Alaska Airlines and Horizon Air 2013 Annual Report Download - page 136

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
changes in 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 million, $57 million, and $42 million
in 2013, 2012, and 2011, respectively. We
expect the 2014 expense to be approximately $9
million, as a result of the improvement in the
funded status of our plans.
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 liability and future pension expense
decrease as the discount rate increases. We
discounted future pension obligations using a
rate of 4.85% and 3.95% at December 31, 2013
and 2012, respectively. The discount rate at
December 31, 2013 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. The increase in the discount rate is due to
the rising interest rate environment as the
economy improves from the recent recession. If
the economy were to face unfavorable conditions
and the discount rate decreased by 0.5% (from
4.85% to 4.35%), we would increase our
projected benefit obligation at December 31,
2013 by approximately $118 million and
increase our estimated 2014 pension expense
by approximately $8 million.
Pension expense normally increases as the
expected rate of return on pension plan assets
decreases. As of December 31, 2013, we
estimate that the pension plan assets will
generate a long-term rate of return of 6.75%,
which decreased 0.5% from the rate at
December 31, 2012. The decrease in rate is due
to the shift of our pension asset portfolio into
more fixed income investments that better match
the cash flows of our expected benefit payments
and reduce the volatility of future returns. 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, 2013 is
based on an allocation of U.S. and non-U.S.
equities and U.S. fixed-income securities. A
decrease in the expected long-term rate of return
of 0.5% (from 6.75% to 6.25%) would increase
our estimated 2014 pension expense by
approximately $9 million.
All of our defined-benefit pension plans are now
closed to new entrants. Additionally, benefits in
our non-union defined-benefit plans were 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, 2013, we had approximately
$3.9 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
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