Alaska Airlines and Horizon Air 2014 Annual Report Download - page 127

are impacted by world oil prices and refining costs, which can vary by region in the U.S. Raw fuel
expense approximates cash paid to suppliers and does not reflect the effect of our fuel hedges.
Aircraft fuel expense decreased $49 million, or 3% compared to 2013. The elements of the change are
illustrated in the following table:
Twelve Months Ended December 31,
2014 2013
(in millions, except for per gallon amounts) Dollars Cost/Gal Dollars Cost/Gal
Raw or “into-plane” fuel cost $ 1,400 $ 2.99 $ 1,423 $ 3.19
(Gains) losses on settled hedges 41 0.09 52 0.11
Consolidated economic fuel expense $ 1,441 $ 3.08 $ 1,475 $ 3.30
Mark-to-market fuel hedge adjustments (23) (0.05) (8) (0.02)
GAAP fuel expense $ 1,418 $ 3.03 $ 1,467 $ 3.28
Fuel gallons 469 447
Fuel gallons consumed increased 4.9% in line with the increase in departures and capacity, partially
offset by a 2.1% improvement in fuel efficiency as measured by ASMs per gallon.
The raw fuel price per gallon decreased 6.3% as a result of lower West Coast jet fuel prices. West
Coast jet fuel prices are impacted by both the price of crude oil, as well as refining margins associated
with the conversion of crude oil to jet fuel. The decrease in raw fuel price per gallon during 2014 was
due to a decrease in average crude oil prices of 5.2% and decrease in refining margins of 15.7%, as
compared to the prior year.
We also evaluate economic fuel expense, which we define as raw fuel expense adjusted for the cash we
receive from, or pay to, hedge counterparties for hedges that settle during the period, and for the
premium expense that we paid for those contracts. A key difference between aircraft fuel expense and
economic fuel expense is the timing of gain or loss recognition on our hedge portfolio. When we refer to
economic fuel expense, we include gains and losses only when they are realized for those contracts
that were settled during the period based on their original contract terms. We believe this is the best
measure of the effect that fuel prices are currently having on our business because it most closely
approximates the net cash outflow associated with purchasing fuel for our operations. Accordingly,
many industry analysts evaluate our results using this measure, and it is the basis for most internal
management reporting and incentive pay plans.
Losses recognized for hedges that settled during the year were $41 million in 2014, compared to
losses of $52 million in 2013. These amounts represent the cash received, or paid, net of the premium
expense recognized for those hedges.
In the third quarter of 2014, we discontinued the hedge program for refining margins. We currently
expect our economic fuel price per gallon to be approximately 41.0% lower in the first quarter of 2015
than the first quarter of 2014 due to lower West Coast jet fuel prices and the decrease in premium
costs related to our fuel hedge program. As both oil prices and refining margins are volatile, we are
unable to forecast the full-year cost with any certainty.
43
ŠForm 10-K