Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018
 
OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from                      to                      

Commission File Number 1-8957
ALASKA AIR GROUP, INC.
 
Delaware
 
91-1292054
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

 
19300 International Boulevard, Seattle, Washington 98188
Telephone: (206) 392-5040

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   x
Accelerated filer  ¨
Non-accelerated filer   ¨ 
(Do not check if a smaller reporting company)
Smaller reporting company   ¨
Emerging growth company   ¨

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
 
The registrant has 123,299,895 common shares, par value $0.01, outstanding at October 31, 2018.



ALASKA AIR GROUP, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 TABLE OF CONTENTS

 

As used in this Form 10-Q, the terms “Air Group,” the “Company,” “our,” “we” and "us" refer to Alaska Air Group, Inc. and its subsidiaries, unless the context indicates otherwise. Alaska Airlines, Inc., Virgin America Inc. (through July 20, 2018, at which point it was legally merged into Alaska Airlines, Inc), and Horizon Air Industries, Inc. are referred to as “Alaska,” “Virgin America” and “Horizon” and together as our “airlines.”
 

2


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "assume" or other similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or the Company’s present expectations. Some of the things that could cause actual results to differ from our expectations are:

•
the competitive environment in our industry;
•
changes in our operating costs, including fuel, which can be volatile;
•
our ability to meet our cost reduction goals;
•
our ability to achieve anticipated synergies and timing thereof in connection with our acquisition of Virgin America;
•
our ability to successfully integrate the Boeing and Airbus operations into those of Alaska;
•
labor disputes and our ability to attract and retain qualified personnel;
•
operational disruptions;
•
general economic conditions, including the impact of those conditions on customer travel behavior;
•
the concentration of our revenue from a few key markets;
•
an aircraft accident or incident;
•
actual or threatened terrorist attacks, global instability and potential U.S. military actions or activities;
•
our reliance on automated systems and the risks associated with changes made to those systems;
•
changes in laws and regulations.

You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. For a discussion of these and other risk factors, see Item 1A. "Risk Factors” of the Company’s annual report on Form 10-K for the year ended December 31, 2017, and Item 1A. "Risk Factors" included herein. Please consider our forward-looking statements in light of those risks as you read this report.


3


PART I
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions)
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
174

 
$
194

Marketable securities
1,223

 
1,427

Total cash and marketable securities
1,397

 
1,621

Receivables—net
422

 
341

Inventories and supplies—net
57

 
57

Prepaid expenses and other current assets
180

 
133

Total Current Assets
2,056

 
2,152

 
 
 
 
Property and Equipment
 

 
 

Aircraft and other flight equipment
7,911

 
7,559

Other property and equipment
1,322

 
1,222

Deposits for future flight equipment
429

 
494

 
9,662

 
9,275

Less accumulated depreciation and amortization
3,167

 
2,991

Total Property and Equipment—Net
6,495

 
6,284

 
 
 
 
Goodwill
1,943

 
1,943

Intangible assets
128

 
133

Other noncurrent assets
271

 
234

Other Assets
2,342

 
2,310

 
 
 
 
Total Assets
$
10,893

 
$
10,746


Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.


4

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except share amounts)
September 30, 2018
 
December 31, 2017
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Accounts payable
$
114

 
$
120

Accrued wages, vacation and payroll taxes
334

 
418

Air traffic liability
950

 
806

Other accrued liabilities
452

 
400

Deferred revenue
693

 
635

Current portion of long-term debt
345

 
307

Total Current Liabilities
2,888

 
2,686

 
 
 
 
Long-Term Debt, Net of Current Portion
1,684

 
2,262

Other Liabilities and Credits
 

 
 

Deferred income taxes
494

 
370

Deferred revenue
1,138

 
1,090

Obligation for pension and postretirement medical benefits
470

 
453

Other liabilities
428

 
425

 
2,530

 
2,338

Commitments and Contingencies


 


Shareholders' Equity
 

 
 

Preferred stock, $0.01 par value, Authorized: 5,000,000 shares, none issued or outstanding
—

 
—

Common stock, $0.01 par value, Authorized: 400,000,000 shares, Issued: 2018 - 130,786,648 shares; 2017 - 129,903,498 shares, Outstanding: 2018 - 123,360,846 shares; 2017 - 123,060,638 shares
1

 
1

Capital in excess of par value
224

 
164

Treasury stock (common), at cost: 2018 - 7,425,802 shares; 2017 - 6,842,860 shares
(556
)
 
(518
)
Accumulated other comprehensive loss
(428
)
 
(380
)
Retained earnings
4,550

 
4,193

 
3,791

 
3,460

Total Liabilities and Shareholders' Equity
$
10,893

 
$
10,746


Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.



5

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share amounts)
2018
 
2017
 
2018
 
2017
Operating Revenues
 
 
 
 
 
 
 
Passenger revenue
$
2,043

 
$
1,958

 
5,725

 
5,505

Mileage Plan other revenue
114

 
105

 
329

 
314

Cargo and other
55

 
47

 
146

 
133

Total Operating Revenues
2,212

 
2,110

 
6,200

 
5,952

Operating Expenses
 
 
 
 
 

 
 

Wages and benefits
549

 
477

 
1,629

 
1,397

Variable incentive pay
27

 
40

 
104

 
98

Aircraft fuel, including hedging gains and losses
513

 
368

 
1,397

 
1,051

Aircraft maintenance
107

 
88

 
320

 
271

Aircraft rent
82

 
70

 
233

 
204

Landing fees and other rentals
135

 
124

 
371

 
338

Contracted services
70

 
76

 
227

 
234

Selling expenses
79

 
92

 
245

 
277

Depreciation and amortization
99

 
95

 
290

 
275

Food and beverage service
53

 
50

 
158

 
145

Third-party regional carrier expense
38

 
30

 
114

 
84

Other
141

 
150

 
423

 
421

Special items—merger-related costs
22

 
23

 
67

 
86

Special items—other
—

 
—

 
25

 
—

Total Operating Expenses
1,915

 
1,683

 
5,603

 
4,881

Operating Income
297

 
427

 
597

 
1,071

Nonoperating Income (Expense)
 
 
 
 
 

 
 

Interest income
11

 
9

 
29

 
25

Interest expense
(22
)
 
(26
)
 
(71
)
 
(77
)
Interest capitalized
5

 
5

 
14

 
13

Other—net
(7
)
 
2

 
(20
)
 
1

Total Nonoperating Income (Expense)
(13
)
 
(10
)
 
(48
)
 
(38
)
Income Before Income Tax
284

 
417

 
549

 
1,033

Income tax expense
67

 
158

 
135

 
388

Net Income
$
217

 
$
259

 
$
414

 
$
645

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
$
1.76

 
$
2.10

 
$
3.36

 
$
5.22

Diluted Earnings Per Share:
$
1.75

 
$
2.09

 
$
3.34

 
$
5.19

Shares used for computation:
 
 
 
 
 
 
 

Basic
123.224

 
123.467

 
123.216

 
123.501

Diluted
123.864

 
124.220

 
123.804

 
124.341

 
 
 
 
 
 
 
 
Cash dividend declared per share:
$
0.32

 
$
0.30

 
$
0.96

 
$
0.90


Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

6

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions)
2018
 
2017
 
2018
 
2017
Net Income
$
217

 
$
259

 
$
414

 
$
645

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Related to marketable securities:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period
(2
)
 
1

 
(19
)
 
5

Reclassification of (gain) loss into Other—net nonoperating income (expense)
2

 
(1
)
 
5

 
—

Income tax effect
1

 
—

 
4

 
(2
)
Total
1

 
—

 
(10
)
 
3

 
 
 
 
 
 
 
 
Related to employee benefit plans:
 
 
 
 
 
 
 
Reclassification of net pension expense into Wages and benefits
7

 
5

 
21

 
16

Income tax effect
(2
)
 
(2
)
 
(5
)
 
(5
)
Total
5

 
3

 
16

 
11

 
 
 
 
 
 
 
 
Related to interest rate derivative instruments:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period
—

 
—

 
8

 
(2
)
Reclassification of (gain) loss into Aircraft rent
2

 
2

 
3

 
4

Income tax effect
(1
)
 
(1
)
 
(3
)
 
(1
)
Total
1

 
1

 
8

 
1

 
 
 
 
 
 
 
 
Other Comprehensive Income
7

 
4

 
14

 
15

 
 
 
 
 
 
 
 
Comprehensive Income
$
224

 
$
263

 
$
428

 
$
660


Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.



7

ALASKA AIR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Nine Months Ended September 30,
(in millions)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
414

 
$
645

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
290

 
275

Stock-based compensation and other
34

 
43

Changes in certain assets and liabilities:
 
 
 
Changes in deferred tax provision
122

 
208

Increase in air traffic liability
144

 
223

Increase in deferred revenue
106

 
130

Other—net
(124
)
 
(167
)
Net cash provided by operating activities
986

 
1,357

Cash flows from investing activities:
 

 
 

Property and equipment additions:
 

 
 

Aircraft and aircraft purchase deposits
(349
)
 
(679
)
Other flight equipment
(76
)
 
(70
)
Other property and equipment
(129
)
 
(92
)
Total property and equipment additions, including capitalized interest
(554
)
 
(841
)
Purchases of marketable securities
(672
)
 
(1,408
)
Sales and maturities of marketable securities
857

 
1,069

Other investing activities
36

 
38

Net cash used in investing activities
(333
)
 
(1,142
)
Cash flows from financing activities:
 

 
 

Long-term debt payments
(544
)
 
(265
)
Common stock repurchases
(37
)
 
(50
)
Dividends paid
(118
)
 
(111
)
Other financing activities
33

 
27

Net cash used in financing activities
(666
)
 
(399
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(13
)
 
(184
)
Cash, cash equivalents, and restricted cash at beginning of year
197

 
328

Cash, cash equivalents, and restricted cash at end of the period
$
184

 
$
144

 
 
 
 
Cash paid during the period for:
 
 
 
Interest (net of amount capitalized)
$
60

 
$
68

Income taxes
—

 
129

 
 
 
 
Reconciliation of cash, cash equivalents, and restricted cash at end of the period
 
 
 
Cash and cash equivalents
$
174

 
$
144

Restricted cash included in Prepaid expenses and other current assets
10

 
—

Total cash, cash equivalents, and restricted cash at end of the period
$
184

 
$
144

 
 
 
 
Certain historical information has been adjusted to reflect the adoption of new accounting standards. See accompanying notes to condensed consolidated financial statements.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation
 
The condensed consolidated financial statements include the accounts of Air Group, or the Company, and its primary subsidiaries, Alaska (including Virgin America) and Horizon. Our condensed consolidated financial statements also include McGee Air Services, a ground services subsidiary of Alaska. The Company conducts substantially all of its operations through these subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. It should be read in conjunction with the consolidated financial statements and accompanying notes in the Form 10-K for the year ended December 31, 2017. In the opinion of management, all adjustments have been made that are necessary to fairly present the Company’s financial position as of September 30, 2018 and the results of operations for the three and nine months ended September 30, 2018 and 2017. Such adjustments were of a normal recurring nature.

Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.

In preparing these statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities, as well as the reported amounts of revenues and expenses. Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions, changes in the competitive environment and other factors, operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of operating results for the entire year.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to recognize assets and liabilities for leases currently classified as operating leases. Under the new standard, a lessee will recognize a liability on the balance sheet representing the lease payments owed, and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities.

In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements - Leases (Topic 842)" which amended Topic 842 to provide companies an alternative transition method which would not require adjusting comparative period financial information. The Company plans to utilize this alternative transition method, and will record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new standard is effective for the Company on January 1, 2019. The Company will not early adopt the standard.

At this time, the Company believes the most significant impact to the financial statements from the new lease accounting standard will relate to the recording of a right-of-use asset and related liability associated with leased aircraft. The Company does not expect the new standard to have a material impact on the pattern or amount of expense recognized for aircraft leases on the income statement. Other leases, including airports and real estate, equipment, software and other miscellaneous leases continue to be assessed.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows—Restricted Cash (Topic 230)" related to the presentation of restricted cash on the statement of cash flows, and within the accompanying footnotes. The Company adopted the standard effective January 1, 2018.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The ASU expands the activities that qualify for hedge accounting and simplifies the rules for reporting hedging relationships. The ASU is effective for the Company beginning January 1, 2019, and is required to be adopted using the modified retrospective approach.

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The standard allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting

9


from the Tax Cuts and Jobs Act. The amount of the reclassification is the difference between the amount initially recorded directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been recorded directly to other comprehensive income using the newly enacted U.S. federal income tax rate. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company elected to early adopt the standard effective January 1, 2018. As a result, retained earnings increased approximately $62 million in 2018 due to the reclassification of tax effects in AOCI recorded in prior periods at previously enacted tax rates.

NOTE 2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

Revenue Recognition and Retirement Benefits Accounting Standards

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Adoption of the new standard resulted in changes to accounting policies for revenue recognition related to frequent flyer activity, certain ancillary revenues such as change fees, air traffic liabilities, and sales and marketing expenses. As a result of adoption, the Company also changed certain financial statement line item disclosure captions. See Note 3 for a discussion of the impact of this standard.

Although less significant, in March 2017 the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which requires the Company to present the service cost component of net periodic benefit cost as Wages and benefits in the statement of operations. The Company adopted the new standard as of January 1, 2018, utilizing a full retrospective transition method. Under this new standard, all components of net periodic benefit cost are presented in Nonoperating income (expense), except service cost, which remains in Wages and benefits.

Certain line item captions on the balance sheet and statement of operations changed as a result of the newly implemented standards. Accordingly, historical financial information presented below as reported has been presented using the new captions. The cumulative impact to retained earnings at January 1, 2016 as a result of the new revenue recognition standard was $171 million. Below are the impacts of these newly adopted accounting standards to the financial statements.




10


Condensed consolidated statement of operations for the three and nine months ended September 30, 2017 (in millions):
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
 
 
Adjustments
 
 
 
 
 
Adjustments
 
 
 
As Reported
 
Revenue Recognition
 
Retirement Benefits
 
As Adjusted
 
As Reported
 
Revenue Recognition
 
Retirement Benefits
 
As Adjusted
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger Revenue
$
1,824

 
$
134

 
$
—

 
$
1,958

 
$
5,115

 
$
390

 
$
—

 
$
5,505

Mileage plan other revenue
122

 
(17
)
 
—

 
105

 
369

 
(55
)
 
—

 
314

Cargo and other revenue
174

 
(127
)
 
—

 
47

 
487

 
(354
)
 
—

 
133

Total Operating Revenue
2,120

 
(10
)
 
—

 
2,110

 
5,971

 
(19
)
 
—

 
5,952

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wages and benefits
475

 
—

 
2

 
477

 
1,392

 
—

 
5

 
1,397

Selling expenses
91

 
1

 
—

 
92

 
269

 
8

 
—

 
277

Special items—merger-related costs
24

 
(1
)
 
—

 
23

 
88

 
(2
)
 
—

 
86

All other operating expenses
1,091

 
—

 
—

 
1,091

 
3,121

 
—

 
—

 
3,121

Total Operating Expenses
1,681

 
—

 
2

 
1,683

 
4,870

 
6

 
5

 
4,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
439

 
(10
)
 
(2
)
 
427

 
1,101

 
(25
)
 
(5
)
 
1,071

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonoperating Income (Expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other—net
—

 
—

 
2

 
2

 
(4
)
 
—

 
5

 
1

All other nonoperating income (expense)
(12
)
 
—

 
—

 
(12
)
 
(39
)
 
—

 
—

 
(39
)
 
(12
)
 
—

 
2

 
(10
)
 
(43
)
 
—

 
5

 
(38
)
Income (loss) before income tax
427

 
(10
)
 
—

 
417

 
1,058

 
(25
)
 
—

 
1,033

Income tax expense (benefit)
161

 
(3
)
 
—

 
158

 
397

 
(9
)
 
—

 
388

Net Income (Loss)
$
266

 
$
(7
)
 
$
—

 
$
259

 
$
661

 
$
(16
)
 
$
—

 
$
645



11


Condensed consolidated statement of cash flows for the nine months ended September 30, 2017 (in millions):
 
Nine Months Ended September 30, 2017
 
As Reported
 
Adjustments - Revenue Recognition
 
As Adjusted
Cash flows from operating activities:
 
 
 
 
 
Net income
$
661

 
$
(16
)
 
$
645

 
 
 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 

Depreciation and amortization
275

 
—

 
275

Stock-based compensation and other
43

 
—

 
43

Changes in certain assets and liabilities:
 
 
 
 
 
Changes in deferred tax provision
217

 
(9
)
 
208

Increase in air traffic liability
254

 
(31
)
 
223

Increase in deferred revenue
46

 
84

 
130

Other—net
(139
)
 
(28
)
 
(167
)
Net cash provided by operating activities
1,357

 
—

 
1,357

 
 
 
 
 
 
Net cash used in investing activities
(1,142
)
 
—

 
(1,142
)
 
 
 
 
 
 
Net cash used in financing activities
(399
)
 
—

 
(399
)
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(184
)
 
—

 
(184
)
Cash and cash equivalents at beginning of year
328

 
—

 
328

Cash and cash equivalents at end of the period
$
144

 
$
—

 
$
144


NOTE 3. REVENUE

Ticket revenue is recorded as Passenger revenue, and represents the primary source of the Company's revenue. Also included in Passenger revenue are passenger ancillary revenues such as bag fees, on-board food and beverage, ticket change fees, and certain revenue from the frequent flyer program. Mileage Plan™ other revenue includes brand and marketing revenue from our affinity credit card and other partners and certain interline frequent flyer revenue, net of commissions. Cargo and other revenue includes freight and mail revenue, and to a lesser extent, other ancillary revenue products such as lounge membership and certain commissions.

The Company disaggregates revenue by segment in Note 9. The level of detail within the Company’s statements of operations, segment disclosures, and in this footnote depict the nature, amount, timing and uncertainty of revenue and how cash flows are affected by economic and other factors.

Passenger Ticket and Ancillary Services Revenue

The primary performance obligation on a typical passenger ticket is to provide air travel to the Company’s passenger. Ticket revenue is collected in advance of travel and recorded as Air Traffic Liability (ATL) on the consolidated balance sheets. The Company satisfies its performance obligation and recognizes ticket revenue on each flight segment when the transportation is provided.

Ancillary passenger revenues relate to items such as checked-bag fees, ticket change fees, and on-board food and beverage sales, all of which are provided at time of flight. As such, the obligation to perform these services is satisfied at the time of travel and is recorded with ticket revenue in Passenger revenue.


12


Revenue is also recognized for tickets that are expected to expire unused, a concept referred to as “passenger ticket breakage.” Passenger ticket breakage is recorded at the flight date using estimates made at the time of sale based on the Company’s historical experience of expired tickets, and other facts such as program changes and modifications.

In addition to selling tickets on its own marketed flights, the Company has interline agreements with partner airlines under which it sells multi-city tickets with one or more segments of the trip flown by a partner airline, or it operates a connecting flight sold by a partner airline. Each segment in a connecting flight represents a separate performance obligation. Revenue on segments sold and operated by the Company is recognized as Passenger revenue in the gross amount of the allocated ticket price when the travel occurs, while the commission paid to the partner airline is recognized as a selling expense when the related transportation is provided. Revenue on segments operated by a partner airline is deferred for the full amount of the consideration received at the time the ticket is sold and, once the segment has been flown the Company records the net amount, after compensating the partner airline, as Cargo and other revenue.

A portion of revenue from the Mileage Plan™ program is recorded in Passenger revenue. As members are awarded mileage credits on flown tickets, these credits become a distinct performance obligation for the Company. The Company allocates the transaction price to each performance obligation identified in a passenger ticket contract on a relative standalone selling price basis. The standalone selling price for loyalty mileage credits issued is discussed in the Loyalty Mileage Credits section of this Note below. The amount allocated to the mileage credits is deferred on the balance sheet. Once a member travels using a travel award redeemed with mileage credits on one of the Company's airline carriers, the revenue associated with those mileage credits is recorded as Passenger revenue.

Taxes collected from passengers, including transportation excise taxes, airport and security fees and other fees, are recorded on a net basis within passenger revenue in the consolidated statements of operations.

Passenger revenue recognized in the condensed consolidated statements of operations (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Passenger ticket revenue, including ticket breakage and net of taxes and fees
$
1,744

 
$
1,683

 
$
4,865

 
$
4,709

Passenger ancillary revenue
146

 
141

 
401

 
391

Mileage PlanTM passenger revenue
153

 
134

 
459

 
405

Total passenger revenue
$
2,043

 
$
1,958

 
$
5,725

 
$
5,505


As passenger tickets and related ancillary services are primarily sold via credit cards, certain amounts due from credit card processors are recorded as airline traffic receivables. These credit card receivables and receivables from our affinity credit card partner represent the majority of the receivables balance on the Balance Sheet.

For performance obligations with performance periods of less than one year, GAAP provides a practical expedient that allows the Company not to disclose the transaction price allocated to remaining performance obligations and the timing of related revenue recognition. As passenger tickets expire one year from ticketing, the Company elected to apply this practical expedient for tickets unused or not exchanged.

Mileage Plan™ Loyalty Program

Loyalty mileage credits

The Company’s Mileage Plan™ loyalty program provides frequent flyer travel awards to program members based upon accumulated loyalty mileage credits. Mileage credits are earned through travel, purchases using the Mileage Plan™ co-branded credit card and purchases from other participating partners. The program has a 24-month expiration period for unused mileage credits from the month of last account activity. The Company offers redemption of mileage credits through free, discounted or upgraded air travel on Alaska flights or on one of its 15 airline partners, as well as redemption at partner hotels.

The Company uses a relative standalone selling price allocation to allocate consideration to material performance obligations in contracts with customers that include loyalty mileage credits. As directly observable selling prices for mileage credits are not available, the Company determines the standalone selling price of mileage credits primarily using actual ticket purchase prices for similar tickets flown, adjusted for the likelihood of redemption, or breakage. In determining similar tickets flown,

13


the Company considers current market prices, class of service, type of award, and other factors. For mileage credits accumulated through travel on partner airlines, the Company uses actual consideration received from the partners.

Revenue related to air transportation is deferred in the amount of the relative standalone selling price allocated to the mileage credits as they are issued. The Company satisfies its performance obligation when the mileage credits are redeemed and the related air transportation is delivered.

The Company estimates breakage for the portion of mileage credits not expected to be redeemed using a statistical analysis of historical data, including actual mileage credits expiring, slow-moving and low-credit accounts, among other factors. The breakage rate for the three and nine months ended September 30, 2018 and 2017 was 17.4%. The Company reviews the breakage rate used on an annual basis.

Co-brand credit card agreement and other

In addition to mileage credits, the co-brand credit card agreement, referred to herein as the Agreement, also includes performance obligations for waived bag fees, Companion Fare™ offers to purchase an additional ticket at a discount, marketing, and the use of intellectual property including the brand (unlimited access to the use of the Company’s brand and frequent flyer member lists), which is the predominant element in the Agreement. The affinity card bank partner is the customer for some elements, including the brand and marketing, while the Mileage Plan™ member is the customer for other elements such as mileage credits, bag waivers, and Companion Fares.

At the inception of the Agreement, management estimated the selling price of each of the performance obligations. The objective was to determine the price at which a sale would be transacted if the product or service was sold on a stand-alone basis. The Company determined its best estimate of selling price for each element by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of miles awarded and number of miles redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The estimates of the standalone selling prices of each element do not change subsequent to the original valuation of the contract unless the contract is materially modified, but the allocation between elements may change based upon the actual and updated projected volumes of each element delivered during the term of the contract.

Consideration received from the bank is variable and is primarily from consumer spend on the card, among other items. The Company allocates consideration to each of the performance obligations, including mileage credits, waived bag fees, Companion Fares, and brand and marketing, using their relative standalone selling price. Because the performance obligation related to providing use of intellectual property including the brand is satisfied over time, it is recognized in Mileage PlanTM other revenue in the period that those elements are sold. The Company records passenger revenue related to the air transportation and certificates for discounted companion travel when the transportation is delivered.

In contracts with non-bank partners, the Company has identified two performance obligations in most cases - travel and brand. Revenue is recognized using the residual method, where the travel performance obligation is deferred until transportation is provided in the amount of the estimated standalone selling price of the ticket, less breakage. The residual amount, if any, is recognized as commission revenue when the brand element is sold. Mileage credit sales recorded under the residual approach are immaterial to the overall program.

Interline loyalty

The Company has interline arrangements with certain airlines whereby its members may earn and redeem Mileage Plan™ credits on those airlines, and members of a partner airline’s loyalty program may earn and redeem frequent flyer program credits on Alaska. When a Mileage Plan™ member earns credits on a partner airline, the partner airline remits a contractually-agreed upon fee to the Company which is deferred until credits are redeemed. When a Mileage Plan™ member redeems credits on a partner airline, the Company pays a contractually agreed upon fee to the other airline, which offsets the revenue recognized associated with the award travel. When a member of a partner airline redeems frequent flyer credits on Alaska, the partner airline remits a contractually-agreed upon amount to the Company, recognized as Passenger revenue upon travel. If the partner airline’s member earns frequent flyer program credits on an Alaska flight, the Company remits a contractually-agreed upon fee to the partner airline and records a commission expense.


14


Mileage Plan™ revenue included in the condensed consolidated statements of operations (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Passenger revenue
$
153

 
$
134

 
$
459

 
$
405

Mileage PlanTM other revenue
114

 
105

 
329

 
314

Total Mileage Plan™ revenue
$
267

 
$
239

 
$
788

 
$
719


Mileage Plan™ other revenue is primarily brand and marketing revenue from our affinity card products.

Cargo and Other

The Company provides freight and mail services (cargo). The majority of cargo services are provided to commercial businesses and the United States Postal Service. The Company satisfies cargo service performance obligations and recognizes revenue when the shipment arrives at its final destination or is transferred to a third-party carrier for delivery.

The Company also earns other revenue for lounge memberships, hotel and car commissions, and certain other immaterial items not intrinsically tied to providing air travel to passengers. Revenue is recognized when these services are rendered and recorded as Cargo and other revenue. The transaction price for Cargo and other revenue is the price paid by the customer.

Cargo and other revenue included in the condensed consolidated statements of operations (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Cargo revenue
$
36

 
$
32

 
$
96

 
$
88

Other revenue
19

 
15

 
50

 
45

Total Cargo and other revenue
$
55

 
$
47

 
$
146

 
$
133


Air Traffic Liability and Deferred Revenue

Passenger ticket and ancillary services liabilities

Air traffic liability included on the condensed consolidated balance sheets represents the remaining obligation associated with passenger tickets and ancillary services. The air traffic liability balance fluctuates with seasonal travel patterns. The Company recognized Passenger revenue of $27 million and $23 million from the prior year-end air traffic liability balance for the three months ended September 30, 2018 and 2017, and $540 million and $543 million for the nine months ended September 30, 2018 and 2017.

Mileage PlanTM liabilities

The total deferred revenue liability included on the condensed consolidated balance sheets represents the remaining transaction price that has been allocated to Mileage PlanTM performance obligations not yet satisfied by the Company. In general, the current amounts will be recognized as revenue within 12 months and the long-term amounts will be recognized as revenue over, on average, a period of approximately three to four years. This period of time represents the average time that members have historically taken to earn and redeem miles.

The Company records a receivable for amounts due from the bank partner and from other partners as mileage credits are sold until the payments are collected. The Company had $106 million of such receivables as of September 30, 2018 and $101 million as of December 31, 2017.


15


Mileage credits are combined in one homogeneous pool and are not specifically identifiable. As such, loyalty revenues disclosed earlier in this Note are comprised of miles that were part of the deferred revenue and liabilities balances at the beginning of the period and miles that were issued during the period. The table below presents a roll forward of the total frequent flyer liability (in millions):
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Total Deferred Revenue balance at January 1
 
$
1,725

 
$
1,534

Travel miles and companion certificate redemption - Passenger revenue
 
(459
)
 
(405
)
Miles redeemed on partner airlines - Other revenue
 
(66
)
 
(54
)
Increase in liability for mileage credits issued
 
631

 
586

Total Deferred Revenue balance at September 30
 
$
1,831

 
$
1,661

 
Selling Costs

Certain costs such as credit card fees, travel agency and other commissions paid, as well as Global Distribution Systems (GDS) booking fees are incurred when the Company sells passenger tickets and ancillary services in advance of the travel date. The Company defers such costs and recognizes them as expenses when the travel occurs. Prepaid expense recorded on the consolidated balance sheets for such costs was $27 million and $24 million as of September 30, 2018 and December 31, 2017. The Company recorded related expense on the condensed consolidated statement of operations of $57 million and $61 million for the three months ended September 30, 2018 and 2017, and $166 million and $183 million for the nine months ended September 30, 2018 and 2017.

NOTE 4. FAIR VALUE MEASUREMENTS

In determining fair value, there is a three-level hierarchy based on the reliability of the inputs used. Level 1 refers to fair values based on quoted prices in active markets for identical assets or liabilities. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 refers to fair values estimated using significant unobservable inputs.


16


Fair Value of Financial Instruments on a Recurring Basis

As of September 30, 2018, total cost basis for all marketable securities was $1.2 billion. There were no significant differences between the cost basis and fair value of any individual class of marketable securities.

Fair values of financial instruments on the consolidated balance sheet (in millions):
September 30, 2018
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
338

 
$
—

 
$
338

Foreign government bonds
—

 
29

 
29

Asset-backed securities
—

 
209

 
209

Mortgage-backed securities
—

 
79

 
79

Corporate notes and bonds
—

 
559

 
559

Municipal securities
—

 
9

 
9

Total Marketable securities
338

 
885

 
1,223

Derivative instruments
 
 
 
 
 
Fuel hedge—call options
—

 
54

 
54

Interest rate swap agreements
—

 
15

 
15

Total Assets
$
338

 
$
954

 
$
1,292

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(3
)
 
(3
)
Total Liabilities
$
—

 
$
(3
)
 
$
(3
)
December 31, 2017
Level 1
 
Level 2
 
Total
Assets
 
 
 
 
 
Marketable securities
 
 
 
 
 
U.S. government and agency securities
$
328

 
$
—

 
$
328

Foreign government bonds
—

 
43

 
43

Asset-backed securities
—

 
209

 
209

Mortgage-backed securities
—

 
99

 
99

Corporate notes and bonds
—

 
726

 
726

Municipal securities
—

 
22

 
22

Total Marketable securities
328

 
1,099

 
1,427

Derivative instruments
 
 
 
 
 
Fuel hedge—call options
—

 
22

 
22

Interest rate swap agreements
—

 
9

 
9

Total Assets
$
328

 
$
1,130

 
$
1,458

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Derivative instruments
 
 
 
 
 
Interest rate swap agreements
—

 
(8
)
 
(8
)
Total Liabilities
$
—

 
$
(8
)
 
$
(8
)

The Company uses both the market and income approach to determine the fair value of marketable securities. U.S. government securities are Level 1 as the fair value is based on quoted prices in active markets. Foreign government bonds, asset-backed securities, mortgage-backed securities, corporate notes and bonds, and municipal securities are Level 2 as the fair value is based on standard valuation models that are calculated based on observable inputs such as quoted interest rates, yield curves, credit ratings of the security and other observable market information.


17


The Company uses the market approach and the income approach to determine the fair value of derivative instruments. The fair value for fuel hedge call options is determined utilizing an option pricing model based on inputs that are readily available in active markets or can be derived from information available in active markets. In addition, the fair value considers the exposure to credit losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as the fair value of these contracts is determined based on the difference between the fixed interest rate in the agreements and the observable LIBOR-based interest forward rates at period end multiplied by the total notional value.

Activity and Maturities for Marketable Securities

Unrealized losses from marketable securities are primarily attributable to changes in interest rates. Management does not believe any unrealized losses represent other-than-temporary impairments based on its evaluation of available information as of September 30, 2018.

Maturities for marketable securities (in millions):
September 30, 2018
Cost Basis
 
Fair Value
Due in one year or less
$
126

 
$
126

Due after one year through five years
1,094

 
1,072

Due after five years through 10 years
26

 
25

Total
$
1,246

 
$
1,223


Fair Value of Other Financial Instruments

The Company uses the following methods and assumptions to determine the fair value of financial instruments that are not recognized at fair value as described below.

Cash, Cash Equivalents and Restricted Cash: Cash equivalents consist of highly liquid investments with original maturities of three months or less, such as money market funds, commercial paper and certificates of deposit. They are carried at cost, which approximates fair value.

The Company's restricted cash balances are primarily used to guarantee various letters of credit, self-insurance programs or other contractual rights. Restricted cash consists of highly liquid securities with original maturities of three months or less. They are carried at cost, which approximates fair value.

Debt: Debt assumed in the acquisition of Virgin America was subject to a non-recurring fair valuation adjustment as part of purchase price accounting. The adjustment is amortized over the life of the associated debt. All other fixed-rate debt is carried at cost. To estimate the fair value of all fixed-rate debt as of September 30, 2018, the Company uses the income approach by discounting cash flows using borrowing rates for comparable debt over the remaining life of the outstanding debt. The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.

Fixed-rate debt on the consolidated balance sheet and the estimated fair value of long-term fixed-rate debt is as follows (in millions):
 
September 30, 2018
 
December 31, 2017
Fixed-rate debt at cost
$
703

 
$
956

Non-recurring purchase price accounting fair value adjustment
3

 
3

Total fixed-rate debt
$
706

 
$
959

 
 
 
 
Estimated fair value
$
700

 
$
959


Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property, plant and equipment, goodwill, and intangible assets. These assets are subject to fair valuation when there is evidence of impairment. No material impairment charges were taken in the three and nine months ended September 30, 2018 and September 30, 2017.


18


NOTE 5. LONG-TERM DEBT
 
Long-term debt obligations on the consolidated balance sheet (in millions):
 
September 30, 2018
 
December 31, 2017
Fixed-rate notes payable due through 2028
$
706

 
$
959

Variable-rate notes payable due through 2028
1,335

 
1,625

Less debt issuance costs
(12
)
 
(15
)
Total debt
2,029

 
2,569

Less current portion
345

 
307

Long-term debt, less current portion
$
1,684

 
$
2,262

 
 
 
 
Weighted-average fixed-interest rate
4.1
%
 
4.2
%
Weighted-average variable-interest rate
3.4
%
 
2.8
%

During the nine months ended September 30, 2018 the Company made debt payments of $544 million, including the prepayment of $231 million of debt.

At September 30, 2018 long-term debt principal payments for the next five years and thereafter are as follows (in millions):
 
Total
Remainder of 2018
$
123

2019
267

2020
381

2021
363

2022
179

Thereafter
725

Total
$
2,038

 
Bank Lines of Credit
 
The Company had three credit facilities totaling $516 million as of September 30, 2018. All three facilities have variable interest rates based on LIBOR plus a specified margin. One credit facility for $250 million expires in June 2021 and is secured by aircraft. The second credit facility increased from $75 million to $116 million in July 2018. It expires in July 2019, with a mechanism for annual renewal, and is secured by aircraft. A third credit facility for $150 million expires in March 2022 and is secured by certain accounts receivable, spare engines, spare parts and ground service equipment. The Company has secured letters of credit against the $116 million facility, but has no plans to borrow using either of the two other facilities. All three credit facilities have a requirement to maintain a minimum unrestricted cash and marketable securities balance of $500 million. The Company was in compliance with this covenant at September 30, 2018.


19


NOTE 6. EMPLOYEE BENEFIT PLANS

Net periodic benefit costs for qualified defined-benefit plans include the following (in millions): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
$
12

 
$
10

 
$
36

 
$
30

Pension expense included in Wages and benefits
12

 
10

 
36

 
30

 
 
 
 
 
 
 
 
Interest cost
20

 
19

 
59

 
55

Expected return on assets
(27
)
 
(27
)
 
(80
)
 
(80
)
Amortization of prior service cost (credit)
(1
)
 
(1
)
 
(1
)
 
(1
)
Recognized actuarial loss (gain)
9

 
7

 
25

 
20

Pension expense (benefit) included in Nonoperating Income (Expense)
$
1

 
$
(2
)
 
$
3

 
$
(6
)

NOTE 7. COMMITMENTS AND CONTINGENCIES

Future minimum payments for commitments as of September 30, 2018 (in millions):
 
Aircraft Leases
 
Facility Leases
 
Aircraft Commitments(a)
 
Capacity Purchase Agreements (b)
 
Aircraft Maintenance Deposits
Remainder of 2018
$
88

 
$
18

 
$
378

 
$
33

 
$
16

2019
349

 
64

 
514

 
138

 
65

2020
324

 
56

 
525

 
145

 
68

2021
282

 
50

 
558

 
166

 
64

2022
265

 
35

 
302

 
174

 
52

Thereafter
1,070

 
149

 
140

 
1,205

 
38

Total
$
2,378

 
$
372

 
$
2,417

 
$
1,861

 
$
303

(a)
Includes non-cancelable contractual commitments for aircraft and engines, buyer furnished equipment, and aircraft maintenance and parts management.
(b)
Includes all non-aircraft lease costs associated with capacity purchase agreements.

Lease Commitments

Aircraft lease commitments include future obligations for all of the Company's operating aircraft, as well as aircraft leases operated by third-parties. At September 30, 2018, the Company had lease contracts for 10 Boeing 737 (B737) aircraft, 61 Airbus aircraft, 9 Bombardier Q400 aircraft, and 32 Embraer 175 (E175) aircraft with SkyWest Airlines, Inc. (SkyWest). The Company has an additional two scheduled lease deliveries of A321neo aircraft through 2019, as well as three scheduled lease deliveries of E175 aircraft in 2021 to be operated by SkyWest. The Company does not intend to operate the three E175 aircraft currently scheduled for delivery in 2021, and is working to remove those aircraft from the capacity purchase agreement. All lease contracts have remaining non-cancelable lease terms ranging from 2018 to 2033. The Company has the option to increase capacity flown by SkyWest with eight additional E175 aircraft with deliveries from 2021 to 2022. Options to lease are not reflected in the commitments table above.

Facility lease commitments primarily include airport and terminal facilities and building leases. Total rent expense for aircraft and facility leases was $165 million and $145 million for the three months ended September 30, 2018 and 2017, and $455 million and $406 million for the nine months ended September 30, 2018 and 2017.


20


Aircraft Commitments
 
Aircraft purchase commitments include non-cancelable contractual commitments for aircraft and engines. As of September 30, 2018, the Company had commitments to purchase 38 B737 aircraft (6 B737 NextGen aircraft and 32 B737 MAX aircraft), with deliveries in the remainder of 2018 through 2023. In the first quarter of 2018 the Company entered into a supplemental agreement with Boeing to defer certain B737 deliveries and to convert 15 MAX8 aircraft orders to MAX9 aircraft orders. The Company also has commitments to purchase 17 E175 aircraft with deliveries in the remainder of 2018 through 2021 and has cancelable purchase commitments for 30 Airbus A320neo aircraft with deliveries from 2022 through 2024. In addition, the Company has options to purchase 37 B737 aircraft from 2021 through 2024 and 30 E175 aircraft from 2021 through 2023. The cancelable purchase commitments and option payments are not reflected in the table above.

Contingencies

The Company is a party to routine litigation matters incidental to its business and with respect to which no material liability is expected. Liabilities for litigation related contingencies are recorded when a loss is determined to be probable and estimable.

In 2015, three flight attendants filed a class action lawsuit seeking to represent all Virgin America flight attendants for damages based on alleged violations of California and City of San Francisco wage and hour laws. Two thousand flight attendants were certified as a class in November 2016. The Company believes the claims in this case are without factual and legal merit.

In July 2018, the Court granted in part Plaintiffs' motion for summary judgment, finding Virgin America responsible for various damages and penalties sought by the class members. Plaintiffs value these damages and penalties at $85 million, and as of November 1, 2018, moved the Court to enter judgment against Virgin America in that amount. Plaintiffs do not seek monetary or behavioral relief from Alaska Airlines.

The Court will render its final judgment in March 2019. The Company will then seek an appellate court ruling that the California laws on which the judgment is based are invalid as applied to national airlines pursuant to the U.S. Constitution and federal law. The Company remains confident that a higher court will respect the federal preemption principles that were enacted to shield inter-state common carriers from a patchwork of state and local wage and hour regulations such as those at issue in this case.

This forward-looking statement is based on management's current understanding of the relevant law and facts, and it is subject to various contingencies, including the potential costs and risks associated with litigation and the actions of judges and juries.

NOTE 8. SHAREHOLDERS' EQUITY

Dividends

During the three months ended September 30, 2018, the Company declared and paid cash dividends of $0.32 per share, or $39 million. During the nine months ended September 30, 2018, the Company declared and paid cash dividends of $0.96 per share, or $118 million.

Common Stock Repurchase

In August 2015, the Board of Directors authorized a $1 billion share repurchase program. As of September 30, 2018, the Company has repurchased 5.7 million shares for $426 million under this program.
Share repurchase activity (in millions, except share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
2015 Repurchase Program—$1 billion
193,203

 
$
12

 
355,415

 
$
28

 
582,942

 
$
37

 
612,095

 
$
50



21


Accumulated Other Comprehensive Loss
 
Components of accumulated other comprehensive loss, net of tax (in millions):
 
September 30, 2018
 
December 31, 2017
Related to marketable securities
$
(17
)
 
$
(5
)
Related to employee benefit plans
(420
)
 
(376
)
Related to interest rate derivatives
9

 
1

Total
$
(428
)
 
$
(380
)

The Company elected to early adopt ASU 2018-02 in the first quarter of 2018. As a result, the Company reclassified approximately $62 million of tax effects in AOCI recorded in prior periods at previously enacted tax rates thus increasing Retained earnings.

Earnings Per Share (EPS)

Diluted EPS is calculated by dividing net income by the average number of common shares outstanding plus the number of additional common shares that would have been outstanding assuming the exercise of in-the-money stock options and restricted stock units, using the treasury-stock method. For the three and nine months ended September 30, 2018 and 2017, anti-dilutive shares excluded from the calculation of EPS were not material.

NOTE 9. OPERATING SEGMENT INFORMATION

Alaska Air Group has two operating airlines—Alaska (including Virgin America after the single operating certificate was received in January 2018) and Horizon. Each is regulated by the U.S. Department of Transportation’s Federal Aviation Administration. Alaska has CPAs for regional capacity with Horizon, as well as with third-party carriers SkyWest and PenAir, under which Alaska receives all passenger revenues.

Under U.S. GAAP, operating segments are defined as components of a business for which there is discrete financial information that is regularly assessed by the Chief Operating Decision Maker (CODM) in making resource allocation decisions. Financial performance for the operating airlines and CPAs is managed and reviewed by the Company's CODM as part of three reportable operating segments:
 
•
Mainline - includes scheduled air transportation on Alaska's Boeing or Airbus jet aircraft for passengers and cargo throughout the U.S., and in parts of Canada, Mexico, and Costa Rica.
•
Regional - includes Horizon's and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the U.S. under CPAs. This segment includes the actual revenues and expenses associated with regional flying, as well as an allocation of corporate overhead incurred by Air Group on behalf of the regional operations.
•
Horizon - includes the capacity sold to Alaska under CPA. Expenses include those typically borne by regional airlines such as crew costs, ownership costs and maintenance costs.

The CODM makes resource allocation decisions for these reporting segments based on flight profitability data, aircraft type, route economics and other financial information.

The "Consolidating and Other" column reflects Air Group parent company activity, McGee Air Services, consolidating entries and other immaterial business units of the company. The “Air Group Adjusted” column represents a non-GAAP measure that is used by the Company's CODM to evaluate performance and allocate resources. Adjustments are further explained below in reconciling to consolidated GAAP results.


22


Operating segment information is as follows (in millions):
 
Three Months Ended September 30, 2018
 
Mainline
 
Regional
 
Horizon
 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
$
1,727

 
$
316

 
$
—

 
$
—

 
$
2,043

 
$
—

 
$
2,043

CPA revenues
—

 
—

 
128

 
(128
)
 
—

 
—

 
—

Mileage Plan other revenue
104

 
10

 
—

 
—

 
114

 
—

 
114

Cargo and other
53

 
—

 
2

 
—

 
55

 
—

 
55

Total operating revenues
1,884

 
326

 
130

 
(128
)
 
2,212

 
—

 
2,212

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,126

 
267

 
118

 
(131
)
 
1,380

 
22

 
1,402

Economic fuel
438

 
70

 
—

 
—

 
508

 
5

 
513

Total operating expenses
1,564

 
337

 
118

 
(131
)
 
1,888

 
27

 
1,915

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
15

 
—

 
—

 
(4
)
 
11

 
—

 
11

Interest expense
(20
)
 
—

 
(6
)
 
4

 
(22
)
 
—

 
(22
)
Interest capitalized
4

 
—

 
1

 
—

 
5

 
—

 
5

Other—net
(5
)
 
(2
)
 
—

 
—

 
(7
)
 
—

 
(7
)
Total Nonoperating income (expense)
(6
)
 
(2
)
 
(5
)
 
—

 
(13
)
 
—

 
(13
)
Income (loss) before income tax
$
314

 
$
(13
)
 
$
7

 
$
3

 
$
311

 
$
(27
)
 
$
284

 
Three Months Ended September 30, 2017(d)
 
Mainline
 
Regional
 
Horizon
 
Consolidating & Other(a)
 
Air Group Adjusted(b)
 
Special Items(c)
 
Consolidated
Operating revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Passenger revenues
$
1,677

 
$
281

 
$
—

 
$
—

 
$
1,958

 
$
—

 
$
1,958

CPA revenues
—

 
—

 
112

 
(112
)
 
—

 
—

 
—

Mileage Plan other revenue
97

 
8

 
—

 
—

 
105

 
—

 
105

Cargo and other
46

 
—

 
1

 
—

 
47

 
—

 
47

Total operating revenues
1,820

 
289

 
113

 
(112
)
 
2,110

 
—

 
2,110

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses, excluding fuel
1,081

 
219

 
104

 
(112
)
 
1,292

 
23

 
1,315

Economic fuel
328

 
45

 
—

 
—

 
373

 
(5
)
 
368

Total operating expenses
1,409

 
264

 
104

 
(112
)
 
1,665

 
18

 
1,683

Nonoperating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
12

 
—

 
—

 
(3
)
 
9

 
—

 
9

Interest expense
(25
)
 
—

 
(4
)
 
3

 
(26
)
 
—

 
(26
)
Interest capitalized
5

 
—

 
—

 
—

 
5

 
—

 
5

Other—net
2

 
—

 
—

 
—

 
2

 
—

 
2

Total Nonoperating income (expense)
(6
)
 
—

 
(4
)
 
—

 
(10
)
 
—

 
(10
)
Income (loss) before income tax
$
405

 
$
25

 
$
5