Alaska Airlines and Horizon Air 2007 Annual Report Download - page 145

Significant period-over-period changes in the
components of operating expenses are as
follows:
Wages and Benefits
Wages and benefits increased $11.9 million, or
6.3%, as a result of a slight increase in full-time
equivalent employees, higher wages due to
market and step increases, and an increase in
our group medical costs. We expect that wages
and benefits will be flat in 2008 compared to
2007.
Aircraft Fuel
Aircraft fuel expense increased $22.3 million, or
19.1%, compared to 2006. The elements of the
change are illustrated in the following table:
Years Ended
December 31
(in millions, except per-gallon
amounts) 2007 2006
%
Change
Fuel gallons consumed ...... 64.8 54.3 19.3
Raw price per gallon......... $ 2.41 $ 2.19 10.0
Total raw fuel expense ....... $156.2 $119.1 31.2
Impact on fuel expense from
changes in value of the fuel
hedge portfolio (gain) ...... (17.4) (2.6) NM
Aircraft fuel expense ........ $138.8 $116.5 19.1
NM = Not meaningful
The 19.3% increase in consumption was driven
by the return of all nine CRJ-700s from Frontier
JetExpress and the introduction of several new
Q400s into the fleet, replacing smaller Q200s.
Under the Frontier JetExpress arrangement, fuel
was purchased by Frontier. We expect to see a
year-over-year increase in the number of gallons
consumed in 2008 as we see the full effect of
the fleet changes. Offsetting these increases in
fuel consumption is the improved fuel efficiency
of our fleet resulting from new Q400 aircraft
deliveries. These more fuel-efficient aircraft have
helped to improve the overall fuel-burn rate per
ASM by approximately 3% from 2006.
The raw fuel price per gallon increased by 10%
as a result of higher West Coast jet fuel prices
driven by higher crude oil costs.
During 2007, we recorded mark-to-market gains
reflecting an increase in the value of our fuel
hedge portfolio between December 31, 2006
and December 31, 2007. In 2006, we recorded
a mark-to-market loss, as oil prices on
December 31, 2006 were lower than they were a
year earlier. Our hedge portfolio consists
primarily of call options that are based on the
price of crude oil.
We realized gains of $8.5 million from settled
hedge contracts in 2007, compared to $14.1
million in 2006. Our economic fuel expense is
calculated as follows:
Years Ended
December 31
(in millions, except per-gallon
amounts) 2007 2006
%
Change
Raw fuel expense .......... $156.2 $119.1 31.2
Less: cash received from
settled hedges ........... (8.5) (14.1) NM
Economic fuel expense ...... $147.7 $105.0 40.7
Fuel gallons consumed ...... 64.8 54.3 19.3
Economic fuel cost per
gallon .................. $ 2.28 $ 1.93 18.1
NM = Not meaningful
Like Alaska, our fuel hedge protection declined
substantially in 2007 as the strike price of our
hedges was closer to current oil prices compared
to those in place during the previous two years.
The total cash benefit from hedges that settled
during the period declined to $8.5 million in
2007 from $14.1 million in 2006 and $16.2
million in 2005.
We currently expect economic fuel expense to be
higher in 2008 than in 2007 because of high
crude oil prices. For example, if oil were to
average $87 per barrel in 2008, we would expect
our raw fuel expense to be approximately $2.72
per gallon and the cash benefit of settled hedges
to be approximately $10 million, resulting in an
economic fuel price per gallon of approximately
$2.59.
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ŠForm 10-K