Alaska Airlines and Horizon Air 2014 Annual Report Download - page 143

5. The costs that will be incurred to provide award travel:
When a frequent flier travels on his or her award ticket on one of our airlines, 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 consolidated financial statements
and requires recognition of the changes in 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 $9 million, $50 million, and $57 million in 2014, 2013, and 2012, respectively. We
expect the 2015 expense to be approximately $28 million, as a result of a lower discount rate, a lower
expected return on assets, and an increase in estimated participant longevity assumptions.
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 liability and future pension expense decrease as the discount rate increases. We discounted
future pension obligations using a rate of 4.20% and 4.85% at December 31, 2014 and 2013,
respectively. The discount rate 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. At
December 31, 2014, we refined the yield curve to use a pool of higher-yielding bonds estimated to be
more reflective of settlement rates, as we are taking steps to ultimately terminate or settle plans that
are frozen and move toward freezing benefits in active plans in the future. If the discount rate
decreased by 0.5% (from 4.20% to 3.70%), our projected benefit obligation at December 31, 2014
would increase by approximately $152 million and our estimated 2015 pension expense would increase
by approximately $10 million.
Pension liability and future pension expense can increase or decrease as assumptions in the actuarial
data changes. In December 31, 2014, new mortality tables became available using more recent
participant data. The new tables are intended to update and replace the RP-2000 tables that have been
used in actuarial valuations since 2000. We have elected to apply proprietary mortality tables provided
by a third party actuary which is segregated into industry-specific mortality information and includes
actual participant data from our plans. As expected, the tables reflect the longer expected lifespans of
employees. Generally speaking, the new tables reflect an 11%—12% longer life expectancy of people
age 65 than the 2000 tables. The change in the assumption increased our projected benefit obligation
by approximately $80 million at December 31, 2014.
59
ŠForm 10-K