefits were up $49.9 million, or
6.7%, compared to 2008. The primary
components of wages and benefits are shown in
the following table:
Years Ended December 31
(in millions) 2009 2008
%
Change
Wages .............. $540.4 $547.1 (1.2)
Pension and defined-
contribution
retirement
benefits ........... 114.8 68.7 67.1
Medical benefits ...... 83.3 72.3 15.2
Other benefits and
payroll taxes ....... 54.1 54.6 (0.9)
Total wages and
benefits ........... $792.6 $742.7 6.7
Wages declined 1.2% on a 7.4% reduction in
FTEs compared to 2008. Wages have not
declined in step with the FTE reduction because
of higher wage rates for the pilot group in
connection with their new contract and increased
average wages for certain other employees
stemming from higher average seniority.
The 67.1% increase in pension and other
retirement-related benefits is primarily due to a
$45.0 million increase in our defined-benefit
pension cost driven by the significant decline in
the market value of pension assets at the end of
2008.
Medical benefits increased 15.2% from the prior
year primarily as a result of an increase in the
post-retirement medical expense for the pilot
group in connection with their new contract and
an increase in overall medical costs.
We expect wages and benefits to decline in
2010 as compared to 2009 because of a
significant decline in our defined-benefit pension
cost, and productivity and overhead reduction
initiatives that should reduce the average
number of full-time equivalent employees. These
declines will likely be partially offset by increased
pilot wage rates stemming from the full year
impact of the 2009 contract, normal step and
scale wage increases in other represented
employee groups, and higher employee and
retiree medical costs.
Variable Incentive Pay
Variable incentive pay expense increased from
$15.8 million in 2008 to $61.6 million in 2009.
The increase is partially due to the fact that in
2009, our financial and operational results
exceeded targets established by our Board. In
2008, our performance fell short of targets. The
increase can also be attributed to the addition of
pilots, flight attendants and mechanics to the
PBP incentive plan.
Over the long term, our plan is designed to pay
at target, although we may or may not meet
those targets in any single year. At target, we
estimate the PBP expense would be $30 million
and aggregate incentive pay for all plans would
be approximately $40 million to $45 million for
2010, which would be lower than in 2009.
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ŠForm 10-K