Alaska Airlines and Horizon Air 2013 Annual Report Download - page 114

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following Management’s Discussion and
Analysis of Financial Condition and Results of
Operations (MD&A) is intended to help the
reader understand the Company, our operations
and our present business environment. MD&A is
provided as a supplement to—and should be
read in conjunction with—our consolidated
financial statements and the accompanying
notes. All statements in the following discussion
that are not statements of historical information
or descriptions of current accounting policy are
forward-looking statements. Please consider our
forward-looking statements in light of the risks
referred to in this report’s introductory cautionary
note and the risks mentioned in Part I, “Item 1A.
Risk Factors.” This overview summarizes the
MD&A, which includes the following sections:
•Year in Review—highlights from 2013
outlining some of the major events that
happened during the year and how they
affected our financial performance.
•Results of Operations—an in-depth analysis
of our revenues by segment and our
expenses from a consolidated perspective
for the three years presented in our
consolidated financial statements. To the
extent material to the understanding of
segment profitability, we more fully describe
the segment expenses per financial
statement line item. We believe this
analysis will help the reader better
understand our consolidated statements of
operations. Financial and statistical data is
also included here. This section also
includes forward-looking statements
regarding our view of 2014.
•Liquidity and Capital Resources—an
analysis of cash flows, sources and uses of
cash, contractual obligations, commitments
and off-balance sheet arrangements, and an
overview of financial position.
•Critical Accounting Estimates—a discussion
of our accounting estimates that involve
significant judgment and uncertainties.
YEAR IN REVIEW
Our 2013 consolidated pretax income was $816
million compared to $514 million in 2012. The
$302 million improvement was primarily due to
the $499 million increase in revenues, partially
offset by the $8 million increase in aircraft fuel
expense and $185 million increase in other
operating expenses. Our improvement in revenues
of $499 million was partially due to a one-time,
non-cash Special mileage plan revenue item of
$192 million related to the accounting for our
recently modified affinity card agreement, where
the accounting rules required us to revalue the
deferred revenue associated with miles previously
sold to our bank partner with a corresponding
benefit to revenue. Additionally, passenger
revenue increased $237 million due to a 6.8%
increase in traffic, offset by 0.8% lower ticket
yields. The increase in fuel cost was driven by the
5.9% increase in consumption offset by a 3.6%
decrease in raw cost per gallon. The increase in
other operating expenses was primarily due to
increases in wages and incentive pay, aircraft
maintenance, contracted services, and other
operating expenses as we grew into new markets
and increased spending in IT and other areas.
See “Results of Operations” below for further
discussion of changes in revenues and operating
expenses and our reconciliation of Non-GAAP
measures to the most directly comparable GAAP
measure.
Accomplishments and Highlights
Financial highlights from 2013 include:
• Reported record adjusted earnings for 2013,
marking our tenth consecutive year in which
we reported an adjusted profit.
• Air Group employees earned $105 million in
incentive pay, or more than one-month's pay
for most employees. Over the last four
years, employees have earned more than
$357 million in incentive pay, averaging
8.8% of annual pay for most employees.
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