Form 8-K ALASKA AIR GROUP, INC. For: Oct 23

October 23, 2014 6:02 AM

�

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 8-K

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

October�23, 2014

(Date of earliest event reported)

ALASKA AIR GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

(State or Other Jurisdiction of Incorporation)



1-8957	�	91-1292054
(Commission File Number)	�	(IRS Employer Identification No.)



19300 International Boulevard, Seattle, Washington	�	98188
(Address of Principal Executive Offices)	�	(Zip Code)

(206) 392-5040

(Registrant's Telephone Number, Including Area Code)

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o��Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o��Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o��Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o��Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

�

ITEM 2.02.��Results of Operations And Financial Condition

Alaska Air Group, Inc. today issued a press release reporting financial results for the third quarter of 2014. The press release is filed as Exhibit 99.1.

ITEM 7.01.��Regulation FD Disclosure

Pursuant to 17 CFR Part 243 (Regulation FD), the Company is submitting information relating to its financial and operational outlook in an Investor Update as attached in Exhibit 99.2.

In accordance with General Instruction B.2 of Form 8-K, the information under this item and Exhibit 99.2 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.��This report will not be deemed an admission as to the materiality of any information required to be disclosed solely to satisfy the requirements of Regulation FD.

ITEM 9.01��Financial Statements and Other Exhibits

Exhibit 99.1��Third Quarter 2014 Earnings Press Release dated October�23, 2014

Exhibit 99.2��Investor Update dated October�23, 2014

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALASKA AIR GROUP, INC.��

Registrant

Date: October�23, 2014

/s/ Brandon S. Pedersen��

Brandon S. Pedersen

Executive Vice President/Finance and Chief Financial Officer

Exhibit 99.1



Media contact:	�	Investor contact:
Bobbie Egan	�	Lavanya Sareen
Corporate Communications	�	Managing Director, Investor Relations
(206) 392-5134	�	(206) 392-5656



FOR IMMEDIATE RELEASE�	�	October�23, 2014

Alaska Air Group Reports Record Third Quarter 2014 Results

Financial Highlights:


"	Reported record third quarter net income, excluding special items, of $200 million - a 27% increase over the third quarter of 2013.


"	Reported adjusted earnings per share of $1.47 per diluted share, a 32% increase over the third quarter of 2013 and ahead of First Call analyst consensus estimate of $1.42 per share.


"	Earned net income for the third quarter under Generally Accepted Accounting Principles (GAAP) of $198 million or $1.45 per diluted share, compared to net income of $289 million, or $2.04 per diluted share in 2013.


"	Recorded $84 million of incentive pay through the first nine months of 2014. This includes each Air Group employee earning at least $800 by meeting or exceeding monthly customer satisfaction and operational performance goals and tracking to earn above-target payouts for full-year goals.


"	Increased fuel efficiency (as measured by seat-miles per gallon) by 2.8% as part of our effort to be the airline leader in environmental stewardship.


"	Grew passenger revenues by 7%, compared to the third quarter of 2013.


"	Generated record adjusted pretax margin in the third quarter of 21.8% compared to 18.4% in 2013.


"	Generated 15.9% pretax margin for the trailing 12-month period ended September�30, 2014, compared to 11.7% for the same period in the prior year.


"	Achieved trailing 12-month after-tax return on invested capital of 17.2% compared to 13.0% in the 12-month period ended September�30, 2013.


"	Repurchased 3.4 million shares of common stock for $159 million in the third quarter of 2014, and 5.3 million shares for $242 million in the first nine months of 2014, representing 3.8% of the total shares outstanding at the beginning of the year.


"	Paid a $0.125 per-share quarterly cash dividend on September 4, bringing total dividend payments so far this year to $51 million.


"	Generated $1 billion in operating cash flows for the 12-months ended September 30, 2014, generating $321 million of free cash flows.


"	Lowered adjusted debt-to-total-capitalization ratio to 31%.


"	Held $1.3 billion in unrestricted cash and marketable securities as of September�30, 2014.


"	Became one of only two U.S. airlines with investment grade credit ratings.

Year-to-date highlights of Alaska Air Group's five-year strategic plan:

Safety & Compliance


"	Launched Ready, Safe, Go safety campaign designed to increase safety awareness across the Air Group System.

People Focus


"	Reached a five-year agreement in concept with Alaska's Flight Attendants.


"	Signed a six-year contract with Horizon's Aircraft Technicians and Fleet Service Agents in June 2014.


"	Signed a new five-year contract with Alaska's Clerical, Office, and Passenger Service employees (COPS) in April 2014.


"	Signed a four-year contract with Horizon's Dispatchers in April 2014.


"	Completed "Gear Up" - an intensive leadership workshop for over 1,200 leaders at Alaska and Horizon.

Hassle-free Customer Experience


"	Ranked "Highest in Customer Satisfaction Among Traditional Carriers" in 2014 by J.D. Power for the seventh year in a row.


"	Ranked highest by frequent fliers in the first-ever J.D. Power Airline Loyalty/Rewards Program Satisfaction Report.


"	Launched online self-tag baggage options for passengers flying from Seattle to San Diego, Anchorage, or Juneau.


"	Became the launch customer of Boeing's new, innovative, high-capacity 737 Space Bins, which will increase bag capacity in the cabin by 48%.

Energetic & Compelling Brand


"	Celebrated the opening of the Alaska Airlines Center sports complex at the University of Alaska Anchorage.


"	Sponsored Seattle's bike share program that is guaranteed to put 500 bikes and 50 docking stations throughout the city of Seattle.


"	Committed to $1.5 million in grants to support job training for workers at the Seattle-Tacoma airport, in addition to a voluntary wage increase to $12 per hour for certain vendors.


"	Pledged $2.5 million to Seattle's Museum of Flight to help create the Alaska Airlines Aerospace Education Center to guide students toward a future in science, technology, engineering and math (STEM), and sponsored Alaska Airlines Aviation Day in May 2014 to inspire youth to pursue careers in aviation.


"	Flew 12 relief flights to Los Cabos and Loreto, Mexico and transported approximately 2,000 passengers to safety following Hurricane Odile.

Low Fares, Low Costs, and Network Growth


"	Held the No. 1 spot in U.S. Department of Transportation on-time performance among the eight largest U.S. airlines for the twelve months ended August 2014.


"	Named No. 1 on-time carrier in North America for the fourth year in a row from FlightStats in February 2014.


"	Ordered ten additional Boeing 737-900ERs, which will further strengthen Alaska's fuel efficient fleet.


"	Completed 92% of the cabin improvement project, with 67 aircraft upgraded with Recaro seats, all of which will have power at every seat.


"	Added split scimitar winglets to 23 aircraft, which would improve fuel efficiency by another 1.5%.


"	New routes launched and announced in the third quarter are as follows:



New Non-Stop Routes Launched in Q3	New Non-Stop Routes Announced (Launch Dates)
Seattle to Baltimore	Las Vegas to Mammoth Lakes (1/15/15)
Seattle to Albuquerque, New Mexico	San Diego to Kona (03/05/15)
Seattle to Detroit, Michigan

SEATTLE Alaska Air Group, Inc., (NYSE: ALK) today reported third quarter 2014 GAAP net income of $198 million, or $1.45 per diluted share, compared to $289 million, or $2.04 per diluted share in the third quarter of 2013. Excluding the impact of mark-to-market fuel hedge adjustments and a one-time special revenue item in the prior year, the company reported record adjusted net income of $200 million, or $1.47 per diluted share, compared to adjusted net income of $157 million, or $1.11 per diluted share, in 2013.

"This was our best quarterly result ever, said CEO Brad Tilden. I want to thank our 13,000 employees who are keeping a focus on playing our game, and working hard every day to run a great operation, keep fares low, and deliver award winning service to our customers.� All of us at Alaska would like to thank our customers for their continued loyalty.

The following table reconciles the company's reported GAAP net income and earnings per diluted share (EPS) during the third quarters of 2014 and 2013 to adjusted amounts:



�	Three Months Ended September 30,
�	2014					�	2013
(in millions, except per-share amounts)	Dollars		�	Diluted EPS		�	Dollars			�	Diluted EPS
Reported GAAP net income	$	198	�	$	1.45	�	$	289		�	$	2.04
Mark-to-market fuel hedge adjustments, net of tax	2		�	0.02		�	(12		)	�	(0.08		)
Special revenue item, net of tax			�			�	(120		)	�	(0.85		)
Non-GAAP adjusted income and per-share amounts	$	200	�	$	1.47	�	$	157		�	$	1.11

Statistical data, as well as a reconciliation of the reported non-GAAP financial measures, can be found in the accompanying tables. A glossary of financial terms can be found on the last page of this release.

A conference call regarding the third quarter results will be simulcast via the Internet at 8:30 a.m. Pacific time on October�23, 2014. It can be accessed through the company's website at www.alaskaair.com/investors. For those unable to listen to the live broadcast, a replay will be available after the conclusion of the call.

###

References in this news release to Air Group, company, we, us and our refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified. Alaska Airlines, Inc. and Horizon Air Industries, Inc. are referred to as Alaska and Horizon, respectively, and together as our airlines.

This news release may contain forward-looking statements subject to the safe harbor protection provided by 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. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item 1A of the company's Annual Report on Form 10-K for the year ended December�31, 2013. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. 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.

###

Alaska Airlines, a subsidiary of Alaska Air Group (NYSE: ALK), together with its partner regional airlines, serve more than 100 cities through an expansive network in Alaska, the Lower 48, Hawaii, Canada and Mexico. Alaska Airlines ranked Highest in Customer Satisfaction Among Traditional Carriers in the J.D. Power North American Airline Satisfaction Study for seven consecutive years from 2008 to 2014. Alaska Airlines Mileage Plan also ranked highest in the J.D. Power 2014 Airline Loyalty/Rewards Program Satisfaction Report. For reservations, visit www.alaskaair.com . For more news and information, visit the Alaska Airlines/Horizon Air Newsroom at www.alaskaair.com/newsroom.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Alaska Air Group, Inc.

�

Three Months Ended September 30,

�

Nine Months Ended September 30,

(in millions, except per-share amounts)

2014

�

2013

�

Change

�

2014

�

2013

�

Change

Operating Revenues:

�

Passenger

�

Mainline

1,030

�

960

�

�%

�

2,858

�

2,651

�

�%

Regional

219

�

208

�

�%

�

605

�

582

�

�%

Total passenger revenue

1,249

�

1,168

�

�%

�

3,463

�

3,233

�

�%

Freight and mail

�

�%

�

�%

Other - net

184

�

165

�

�%

�

511

�

433

�

�%

Special mileage plan revenue

�

192

�

192

�

Total Operating Revenues

1,465

�

1,557

�

4,062

�

3,946

�

Operating Expenses:

�

Wages and benefits

279

�

285

�

832

�

806

�

�%

Variable incentive pay

�

�%

�

�%

Aircraft fuel, including hedging gains and losses

394

�

363

�

�%

�

1,112

�

1,115

�

�%

Aircraft maintenance

�

�%

�

166

�

187

�

(11

Aircraft rent

�

Landing fees and other rentals

�

�%

�

207

�

207

�

�%

Contracted services

�

�%

�

188

�

161

�

�%

Selling expenses

�

�%

�

154

�

137

�

�%

Depreciation and amortization

�

�%

�

218

�

203

�

�%

Food and beverage service

�

�%

�

�%

Other

�

229

�

202

�

�%

Total Operating Expenses

1,149

�

1,087

�

�%

�

3,342

�

3,238

�

�%

Operating Income

316

�

470

�

(33

�

720

�

708

�

�%

�

Nonoperating Income (Expense):

�

Interest income

�

Interest expense

(12

)

�

(13

)

�

(36

)

�

(42

)

�

Interest capitalized

�

Other - net

�

)

�

)

�

)

�

(17

)

�

Income Before Income Tax

316

�

463

�

733

�

691

�

Income tax expense

118

�

174

�

276

�

261

�

Net Income

198

�

289

�

457

�

430

�

Basic Earnings Per Share:

1.47

�

2.07

�

3.35

�

3.06

�

Diluted Earnings Per Share:

1.45

�

2.04

�

3.31

�

3.02

�

Shares Used for Computation:

�

Basic

134.865

�

139.559

�

136.482

�

140.304

�

Diluted

136.158

�

141.383

�

137.825

�

142.213

�

Cash dividend declared per share:

0.125

�

0.100

�

0.375

�

0.100

�



CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)	�		�	�
Alaska Air Group, Inc.	�		�	�
�	�		�	�
(in millions)	September�30, 2014		�	December�31, 2013
Cash and marketable securities	$	1,343	�	$	1,330
�	�		�	�
Total current assets	1,799		�	1,762
Property and equipment-net	4,244		�	3,893
Other assets	193		�	183
Total assets	6,236		�	5,838
�	�		�	�
Air traffic liability	703		�	564
Current portion of long-term debt	115		�	117
Other current liabilities	949		�	899
Current liabilities	1,767		�	1,580
Long-term debt	710		�	754
Other liabilities and credits	1,530		�	1,475
Shareholders' equity	2,229		�	2,029
Total liabilities and shareholders' equity	$	6,236	�	$	5,838
�	�		�	�
Debt-to-capitalization ratio, adjusted for operating leases^(a)	31%:69%		�	35%:65%
�	�		�	�
Number of common shares outstanding	133.469		�	137.492


^(a)�	Calculated using the present value of remaining aircraft lease payments.



OPERATING STATISTICS SUMMARY (unaudited)											�	�			�	�			�	�
Alaska Air Group, Inc.	�			�	�			�	�		�	�			�	�			�	�
�	�			�	�			�	�		�	�			�	�			�	�
�	Three Months Ended September 30,										�	Nine Months Ended September 30,
�	2014			�	2013			�	Change		�	2014			�	2013			�	Change
Consolidated Operating Statistics:^(a)	�			�	�			�	�		�	�			�	�			�	�
Revenue passengers (000)	7,994			�	7,395			�	8.1	%	�	21,996			�	20,720			�	6.2	%
RPMs (000,000) "traffic"	8,245			�	7,671			�	7.5	%	�	23,078			�	21,852			�	5.6	%
ASMs (000,000) "capacity"	9,582			�	8,868			�	8.1	%	�	26,922			�	25,397			�	6.0	%
Load factor	86.0		%	�	86.5		%	�	(0.5 pts	)	�	85.7		%	�	86.0		%	�	(0.3 pts	)
Yield		15.14	�	�		15.23	�	�	(0.6	%)	�		15.00	�	�		14.80	�	�	1.4	%
PRASM		13.03	�	�		13.17	�	�	(1.1	%)	�		12.86	�	�		12.73	�	�	1.0	%
RASM^(b)		15.28	�	�		15.39	�	�	(0.7	%)	�		15.09	�	�		14.78	�	�	2.1	%
CASM excluding fuel^(b)		7.87	�	�		8.16	�	�	(3.6	%)	�		8.28	�	�		8.36	�	�	(1.0	%)
Economic fuel cost per gallon^(c)	$	3.15		�	$	3.24		�	(2.8	%)	�	$	3.22		�	$	3.33		�	(3.3	%)
Fuel gallons (000,000)	124			�	118			�	5.1	%	�	351			�	337			�	4.2	%
ASM's per gallon	77.3			�	75.2			�	2.8	%	�	76.7			�	75.4			�	1.7	%
Average number of full-time equivalent employees (FTE)	12,998			�	12,295			�	5.7	%	�	12,633			�	12,122			�	4.2	%
�	�			�	�			�	�		�	�			�	�			�	�
Mainline Operating Statistics:	�			�	�			�	�		�	�			�	�			�	�
Revenue passengers (000)	5,752			�	5,366			�	7.2	%	�	15,796			�	14,973			�	5.5	%
RPMs (000,000) "traffic"	7,440			�	6,963			�	6.9	%	�	20,871			�	19,864			�	5.1	%
ASMs (000,000) "capacity"	8,607			�	8,027			�	7.2	%	�	24,197			�	22,973			�	5.3	%
Load factor	86.4		%	�	86.7		%	�	(0.3 pts	)	�	86.3		%	�	86.5		%	�	(0.2 pts	)
Yield		13.84	�	�		13.78	�	�	0.4	%	�		13.69	�	�		13.35	�	�	2.5	%
PRASM		11.97	�	�		11.96	�	�	0.1	%	�		11.81	�	�		11.54	�	�	2.3	%
RASM^(b)		14.18	�	�		14.14	�	�	0.3	%	�		14.01	�	�		13.56	�	�	3.3	%
CASM excluding fuel^(b)		7.02	�	�		7.33	�	�	(4.2	%)	�		7.37	�	�		7.42	�	�	(0.7	%)
Economic fuel cost per gallon^(c)	$	3.15		�	$	3.24		�	(2.8	%)	�	$	3.22		�	$	3.32		�	(3.0	%)
Fuel gallons (000,000)	108			�	104			�	3.8	%	�	305			�	297			�	2.7	%
ASM's per gallon	79.7			�	77.2			�	3.2	%	�	79.3			�	77.4			�	2.5	%
Average number of FTE's	10,153			�	9,645			�	5.3	%	�	9,837			�	9,484			�	3.7	%
Aircraft utilization	10.8			�	11.0			�	(1.8	%)	�	10.5			�	10.8			�	(2.8	%)
Average aircraft stage length	1,161			�	1,157			�	0.3	%	�	1,180			�	1,177			�	0.3	%
Operating fleet	136			�	128			�	8 a/c		�	136			�	128			�	8 a/c
�	�			�	�			�	�		�	�			�	�			�	�
Regional Operating Statistics:^(d)	�			�	�			�	�		�	�			�	�			�	�
Revenue passengers (000)	2,242			�	2,029			�	10.5	%	�	6,200			�	5,747			�	7.9	%
RPMs (000,000) "traffic"	806			�	708			�	13.8	%	�	2,206			�	1,988			�	11.0	%
ASMs (000,000) "capacity"	975			�	841			�	15.9	%	�	2,725			�	2,424			�	12.4	%
Load factor	82.7		%	�	84.2		%	�	(1.5 pts	)	�	81.0		%	�	82.0		%	�	(1.0 pts	)
Yield		27.17	�	�		29.41	�	�	(7.6	%)	�		27.41	�	�		29.27	�	�	(6.4	%)
PRASM		22.46	�	�		24.77	�	�	(9.3	%)	�		22.19	�	�		24.00	�	�	(7.5	%)
Operating fleet (Horizon only)	51			�	48			�	3	�a/c	�	51			�	48			�	3	�a/c


^(a)�	Except for full-time equivalent employees, data includes information related to third-party regional capacity purchase flying arrangements.


^(b)�	See a reconciliation of revenue excluding special items related to accounting changes, operating expenses excluding fuel, and Note A, in the accompanying pages, for a discussion of why these measures may be important to investors.


^(c)�	See a reconciliation of economic fuel cost in the accompanying pages.


^(d)�	Data presented includes information related to flights operated by Horizon Air and third-party carriers.

OPERATING SEGMENTS (unaudited)

�

Alaska Air Group, Inc.

�

Three Months Ended September 30, 2014

�

Alaska

�

(in millions)

Mainline

�

Regional

�

Horizon

�

Consolidating

�

Air Group Adjusted^(a)

�

Special Items^(b)

�

Consolidated

Operating revenues

�

Passenger

�

Mainline

1,030

�

1,030

�

1,030

Regional

�

219

�

219

�

219

Total passenger revenues

1,030

�

219

�

1,249

�

1,249

CPA revenues

�

(99

)

�

Freight and mail

�

Other-net

161

�

184

�

184

Total operating revenues

1,221

�

243

�

100

�

(99

)

�

1,465

�

1,465

�

Operating expenses

�

Operating expenses, excluding fuel

605

�

162

�

(97

)

�

755

�

755

Economic fuel

338

�

390

�

394

Total operating expenses

943

�

214

�

(97

)

�

1,145

�

1,149

�

Nonoperating income (expense)

�

Interest income

�

Interest expense

)

�

)

�

(12

)

�

(12

)

Other

�

)

�

Income (loss) before income tax

282

�

)

�

320

�

)

�

316

�

Three Months Ended September 30, 2013

�

Alaska

�

(in millions)

Mainline

�

Regional

�

Horizon

�

Consolidating

�

Air Group Adjusted^(a)

�

Special Items^(b)

�

Consolidated

Operating revenues

�

Passenger

�

Mainline

960

�

960

�

960

Regional

�

208

�

208

�

208

Total passenger revenues

960

�

208

�

1,168

�

1,168

CPA revenues

�

(88

)

�

Freight and mail

�

Other-net

145

�

165

�

192

�

357

Total operating revenues

1,136

�

228

�

(88

)

�

1,365

�

192

�

1,557

�

Operating expenses

�

Operating expenses, excluding fuel

588

�

144

�

(88

)

�

724

�

724

Economic fuel

337

�

383

�

(20

)

�

363

Total operating expenses

925

�

190

�

(88

)

�

1,107

�

(20

)

�

1,087

�

Nonoperating income (expense)

�

Interest income

�

Interest expense

)

�

)

�

(13

)

�

(13

)

Other

�

)

�

)

�

)

�

)

�

)

Income (loss) before income tax

215

�

251

�

212

�

463

�

Nine Months Ended September 30, 2014

�

Alaska

�

Mainline

�

Regional

�

Horizon

�

Consolidating

�

Air Group Adjusted^(a)

�

Special Items^(b)

�

Consolidated

Operating revenues

�

Passenger

�

Mainline

2,858

�

2,858

�

2,858

Regional

�

605

�

605

�

605

Total passenger revenues

2,858

�

605

�

3,463

�

3,463

CPA revenues

�

277

�

(277

)

�

Freight and mail

�

Other - net

448

�

511

�

511

Total operating revenues

3,390

�

668

�

281

�

(277

)

�

4,062

�

4,062

�

Operating expenses

�

Operating expenses, excluding fuel

1,783

�

464

�

257

�

(274

)

�

2,230

�

2,230

Economic fuel

980

�

149

�

1,129

�

(17

)

�

1,112

Total operating expenses

2,763

�

613

�

257

�

(274

)

�

3,359

�

(17

)

�

3,342

�

Nonoperating income (expense)

�

Interest income

�

Interest expense

(25

)

�

)

�

(10

)

�

(36

)

�

(36

)

Other

�

)

�

(10

)

�

Income (loss) before income tax

651

�

)

�

716

�

733

�

Nine Months Ended September 30, 2013

�

Alaska

�

Mainline

�

Regional

�

Horizon

�

Consolidating

�

Air Group Adjusted^(a)

�

Special Items^(b)

�

Consolidated

Operating revenues

�

Passenger

�

Mainline

2,651

�

2,651

�

2,651

Regional

�

582

�

582

�

582

Total passenger revenues

2,651

�

582

�

3,233

�

3,233

CPA revenues

�

274

�

(274

)

�

Freight and mail

�

Other - net

380

�

433

�

192

�

625

Total operating revenues

3,116

�

634

�

278

�

(274

)

�

3,754

�

192

�

3,946

�

Operating expenses

�

Operating expenses, excluding fuel

1,704

�

440

�

253

�

(274

)

�

2,123

�

2,123

Economic fuel

987

�

135

�

1,122

�

)

�

1,115

Total operating expenses

2,691

�

575

�

253

�

(274

)

�

3,245

�

)

�

3,238

�

Nonoperating income (expense)

�

Interest income

�

Interest expense

(30

)

�

(10

)

�

)

�

(42

)

�

(42

)

Other

�

)

�

)

�

)

�

)

�

(17

)

�

(17

)

Income (loss) before income tax

428

�

)

�

492

�

199

�

691


^(a)�	The adjusted column represents the financial information that is reviewed by management to assess performance of operations and determine capital allocations and does not include certain revenues/charges. See Note A in the accompanying pages for further information .


^(b)�	Includes mark-to-market fuel-hedge accounting charges and accounting adjustments related to Special mileage plan revenue.

Alaska Air Group, Inc.

�

CASM EXCLUDING FUEL RECONCILIATION (unaudited)

�

Three Months Ended September 30,

�

Nine Months Ended September 30,

(in cents)

2014

�

2013

�

2014

�

2013

Consolidated:

�

CASM

11.99

�

12.26

�

12.41

�

12.75

�

Less the following components:

�

Aircraft fuel, including hedging gains and losses

4.12

�

4.10

�

4.13

�

4.39

CASM excluding fuel

7.87

�

8.16

�

8.28

�

8.36

�

Mainline:

�

CASM

11.00

�

11.27

�

11.35

�

11.68

�

Less the following components:

�

Aircraft fuel, including hedging gains and losses

3.98

�

3.94

�

3.98

�

4.26

CASM excluding fuel

7.02

�

7.33

�

7.37

�

7.42

�



FUEL RECONCILIATIONS (unaudited)
�	Three Months Ended September 30,
�	2014					�	2013
(in millions, except for per-gallon amounts)	Dollars		�	Cost/Gallon		�	Dollars			�	Cost/Gallon
Raw or "into-plane" fuel cost	$	383	�	$	3.09	�	$	373		�	$	3.16
Losses on settled hedges	7		�	0.06		�	10			�	0.08
Consolidated economic fuel expense	390		�	3.15		�	383			�	3.24
Mark-to-market fuel hedge adjustment	4		�	0.03		�	(20		)	�	(0.17		)
GAAP fuel expense	$	394	�	$	3.18	�	$	363		�	$	3.07
Fuel gallons	124		�	�		�	118			�	�



�	Nine Months Ended September 30, 2014
�	2014							�	2013
(in millions, except for per-gallon amounts)	Dollars			�	Cost/Gallon			�	Dollars			�	Cost/Gallon
Raw or "into-plane" fuel cost	$	1,095		�	$	3.12		�	$	1,076		�	$	3.19
Losses on settled hedges	34			�	0.10			�	46			�	0.14
Consolidated economic fuel expense	1,129			�	3.22			�	1,122			�	3.33
Mark-to-market fuel hedge adjustment	(17		)	�	(0.05		)	�	(7		)	�	(0.02		)
GAAP fuel expense	$	1,112		�	$	3.17		�	$	1,115		�	$	3.31
Fuel gallons	351			�	�			�	337			�	�

Note A:�Pursuant to Regulation G, we are providing disclosure of the reconciliation of reported non-GAAP financial measures to their most directly comparable financial measures reported on a GAAP basis. We believe that consideration of these non-GAAP financial measures may be important to investors for the following reasons:

By eliminating fuel expense and certain special items from our unit metrics, we believe that we have better visibility into the results of operations without the consideration of accounting changes or our non-fuel cost-reduction initiatives.�Our industry is highly competitive and is characterized by high fixed costs, so even a small reduction in non-fuel operating costs can result in a significant improvement in operating results.�In addition, we believe that all domestic carriers are similarly impacted by changes in jet fuel costs over the long term, so it is important for management (and thus investors) to understand the impact of (and trends in) company-specific cost drivers such as labor rates and productivity, airport costs, maintenance costs, etc., which are more controllable by management.

Operating revenue per ASM (RASM) for the prior year excludes a favorable, one-time "special" revenue item of $192 million primarily related to our modified affinity card agreement with Bank of America, executed in July 2013. In accordance with accounting standards, we recorded this one-time special revenue item in the the third quarter of 2013. This is purely an accounting change and the prior period results do not reflect the economics of the agreement, rather it reflects a non-cash adjustment of the value of miles outstanding in the program. We believe it is appropriate to exclude this special revenue item from adjusted earnings and revenue metrics.


"	Cost per ASM (CASM) excluding fuel and certain special items is one of the most important measures used by management and by the Air Group Board of Directors in assessing quarterly and annual cost performance.


"	Adjusted Income before Income Taxes and CASM excluding fuel (and other items as specified in our plan documents) are important metrics for the employee incentive plan that covers all Air Group employees.


"	CASM excluding fuel and certain special items is a measure commonly used by industry analysts, and we believe it is the basis by which they compare our airlines to others in the industry.�The measure is also the subject of frequent questions from investors.

Disclosure of the individual impact of certain noted items provides investors the ability to measure and monitor performance both with and without these special items. We believe that disclosing the impact of certain items, such as mark-to-market hedging adjustments or special revenues, is important because it provides information on significant items that are not necessarily indicative of future performance. Industry analysts and investors consistently measure our performance without these items for better comparability between periods and among other airlines.

Although we disclose our passenger unit revenues, we do not (nor are we able to) evaluate unit revenues excluding the impact that changes in fuel costs have had on ticket prices.�Fuel expense represents a large percentage of our total operating expenses.�Fluctuations in fuel prices often drive changes in unit revenues in the mid-to-long term.�Although we believe it is useful to evaluate non-fuel unit costs for the reasons noted above, we would caution readers of these financial statements not to place undue reliance on unit costs excluding fuel as a measure or predictor of future profitability because of the significant impact of fuel costs on our business.

Note B: Air Group has two operating airlines - Alaska Airlines and Horizon Air. Each is a regulated airline with separate management teams primarily in operational roles. To manage the two operating airlines, management views the business in three operating segments. Alaska operates a fleet of passenger jets (Alaska Mainline) and contracts with Horizon, SkyWest Airlines, Inc. (SkyWest), and Peninsula Airways, Inc. (PenAir) for regional capacity under which Alaska receives all passenger revenue from those flights (Alaska Regional). Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a capacity purchase arrangement (Horizon). The Company believes the amounts paid by Alaska to Horizon approximate current market rates received by other regional carriers for similar flying and are available to pay for various Horizon operating expenses such as crew expenses, maintenance, and aircraft ownership costs. All inter-company revenues and expenses between Alaska and Horizon are eliminated in consolidation.

Glossary of Terms

Aircraft Utilization - block hours per day; this represents the average number of hours our aircraft are flying

Aircraft Stage Length - represents the average miles flown per aircraft departure

ASMs - available seat miles, or capacity; represents total seats available across the fleet multiplied by the number of miles flown

CASM - operating costs per ASM, or "unit cost"; represents all operating expenses including fuel and special items

CASMex - operating costs excluding fuel and special items per ASM; this metric is used to help track progress toward reduction of non-fuel operating costs since fuel is largely out of our control

Debt-to-capitalization ratio - represents adjusted debt (long-term debt plus the present value of future operating lease payments) divided by total equity plus adjusted debt

Diluted Earnings per Share - represents earnings per share using fully diluted shares outstanding

Diluted Shares - represents the total number of shares that would be outstanding if all possible sources of conversion, such as stock options, were exercised

Economic Fuel - best estimate of the cash cost of fuel, net of the impact of our fuel-hedging program

Load Factor - RPMs as a percentage of ASMs; represents the number of available seats that were filled with paying passengers

Mainline - represents flying Boeing 737 jets and all associated revenues and costs

PRASM - passenger revenue per ASM; commonly called passenger unit revenue

Productivity - number of revenue passengers per full-time equivalent employee

RASM - operating revenue per ASMs, or "unit revenue"; operating revenue includes all passenger revenue, freight & mail, Mileage Plan, and other ancillary revenue; represents the average total revenue for flying one seat one mile

Regional - represents capacity purchased by Alaska from Horizon, SkyWest, and PenAir. In this segment, Alaska Regional records actual on-board passenger revenue, less costs such as fuel, distribution costs, and payments made to Horizon, SkyWest and PenAir under the respective capacity purchased arrangement (CPAs). Additionally, Alaska Regional includes an allocation of corporate overhead such as IT, finance, other administrative costs incurred by Alaska and on behalf of Horizon.

RPMs - revenue passenger miles, or "traffic"; represents the number of seats that were filled with paying passengers; one passenger traveling one mile is one RPM

Yield - passenger revenue per RPM; represents the average revenue for flying one passenger one mile

Exhibit 99.2

Investor Update - October�23, 2014

References in this update to Air Group, Company, we, us, and our refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.

This update includes forecasted operational and financial information for our mainline and consolidated operations. Our disclosure of operating cost per available seat mile, excluding fuel and other items, provides us (and may provide investors) with the ability to measure and monitor our performance without these items. The most directly comparable GAAP measure is total operating expenses per available seat mile. However, due to the fluctuations in fuel prices, we are unable to predict total operating expenses for any future period with any degree of certainty. In addition, we believe the disclosure of fuel expense on an economic basis is useful to investors in evaluating our ongoing operational performance. Please see the cautionary statement under Forward-Looking Information.

We are providing information about estimated fuel prices and our hedging program. Management believes it is useful to compare results between periods on an economic basis. Economic fuel expense is defined as the raw or into-plane fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period. Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.

Forward-Looking Information

This update contains forward-looking statements subject to the safe harbor protection provided by 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. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements. For a comprehensive discussion of potential risk factors, see Item�1A of the Company's Annual Report on Form 10-K for the year ended December�31, 2013. Some of these risks include general economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our indebtedness, inability to meet cost reduction goals, seasonal fluctuations in our financial results, an aircraft accident, and changes in laws and regulations. All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. 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.

�

AIR GROUP - CONSOLIDATED

Forecast Information



�	Forecast Q4 2014	�	Change Y-O-Y	�	Forecast Full Year 2014	�	Change Y-O-Y	�	Prior Guidance September 12, 2014
Capacity (ASMs in millions)	9,075 - 9,125	�	~ 10.0%	�	36,000 - 36,050	�	~ 7.0%	�	36,050 - 36,150
Cost per ASM excluding fuel and special items (cents)^(b)	8.58� - 8.63�	�	~ (2.5)%	�	8.36� - 8.37�	�	~ (1.0)%	�	8.38� - 8.41�
Fuel gallons (000,000)	117	�	~ 6.5%	�	467	�	~ 4.5%	�	467
Economic fuel cost per gallon^(a)	$2.77	�	~ (12.0)%	�	$3.10	�	~ (5.5)%	�	N/A

^(a)�

Our economic fuel cost per gallon estimate for the fourth quarter includes the following per-gallon assumptions:�crude oil cost - $1.98 ($83 per barrel), refining margin - 46 cents, cost of settled hedges - 6 cents, with the remaining difference due to taxes and other into-plane costs. For the full year: crude oil cost - $2.27 ($95 per barrel), refining margin - 52 cents, cost of settled hedges - 9 cents, with the remaining difference due to taxes and other into-plane costs.


^(b)�	Includes anticipated one-time costs related to an agreement in concept with Alaska's flight attendants.

Nonoperating Expense

We expect that our consolidated nonoperating expense will be approximately $2 million to $3 million in the fourth quarter of 2014.

Capital Expenditures^(a)�

The table below reflects the full-year expectation for total capital expenditures and additional expenditures if options were exercised. These options will be exercised only if we believe return on invested capital targets can be met.



�	2014		�	2015		�	2016		�	2017
Aircraft and aircraft purchase deposits - firm	$	470	�	$	460	�	$	455	�	$	410
Other flight equipment	150		�	35		�	35		�	25
Other property and equipment	65		�	80		�	75		�	75
Total property and equipment additions	$	685	�	$	575	�	$	565	�	$	510
Option aircraft and aircraft deposits, if exercised^(b)	$	10	�	$	60	�	$	110	�	$	215


^(a)�	Preliminary estimate, subject to change.


^(b)�	Alaska has options to acquire 48 B737 aircraft with deliveries from 2017 through 2024. Horizon has options to acquire seven Q400 aircraft with deliveries from 2015 through 2018.

Projected Fleet Count^(a)�

�

Fleet Count

�

Expected Fleet Activity^(b)

Aircraft

Dec�31, 2013

�

Dec�31, 2014

�

2015 Changes

�

Dec�31, 2015

�

2016-2017 Changes

�

Dec�31, 2017

737 Freighters & Combis

�

)

�

737 Passenger Aircraft^(c)

125

�

131

�

135

�

144

Total Mainline Fleet

131

�

137

�

141

�

147

Q400

�

Total

182

�

188

�

193

�

199


^(a)�	The expected fleet counts at December�31, 2014 and 2015 are subject to change.


^(b)�	Expected fleet activity includes aircraft deliveries, net of planned retirements and lease returns.


^(c)�	Reflects potential extensions of leased aircraft or postponed retirement of owned 737-400s.

AIR GROUP - CONSOLIDATED (continued)

Future Fuel Hedge Positions

All of our future oil positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases. With call options, we benefit from a decline in crude oil prices, as there is no cash outlay other than the premiums we pay to enter into the contracts. Our crude oil positions are as follows:



�	Approximate % of Expected Fuel Requirements		�	Weighted-Average Crude Oil Price per Barrel	�	Average Premium Cost per Barrel
Fourth Quarter 2014	50	%	�	$106	�	$5
��Remainder 2014	50	%	�	$106	�	$5
First Quarter 2015	50	%	�	$106	�	$4
Second Quarter 2015	40	%	�	$105	�	$4
Third Quarter 2015	30	%	�	$106	�	$4
Fourth Quarter 2015	20	%	�	$106	�	$3
Full Year 2015	35	%	�	$106	�	$4
First Quarter 2016	10	%	�	$106	�	$3
Full Year 2016	2	%	�	$106	�	$3

Fuel Price Sensitivity

The following table depicts a forward-looking sensitivity of our full year 2014 economic fuel price per gallon given actual economic costs incurred to date, our current crude oil positions, and a range of possible future crude oil and refining margin prices:



�	�	�	Crude Price per Barrel
�	�	�	$	70	�	$	80	�	$	90	�	$	100	�	$	110
Refining Margin (cents per Gallon)	40	�	$	3.00	�	$	3.06	�	$	3.12	�	$	3.18	�	$	3.23
	50	�	$	3.03	�	$	3.09	�	$	3.15	�	$	3.20	�	$	3.25
	60	�	$	3.05	�	$	3.11	�	$	3.17	�	$	3.23	�	$	3.28
	70	�	$	3.08	�	$	3.14	�	$	3.20	�	$	3.25	�	$	3.30
	80	�	$	3.10	�	$	3.16	�	$	3.22	�	$	3.28	�	$	3.33

ALASKA AIRLINES - MAINLINE

Forecast Information



�	Forecast Q4 2014	�	Change Y-O-Y	�	Forecast Full Year 2014	�	Change Y-O-Y	�	Prior Guidance September 12, 2014
Capacity (ASMs in millions)	8,150 - 8,200	�	~ 10.0%	�	32,350 - 32,400	�	~ 6.5%	�	32,400 - 32,500
Cost per ASM excluding fuel and special items (cents)^(b)	7.66� - 7.71�	�	~ (3.0)%	�	7.44� - 7.46�	�	~ (1.0)%	�	7.47� - 7.50�
Fuel gallons (000,000)	101	�	~ 5.5%	�	406	�	~ 3.5%	�	406
Economic fuel cost per gallon^(a)	$2.77	�	~ (12.0)%	�	$3.10	�	~ (5.5)%	�	N/A


^(a)�	Please see note^(a) in Consolidated.


^(b)�	Includes anticipated one-time costs related to an agreement in concept with Alaska's flight attendants.

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