Alaska Airlines and Horizon Air 2009 Annual Report Download - page 132

Aircraft Fuel
Aircraft fuel expense includes both raw fuel
expense (as defined below) plus the effect of
mark-to-market adjustments to our fuel hedge
portfolio included in our consolidated statement
of operations as the value of that portfolio
increases and decreases. Our aircraft fuel
expense is very volatile, even between quarters,
because it includes these gains or losses in the
value of the underlying instrument as crude oil
prices and refining margins increase or
decrease. Raw fuel expense is defined as the
price that we generally pay at the airport, or the
“into-plane” price, including taxes and fees. Raw
fuel prices are impacted by world oil prices and
refining costs, which can vary by region in the
U.S. Raw fuel expense approximates cash paid
to suppliers and does not reflect the effect of our
fuel hedges.
Aircraft fuel expense declined $613.4 million, or
52.8%, compared to 2008. The elements of the
change are illustrated in the following table:
Years Ended December 31
(in millions, except
per-gallon amounts) 2009 2008
%
Change
Fuel gallons consumed .... 304.9 333.8 (8.7)
Raw price per gallon ...... $ 1.88 $ 3.31 (43.2)
Total raw fuel expense .... $572.3 $1,103.8 (48.2)
Net impact on fuel expense
from (gains) and losses
arising from fuel-hedging
activities ............. (23.3) 58.6 NM
Aircraft fuel expense ...... $549.0 $1,162.4 (52.8)
NM = Not meaningful
Fuel gallons consumed declined 8.7%, primarily
as a result of a 6.6% reduction in aircraft flight
hours and the improved fuel efficiency of our
fleet as we completed the transition to newer,
more fuel-efficient B737-800 aircraft in the
second half of 2008.
The raw fuel price per gallon declined 43.2% as a
result of lower West Coast jet fuel prices driven
by lower crude oil costs and refining margins.
We also evaluate economic fuel expense, which
we define as raw fuel expense less the cash we
receive from hedge counterparties for hedges
that settle during the period, offset by the
premium expense that we paid for those
contracts. A key difference between aircraft fuel
expense and economic fuel expense is the
timing of gain or loss recognition on our hedge
portfolio. When we refer to economic fuel
expense, we include gains and losses only when
they are realized for those contracts that were
settled during the period based on their original
contract terms. We believe this is the best
measure of the effect that fuel prices are
currently having on our business because it most
closely approximates the net cash outflow
associated with purchasing fuel for our
operations. Accordingly, many industry analysts
evaluate our results using this measure, and it is
the basis for most internal management
reporting and incentive pay plans.
Our economic fuel expense is calculated as
follows:
Years Ended December 31
(in millions, except
per-gallon amounts) 2009 2008
%
Change
Raw fuel expense ........ $572.3 $1,103.8 (48.2)
Plus or minus: net of cash
received from settled
hedges and premium
expense recognized .... 50.4 (101.8) NM
Economic fuel expense .... $622.7 $1,002.0 (37.9)
Fuel gallons consumed .... 304.9 333.8 (8.7)
Economic fuel cost per
gallon ............... $ 2.05 $ 3.00 (31.7)
NM = Not meaningful
As noted above, the total net expense
recognized for hedges that settled during the
period was $50.4 million in 2009, compared to a
net cash benefit of $101.8 million in
2008. These amounts represent the net of the
premium expense recognized for those hedges
and any cash received or paid upon settlement.
The decrease is primarily due to the significant
drop in crude oil prices over the past year.
We currently expect our raw and economic fuel
price per gallon to be approximately $2.24 in the
first quarter of 2010. As oil prices are volatile,
we are unable to forecast the full year cost with
any certainty.
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