Alaska Airlines and Horizon Air 2013 Annual Report Download - page 121

Significant operating expense variances from
2012 are more fully described below.
Wages and Benefits
Wages and benefits increased during 2013 by
$48 million, or 5%, compared to 2012. The
primary components of wages and benefits are
shown in the following table:
Year Ended December 31,
(in millions) 2013 2012 % Change
Wages ............ $ 791 $ 745 6
Pension—Defined
benefit plans ..... 50 57 (12)
Defined contribution
plans ........... 44 43 2
Medical and other
benefits ......... 142 135 5
Payroll taxes ....... 59 58 2
Total wages and
benefits ......... $1,086 $1,038 5
Wages increased 6%, primarily due to a newly
ratified contract with Alaska's pilots that was
effective April 1, 2013. Additionally, we hired 2%
more FTEs to support increased flying and other
strategic initiatives, such as IT and hassle-free
projects.
Pension expense decreased 12%, compared to
the same period in the prior year. The decline is
due to having a lower accumulated loss to
amortize as a result of higher plan assets and
improved funded status compared to the prior
year.
Medical benefits increased 5% from the prior
year primarily due to an increase in employee
health-care claims and an increase in the cost of
health care services.
We expect wages and benefits to be higher in
2014 compared to 2013 on a 3% to 4% increase
in FTEs, partially offset by reduced pension
expense of approximately $40 million, as a
result of having higher plan assets and a higher
discount rate related to our benefit obligation.
Variable Incentive Pay
Variable incentive pay expense increased from
$88 million in 2012 to $105 million in 2013.
The increase is due to actual results exceeding
our targets for financial and operational
performance more so than in the prior year.
We expect variable incentive pay in 2014 to be
similar to amounts recorded over the past three
years.
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 increased $8 million, or 1%
compared to 2012. The elements of the change
are illustrated in the following table:
Year Ended December 31,
2013 2012
(in millions, except for
per gallon amounts) Dollars
Cost/
Gal Dollars
Cost/
Gal
Raw or “into-plane” fuel
cost ............. $1,423 $ 3.19 $1,397 $3.31
(Gains) losses on
settled hedges ..... 52 0.11 24 0.06
Consolidated
economic fuel
expense .......... $1,475 $ 3.30 $1,421 $3.37
Mark-to-market fuel
hedge
adjustments ....... (8) (0.02) 38 0.09
GAAP fuel expense . . . $1,467 $ 3.28 $1,459 $3.46
Fuel gallons ......... 447 422
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ŠForm 10-K