Alaska Airlines and Horizon Air 2012 Annual Report Download - page 134

Pension expense increases as the expected rate
of return on pension plan assets decreases. As
of December 31, 2012, we estimate that the
pension plan assets will generate a long-term
rate of return of 7.25%, which is consistent with
the expected rate at December 31, 2011. 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, 2012 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 0.50% (from 7.25% to 6.75%) would increase
our estimated 2013 pension expense by
approximately $8 million.
Pension liability and future pension expense
increase as the discount rate is reduced. We
discounted future pension obligations using a
rate of 3.95% and 4.65% at December 31, 2012
and 2011, respectively. The discount rate at
December 31, 2012 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 3.95% to 3.45%) would increase our
projected benefit obligation at December 31,
2012 by approximately $142 million and
increase estimated 2013 pension expense by
approximately $11 million.
All of our defined-benefit pension plans are now
closed to new entrants. Additionally, benefits in
our non-union defined-benefit plans will be frozen
January 1, 2014.
Future changes in plan asset returns, assumed
discount rates and various other factors related
to the participants in our pension plans will
impact our future pension expense and
liabilities. We cannot predict what these factors
will be in the future.
LONG-LIVED ASSETS
As of December 31, 2012, we had approximately
$3.6 billion of property and equipment and
related assets, net of accumulated depreciation.
In accounting for these long-lived assets, we
make estimates about the expected useful lives
of the assets, changes in fleet plans, the
expected residual values of the assets, and the
potential for impairment based on the fair value
of the assets and the cash flows they generate.
Factors indicating potential impairment include,
but are not limited to, significant decreases in
the market value of the long-lived assets,
management decisions regarding the future use
of the assets, a significant change in the long-
lived assets condition, and operating cash flow
losses associated with the use of the long-lived
asset.
There is inherent risk in estimating the fair value
of our aircraft and related parts and their salvage
values at the time of impairment. Actual
proceeds upon disposition of the aircraft or
related parts could be materially less than
expected, resulting in additional loss. Our
estimate of salvage value at the time of disposal
could also change, requiring us to increase the
depreciation expense on the affected aircraft.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
We have interest-rate risk on our variable-rate
debt obligations and our available-for-sale
marketable investment portfolio, and commodity-
price risk in jet fuel required to operate our
aircraft fleet. We purchase the majority of our jet
fuel at prevailing market prices and seek to
manage market risk through execution of our
hedging strategy and other means. We have
market-sensitive instruments in the form of fixed-
rate debt instruments, and financial derivative
instruments used to hedge our exposure to jet-
fuel price increases and interest-rate increases.
We do not purchase or hold any derivative
financial instruments for trading purposes.
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