Alaska Airlines and Horizon Air 2009 Annual Report Download - page 148

the cost we will pay to other airlines. We
estimate the number of awards that will be
redeemed on Alaska or Horizon versus on
other airlines and accrue the estimated
costs based on historical redemption
patterns. If the number of awards redeemed
on other airlines is higher or lower than
estimated, we may need to adjust our
liability and corresponding expense.
5. The costs that will be incurred to provide
award travel:
When a frequent flyer travels on his or
her award ticket on Alaska or Horizon,
incremental costs such as food, fuel and
insurance are incurred to carry that
passenger. We estimate what these costs
will be (excluding any contribution to
overhead and profit) and accrue a liability. If
the passenger travels on another airline on
an award ticket, we often must pay the other
airline for carrying the passenger. The other
airline costs are based on negotiated
agreements and are often substantially
higher than the costs we would incur to carry
that passenger. We estimate how much we
will pay to other airlines for future travel
awards based on historical redemptions and
settlements with other carriers and accrue a
liability accordingly. The costs actually
incurred by us or paid to other airlines may
be higher or lower than the costs that were
estimated and accrued, and therefore we
may need to adjust our liability and
recognize a corresponding expense.
We regularly review significant Mileage Plan
assumptions and change our assumptions if
facts and circumstances indicate that a change
is necessary. Any such change in assumptions
could have a significant effect on our financial
position and results of operations.
PENSION PLANS
Accounting rules require recognition of the
overfunded or underfunded status of an entity’s
defined-benefit pension and other postretirement
plans as an asset or liability in the financial
statements and requires recognition of the
funded status in other comprehensive income.
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 $93.0 million, $48.0 million, and $62.6
million in 2009, 2008, and 2007, respectively.
We expect the 2010 expense to be
approximately $51 million, which is significantly
lower than the amount recognized in 2009. The
decline is primarily due to the improvement in
the market values of the pension assets in
2009, nearly $150 million of funding in 2009,
and the movement of disability retirement from
the pilot pension plan to a separate long-term
disability plan.
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, 2009, 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, the current value of the
underlying assets, 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, 2009 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 2010 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 5.85% and 6.20% at December 31, 2009
and 2008, respectively. The discount rate at
December 31, 2009 was determined using
current rates earned on high-quality long-term
bonds with maturities that correspond with the
estimated cash distributions from the pension
plans. Decreasing the discount rate by 0.5%
52