Alaska Airlines and Horizon Air 2007 Annual Report Download - page 141

ticket distribution costs and credit card fees that
resulted from new contracts that were put into
place in the fourth quarter of 2006. The 2006
amount also included $3.7 million paid to
Horizon under the revenue-sharing arrangement
in certain designated markets that existed in
2006, compared to zero in the current year
because of the new CPA. These declines were
partially offset by higher advertising costs. We
currently expect that selling expenses will decline
slightly in 2008 as we continue to focus our
efforts on shifting sales to our web sites, which
reduces the commission we pay to outside
providers.
Depreciation and Amortization
Depreciation and amortization increased $4.5
million, or 3.3%, compared to 2006. This is
primarily the result of 10 new B737-800 aircraft
delivered in 2006 and 14 in 2007, partially
offset by the sale and leaseback of 20 MD-80s
in 2007. We expect depreciation and
amortization to increase by about 14% in 2008
as we acquire more new B737-800 aircraft.
Other Operating Expenses
Other operating expenses increased because of
higher passenger remuneration costs, crew
costs, professional fees, software license and
maintenance costs, higher property taxes, and
other costs, offset by lower liability insurance
expense because of better rates negotiated in
December 2006.
Mainline Operating Costs per Available
Seat Mile (CASM)
Operating costs per ASM (CASM) is an important
metric in the industry, and we use it to gauge the
effectiveness of our cost-reduction efforts. Our
effort to reduce unit costs focuses not only on
controlling the actual dollars we spend, but also
on increasing our capacity without adding a
commensurate amount of cost.
Our mainline operating costs per mainline ASM
are summarized below:
Years Ended
December 31
2007 2006 %Change
Total mainline operating
expenses per ASM
(CASM) ................. 10.54¢ 11.92¢ (11.6)
CASM includes the following
components:
Fuel costs per ASM ........ 3.04¢ 3.25¢ (6.4)
Fleet transition costs per
ASM .................. — 0.81¢ NM
Restructuring charges per
ASM .................. —0.11¢ NM
NM = Not meaningful
We have separately listed in the above table our
fuels costs per ASM, fleet transition costs per
ASM and restructuring charges per ASM. These
amounts are included in CASM, but for internal
purposes we consistently use unit cost metrics
that exclude these items to measure our cost-
reduction progress. We do so, and believe that
such analysis may be important to investors and
other readers of these financial statements for
the following reasons:
• Mainline cost per ASM excluding fuel is
one of the most important measures
used by managements of both Alaska
and Horizon and the Air Group Board of
Directors in assessing quarterly and
annual cost performance. For Alaska
Airlines, these decision-makers evaluate
operating results of the “mainline”
operation, which includes the operation
of the B737 and MD-80 aircraft fleets
branded in Alaska Airlines livery. The
revenues and expenses associated with
purchased capacity are evaluated
separately.
• Mainline cost per ASM excluding fuel
(and other items as specified in our
governing documents) is an important
metric for the employee incentive plan
that covers company management and
executives.
• By eliminating fuel expense from our unit
cost metrics, we believe that we have
better visibility into the results of our
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