Alaska Airlines and Horizon Air 2010 Annual Report Download - page 161

4. The number of awards redeemed for travel
on our airlines versus other airlines:
The cost for us to carry an award
passenger is typically lower than the cost we
will pay to our travel partners. We estimate
the number of awards that will be redeemed
on our airlines versus on our travel partners
and accrue the estimated costs based on
historical redemption patterns. If the
number of awards redeemed on our travel
partner is higher or lower than estimated,
we may need to adjust our liability and
corresponding expense.
5. The costs that will be incurred to provide
award travel:
When a frequent flyer 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 financial
statements and requires recognition of the
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 $50.2 million, $93.0 million, and $48.0
million in 2010, 2009, and 2008, respectively.
We expect the 2011 expense to be
approximately $44 million.
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 expense increases as the expected rate
of return on pension plan assets decreases. As
of December 31, 2010, we estimate that the
pension plan assets will generate a long-term
rate of return of 7.75%. This rate was developed
using historical data, the current value of the
underlying assets, as well as long-term inflation
assumptions. We regularly review the actual
asset allocation and periodically rebalance
investments as appropriate. This expected long-
term rate of return on plan assets at
December 31, 2010 is based on an allocation of
U.S. and non-U.S. equities and U.S. fixed-income
securities. Decreasing the expected long-term
rate of return by 0.5% (from 7.75% to 7.25%)
would increase our estimated 2011 pension
expense by approximately $5.7 million.
Pension liability and future pension expense
increase as the discount rate is reduced. We
discounted future pension obligations using a rate
of 5.55% and 5.85% at December 31, 2010 and
2009, respectively. The discount rate at
December 31, 2010 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. Decreasing the discount rate by 0.5% (from
5.55% to 5.05%) would increase our projected
benefit obligation at December 31, 2010 by
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ŠForm 10-K