Alaska Airlines and Horizon Air 2014 Annual Report Download - page 96

As the industry strengthens, airlines are now making significant investments in airports, in new planes,
and in new services to differentiate their customer service offering. Thus, the level of competition is
expected to increase.
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 27% 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 average annual price of crude oil in the last five years has increased from a low of $80 per barrel in
2010 to a high of $98 in 2013. Although the price of crude oil was $53 per barrel at the end of 2014,
the full-year average was $93 per barrel. For us, a $1 per barrel change in the price of oil equates to
approximately $11 million of 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 $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 $14 per barrel and $36 per barrel in the last five years, and averaged
$23 in 2014.
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 operation at a competitive disadvantage. Our average raw fuel
cost per gallon decreased 6% in 2014, decreased 4% in 2013, and increased 2% in 2012.
The percentages 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:
2014 2013 2012 2011 2010
Crude oil 72% 71% 65% 70% 79%
Refining margins 18% 19% 25% 24% 14%
Other(a) 10% 10% 10% 6% 7%
Total 100% 100% 100% 100% 100%
Aircraft fuel expense 32% 34% 35% 34% 27%
(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 as hedges to decrease our exposure to the volatility of jet fuel prices.
Historically, we have had jet fuel refining margin swap contracts, but we discontinued the use of the
refining margin swaps in the third quarter of 2014. Call options effectively cap our pricing for the crude
oil, limiting our exposure to increasing fuel prices for about half of our planned fuel consumption. With
call options, we are hedged against volatile crude oil price increases, and during a period of decline in
crude oil prices, we only forfeit cash previously paid for hedge premiums. Currently, we hedge
approximately 18 months in advance of crude oil consumption.
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
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