Alaska Airlines and Horizon Air 2007 Annual Report Download - page 152

Aircraft Maintenance
Aircraft maintenance expense increased $30.6
million, or 70.7%, primarily as a result of more
scheduled heavy checks and engine overhauls
for the Q200 and Q400 fleets with fewer aircraft
covered under warranty.
Aircraft Rent
Aircraft rent declined slightly by $0.9 million, or
1.3%, in 2006 primarily resulting from the
annualization of lower rates on extended leases
and fewer leased engines.
Other Operating Expenses
Other operating expenses increased by $4.7
million, or 11.1%, largely as a result of higher
crew expenses and passenger remuneration
costs.
Operating Costs per Available Seat Mile
(CASM)
As discussed above, 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. Like Alaska, Horizon’s efforts
to reduce unit costs focus not only on controlling
the actual dollars we spend, but also on
increasing available seat miles without adding a
commensurate amount of cost.
Our operating costs per ASM are summarized
below:
Years Ended December 31
2006 2005 % Change
Total operating expenses per
ASM (CASM) ........... 17.40¢ 15.50¢ 12.2
CASM includes the following
components:
Fuel costs per ASM ........ 3.21¢ 2.14¢ 50.0
CONSOLIDATED NONOPERATING INCOME
(EXPENSE)
Net nonoperating expense was $0.5 million in
2006 compared to $29.3 million in 2005.
Interest income increased $23.4 million
compared to 2005, primarily as a result of higher
average portfolio returns and a higher average
cash and marketable securities balance. Interest
expense increased $15.0 million primarily
resulting from interest rate increases on our
variable-rate debt, new debt arrangements in
2006, and the changes to some of our variable-
rate debt arrangements to slightly higher fixed
rates. This increase was offset by the conversion
of our $150 million senior convertible notes to
equity in April 2006, which eliminated further
interest expense on those notes. Capitalized
interest increased $15.8 million from $8.9
million in 2005 to $24.7 million during 2006.
This is due to the significant increase in
pre-delivery deposits in connection with our
orders for B737-800 and Bombardier Q400
aircraft.
CONSOLIDATED INCOME TAX EXPENSE
(BENEFIT)
Our consolidated effective income tax rate on
pretax income before the cumulative effect of the
accounting change for 2006 was 40.1%
compared to an effective income tax rate of
38.4% in 2005. The 2006 year also includes
$5.5 million of tax benefits associated with the
reduction of certain tax contingency accruals for
periods for which the statute of limitations
expired in 2006. Excluding this benefit, our
effective tax benefit rate for 2006 would have
been 33.8%, which is different from our marginal
2006 tax rate of 37.4%. The difference is
primarily due to the magnitude of nondeductible
expenses, such as employee per-diem costs and
stock-based compensation expense recorded for
certain stock awards. We applied our 2005
marginal rate of 37.5% to the cumulative effect
of the accounting change.
CHANGE IN ACCOUNTING POLICY
Effective January 1, 2005, we changed our
method of accounting for major airframe and
engine overhauls from the capitalize and
amortize method to the direct expense method.
Under the former method, these costs were
capitalized and amortized to maintenance
expense over the shorter of the life of the
overhaul or the remaining lease term. Under the
direct expense method, overhaul costs are
expensed as incurred. We believe that the direct
expense method is preferable because it
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