Alaska Airlines and Horizon Air 2013 Annual Report Download - page 94

FUEL
Our business and financial results are highly
affected by the price and, potentially, the
availability of aircraft fuel. The cost of aircraft fuel
is volatile and outside of our control, and it can
have a significant and immediate impact on our
operating results. Over the past five years, aircraft
fuel expense ranged from 21% to 35% of operating
expenses. Fuel prices are impacted by changes in
both the price of crude oil and refining margins,
and can vary by region in the U.S.
The price of crude oil has ranged from a low of
$62 per barrel in 2009 to a high of $112 in
2011, and averaged $98 per barrel in 2013. For
us, a $1 per barrel increase in the price of oil
equates to approximately $11 million of
additional fuel cost annually. Said another way, a
one-cent change in our fuel price per gallon will
impact our expected annual fuel cost by
approximately $4.5 million per year.
Refining margins, which represent the price of
refining crude oil into aircraft fuel, are a smaller
portion of the overall price of jet fuel, but also
contributed to the price volatility in recent years.
Refining margin prices have fluctuated between $2
per barrel and $50 per barrel in the last five years.
Generally, West Coast aircraft fuel prices are
somewhat higher and more volatile than prices in
the Gulf Coast or on the East Coast, putting our
mainline operation at a competitive
disadvantage. Our average raw fuel cost per
gallon decreased 4% in 2013, increased 2% in
2012, and increased 36% in 2011.
The percentage of our aircraft fuel expense by
crude and refining margins, as well as the
percentage of our aircraft fuel expense of
operating expenses are as follows:
2013 2012 2011 2010 2009
Crude oil ......... 71% 65% 70% 79% 82%
Refining margins . . 19% 25% 24% 14% 13%
Other (a) ......... 10% 10% 6% 7% 5%
Total ............ 100% 100% 100% 100% 100%
Aircraft fuel
expense ....... 34% 35% 34% 27% 21%
(a) Other includes gains and losses on settled fuel hedges,
unrealized mark-to-market fuel hedge gains or losses,
taxes and other into-plane costs.
We use crude oil call options and jet fuel refining
margin swap contracts as hedges to decrease
our exposure to the volatility of jet fuel prices.
Both call options and swaps effectively cap our
pricing for the crude oil and refining margin
components, limiting our exposure to increasing
fuel prices for about half of our planned fuel
consumption. With the call option contracts, we
still benefit from the decline in crude oil prices,
as there is no future cash exposure above the
premiums we pay to enter into the contracts. The
swap contracts do not require an upfront
premium, but do expose us to future cash
outlays in the event actual prices are below the
swap price during the hedge period. During the
second quarter of 2013, we changed the tenor of
our hedging program. Since then, we have been
hedging approximately 18 months in advance of
consumption compared to 36 months
historically. Additionally, we will reach our target
of having 50% of consumption hedged 6 months
in advance compared to 12 months historically.
We believe that operating fuel-efficient aircraft is
the best hedge against high fuel prices. Alaska
operates an all-Boeing 737 fleet and Horizon
operates an all-Bombardier Q400 turboprop fleet.
Air Group's fuel-efficiency rate expressed in
available seat miles flown per gallon (ASMs/g)
improved from 72.6 ASMs/g in 2009 to 75.3
ASMs/g in 2013. These improvements have not
only reduced our fuel consumption rate, but also
the amount of greenhouse gases and other
pollutants that our operations emit.
COMPETITION
Competition in the airline industry is intense and
unpredictable. Our competitors consist primarily
of other airlines and, to a lesser extent, other
forms of transportation. Competition can be
direct, in the form of another carrier flying the
exact non-stop route, or indirect, where a carrier
serves the same two cities non-stop from an
alternative airport in that city or via an itinerary
requiring a connection at another airport. Our five
principal competitors, in order of competitive
overlap, are Delta, United, Southwest, American,
and Hawaiian. Based on schedules filed with the
U.S. Department of Transportation, we expect
the amount of competitive overlap from these
carriers to increase 9% in 2014. We also
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