Alaska Airlines and Horizon Air 2013 Annual Report Download - page 122

Fuel gallons consumed increased 5.9% in line
with the increase in departures and capacity.
The raw fuel price per gallon decreased 3.6% as a
result of lower West Coast jet fuel prices. West
Coast jet fuel prices are impacted by both the price
of crude oil, as well as refining margins associated
with the conversion of crude oil to jet fuel. The
decrease in raw fuel price per gallon during 2013
was due to a decline in refining margins of 26.7%,
offset by the increase in average crude oil prices of
4.1%, as compared to the prior year.
We also evaluate economic fuel expense, which
we define as raw fuel expense adjusted for the
cash we receive from, or pay to, hedge
counterparties for hedges that settle during the
period, and for 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.
Losses recognized for hedges that settled during
the year were $52 million in 2013, compared to
losses of $24 million in 2012. These amounts
represent the cash received, or paid, net of the
premium expense recognized for those hedges.
We currently expect our economic fuel price per
gallon to be approximately 5.0% lower in the first
quarter of 2014 than the first quarter of 2013
due to lower West Coast jet fuel prices and the
decrease in premium costs related to our fuel
hedge program. As both oil prices and refining
margins are volatile, we are unable to forecast
the full-year cost with any certainty.
Aircraft Maintenance
Aircraft maintenance increased by $25 million, or
11%, compared to the prior year, primarily due to
a $14 million increase in lease return provisions.
During the year we modified one of our power-by-
the-hour agreements and terminated another
related to our B737 fleet, resulting in a decrease
in expense under those agreements but an
increase in engine events and related expense
that we are now responsible for. For our B737
and Q400 fleets, we also experienced heavier,
more expensive checks, on flat volumes.
We expect aircraft maintenance to be slightly
lower in 2014 due to lower lease return
expenses and the benefits of changes made to
our power-by-the-hour agreements.
Landing Fees and Other Rentals
Landing fees and other rentals increased $19
million, or 8%, primarily due to the increase in
rates from the newly signed Port of Seattle
lease. Additionally, we experienced increased
rates throughout our network with increased
departures and passengers.
We expect landing fees and other rentals to be
higher in 2014 due to expected increases in
rates, departures, and passengers.
Contracted Services
Contracted services increased $21 million, or
11%, primarily due to more capacity purchase
flying with SkyWest and higher rates with PenAir.
Additionally, we experienced higher passenger
and ramp handling costs, and other services as
a result of an increase in the number of flights to
airports where outside vendors are used.
We expect contracted services to be higher in
2014 to handle expected growth in the number
of passengers and transition costs associated
with changing the ground handling vendor at a
number of our locations.
Selling Expenses
Selling expenses increased by $11 million, or
7%, compared to 2012 as a result of higher
commissions with credit cards and interline
commissions related to international routes.
We expect selling expense will be higher in
2014, primarily due to increased advertising and
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